Do you remember your first real estate deal?
I’ll never forget mine. I hadn’t talked about it much in quite some time, then Brandon Turner asked me about it on my recent BiggerPockets Podcast episode.
I had sold my Detroit staffing firm and fancied myself semi-retired in my mid-30s. Which sounds like a great idea until you try it.
I was an energetic, hard-charging entrepreneur, and I got bored to death quickly. I became the worst version of myself. The worst husband. The worst father. The worst friend and money—and time manager. Just ask my wife.
My wife and I escaped Detroit as it was imploding, and we reacted to our decade there by buying a Blue Ridge Mountain “farm.” On top of a mountain. In the epicenter of the moonshine capital of the world (Franklin County, Virginia).
We thought raising our kids in a rural environment sounded like a good idea. I even bought a straw hat and bib overalls. And we planted an enormous number of blueberry bushes (or trees or whatever they grow on). No one told us they needed to be watered. They died within weeks. Dang.
Anyway, after two monotonous years that seemed like a decade, my good friend Jack moved to town.
Jack didn’t have a job, but he had lots of skills after years as a multifamily maintenance man. I didn’t have much sense, but I had a lot of cash from the sale of my business.
The Dream Team Was Born!
Now what would we do with all this talent and time?
We stumbled across a car wholesaler who sold us a two-year-old Dodge Caravan (a nice minivan) at a few dollars over his cost (that’s what he said, at least). We learned that we could resell up to five cars before the State of Virginia required us to get a used-car lot license. We were in business!
Four months and ZERO van inquiries later, we decided that business was not for us. Oh, and my wife was pregnant with our third child, and we thought she’d look good behind the wheel. (It went with her denim jumper, and as new homeschoolers, we’d just found another way to fit in with the crowd.)
Wait, I was supposed to write about my first real estate deal. Where was I? We’ve covered:
- My first (and last) farm.
- First (and last) overalls and straw hat.
- First (and last) boring retirement.
- First old moonshine stills and dead blueberry trees (we may try more of these).
- First used car salesman job (I really didn’t look the part. Too honest, I guess).
- First homeschool “uniforms” and minivans (done with that).
Our First Real Estate Deal
The Dream Single-Family Flip in the Town with 23 Percent Unemployment
Jack and I had heard that you could acquire houses on the courthouse steps for pennies on the dollar. Or at least under a dollar on the dollar.
I don’t think the term “flip” was coined until years later. We thought it was hilarious when we heard it. We just called them “fixer-uppers.” (Anyone else remember that, or was it a Southwest Virginia thing?)
We also heard that there were very few bidders in the town of Martinsville, Virginia. This was a textile town that was in steep decline since its jobs left after NAFTA. The unemployment rate there was 23 percent, but that didn’t deter us. Smart thinkin’, huh?
Spoiler Alert: This Story Does Not End the Way You’d Expect
We made a pact (but not in blood) that our visit to the courthouse steps was only an exploratory trip. We knew we needed 10 percent cash down to bid, so we intentionally took no cash to the sale. We were committed observers.
It was December 20, 2000. We awoke to snow and ice that morning, and in the Blue Ridge Mountains, that can be treacherous. We made it to Martinsville and stopped by the foreclosed home on the way. Thankfully it was vacant.
We were able to peek in every window, and we were surprised to see it was swept clean and looked great. It even had decent appliances. Assessed at $65,000, we thought it could bring that price with just a coat of paint and (we assumed) a handful of repairs.
“Someone’s gonna get a great deal if this baby goes for under $50K,” said Jack. He didn’t know what he was talking about, but he was generally correct.
We proceeded to the auction and were surprised to see no crowd. No one at all. The snow and ice had scared off “all of the other real estate investors in town,” we reasoned. (It couldn’t have been the economy. After all, 77 percent of the folks were still employed there, right?)
The auctioneer approached, dryly read the rules, and opened bidding.
“The bank is bidding $34,000 for this property. Bidding opens $100 above that.”
I looked at Jack. He looked at me. We both knew our pact and our empty pockets were a silly idea. We also knew the rules. The auctioneer had no option to accept a bid without a check for 10 percent.
We obviously didn’t know her, but we pleaded with her to let us get to a bank and meet her back at the auction site. The problem was that our bank was across town, and it was icy. And she had already driven for hours on a circuit through several other counties that morning.
I think God was smiling on us that day, because she suddenly realized she was hungry and needed to go grab lunch. She said, “I’ll swing back by here after eating my bean burrito, and if you happen to be here, I’ll see what I can do.”
We made it to the bank and back without incident, brought a cashier’s check for $3,400, and got the deal. Jack and I were real estate investors!
Here’s Where it Gets Good…
Entrepreneurs are an optimistic lot. We tend to look at the upside and ignore what may go wrong. This is why entrepreneurs often have a hard time raising capital from investors. Smart investors look at the upside, but they also look at the downside. And they look deeper and ask if they can bear the worst-case scenario, something many entrepreneurs ignore.
You Probably Think You Know Where I’m Going, But You’re Probably Wrong
Sometimes things go better than planned. No, seriously!
Two weeks later, in early January, we closed on the home for cash. We got the keys and eagerly explored the house with our wives. We tested the furnace, the water, the appliances—everything had been maintained and worked like a charm. This home really only needed a coat of paint, and Jack would be able to do that in a few days.
Three weeks later, around Groundhog Day, we put a “For Sale by Owner” sign in the yard with my phone number on it. The home was on a short dead-end street, so we knew we’d have to do a lot of additional marketing (newspaper ads and such) and we’d be ready to list it with a real estate agent if it didn’t sell by spring.
My bag phone (yep, that’s what they were called at one time) rang two hours later. The caller told me how she had been visiting her mother on that same street and was leaving to return to the D.C. area when she saw my sign. She had been hoping to get a home near her elderly mom so she could care for her. This looked perfect.
We showed her the home, and she signed a contract the same hour at the asking price. No negotiation: $65,000 cash with a quick closing.
This All Seemed Too Good to be True
As Jack and I celebrated that evening, we plotted our next moves. “We could do two of these per month! At a $25,000 profit per house, we would clear up to $300,000 each! Then we’ll sit back in our hot tubs (cigar in one hand and bag phone in the other) barking out orders to our crews and enjoying the mountain air and semi-boneless ham.” Semi-retirement sounded more fun than ever!
Several weeks later, by mid-March, everything seemed to be on track to close. Then it turned into a month. Then another month. We had purchased one or two more homes to flip by then, but we had no reason to be seriously concerned.
The buyer just needed to close a deal on another asset to free up cash. Little did I know who her buyer would be!
My bag phone rang and our buyer let out a long sigh. “So you know I have this small doublewide at a trailer park in Northern Virginia, right? Well I thought I had a buyer for it, but they backed out. And the next one couldn’t get financed. How would you like to have a nice move-in ready rental property right outside D.C.?”
She was offering for me to take the home in trade, which would give her the rest of the cash she would need to close on our fixer-upper.
I had no real experience as a landlord, and I wanted to get the deal done. I left rational thought at the door and began to think through the positives of this new “opportunity.”
- I really don’t want to put this house back on the market.
- Regular monthly rent.
- Hey, it was built in 1970, and they don’t make ‘em like that anymore!
- Little out-of-pocket cash (since I stood to make about $12,000 net on the fixer-upper).
- Nice and successful people live near D.C., so I’m sure the tenants will pay their rent on time.
- My wife and I have been wanting to take a homeschool field trip to D.C., and this would be a way to write off part of it.
You know the mental routine. Using left-brain logic to justify right-brain, emotional decision-making. The human condition, especially for rookie investors.
I agreed to the deal. And I learned that it would even come with a bonus liability: I would be responsible for the $800 monthly lot rent! (Where else could you find a deal like that?)
I took a quick trip to Northern, Virginia. I verified that the park was right off I-95 (this was before Google Earth), that it was in high demand, and that the trailer was in reasonable shape.
We took the trailer in trade, signed the park lot agreement, and closed on the home. My partner, Jack “settled” for his portion of the profit with $12,000 or so in cash, while I took the trailer and all the benefits that were about to come along with it.
Don’t Try This at Home
This Was a Deal Created For Sophisticated Investors
I think you can guess how the rest of the story unfolded. Jack, a man with a dozen years of experience in multifamily must have been cackling laughing all evening as he told his wife, Julie, about the deal he’d cut with me. I can hear her now…
“Seriously? He took the trailer and gave you all the cash? How could we be this lucky?”
Exactly what I thought later.
I was able to rent the trailer to the first caller referred from the mobile home park. That was my first second mistake. I was not at all qualified to screen tenants, and after a few months, this one stopped making payments.
I quickly learned the eviction process, and she moved out a month or so later. But not before trashing this already-aging tenement on blocks. And I learned that apparently, I was an evil person for wanting to collect rent!
Of course, I continued to pay the $800 lot rent each month during this process. I was able to round up a few friends (including Jack—he felt sorry for me) to spend several days there cleaning, fixing, and repainting the trailer.
How Could One Person Cause This Much Neglect And Damage in Less Than Six Months?
Amazingly, I would be asking that same question again about seven months later when the next tenant performed a replay of the first. I won’t bore you with the details.
After going through the “non-paying tenant and trashed home” cycle a second time, I was smart enough to realize that there’s a time to surrender and walk away. We talk about this process with most of the guests on my podcast.
One small bright spot: Rather than paying someone to haul it away, I convinced a local mobile-home dealer to pay me $1,000 to assume my lot agreement. He was eager to place one of his new homes in this high-demand location. And he hauled my albatross off to the graveyard of tenements on wheels.
Paul: –$5,000 or so.
The Rest of the Story
If you’re still with me, congratulations. I hope this somewhat comical journey through my first real estate deal gives you hope that you can ultimately learn from your mistakes and go on to great fun and success in real estate. Even though sometimes (always?) things don’t go as planned.
Note that Jack and I are best of friends, and we went on to do dozens of fixer-uppers, built a half-dozen modular homes, and much more. This episode literally launched my real estate career and has led to millions of dollars in income (as well as quite a few losses), years of personal and financial freedom, two books (so far), and a life I wouldn’t trade for any corporate job in America.
I think the best way to learn from others’ successes and failures is through hearing their stories, and you’ve already done that. But here are a few points I want to emphasize:
1. Just do something. But prioritize objective thought over emotion and convenience.
I talk with many people in the BP community who are plagued by analysis paralysis. Jack and I had committed to not buy a house on the courthouse steps that day (to assure we’d done enough analysis). But we made the leap anyway, and it launched two real estate careers. I’ll never regret that decision. But I obviously regret the decision to take the mobile home in trade. That decision was made out of convenience and emotion, and I wouldn’t do it over again.
2. It’s OK to partner with close friends. But always make humility a priority.
Though conventional wisdom says not to partner with close friends, I have done it at least four times and I can’t recall one that went bad. I always took responsibility for my decision to take the trailer in trade, and I never blamed Jack for taking all the cash. And he came to my rescue when I needed to repair it later.
3. It’s OK to take something in trade. But evaluate that Deal on its own merits.
I was tempted to say that a lesson here would be to not take something in trade. But it could have honestly worked out fine. The question to ask yourself is this: “If I saw this deal on Craigslist or the MLS, would I want to buy it for its own merit?” If the answer is no, then I wouldn’t take it in trade either. One exception to this: The guy who paid me $1,000 in trade for my lot agreement essentially took my old mobile home in trade. The economics were so overwhelmingly favorable for him that the scrap trailer was inconsequential. So, for example, if someone offers you a thousand-dollar clunker car as part of their down payment on a rent-to-own deal you’re selling, you can certainly do it. Even if you wouldn’t choose that lime green Ford Escort for your personal ride. (Donate it to charity!)
4. Have fun! But take the business seriously, too.
Jack and I had hundreds of laughs through this ordeal, and we still recall it fondly around the campfire today. Our friendship was strengthened, and we actually remained friends with the lady who traded us her trailer for years after the deal closed. At the same time, we were learning many valuable lessons—lessons I’ve drawn on for almost two decades and will for years to come.
Tell us about your first fixer-upper or real estate deal!
What lessons did you learn? Share below!