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Updated about 5 years ago on . Most recent reply
Fix-n-Flip Gone Wrong
Here is brief story about my first flip.
My name is Dakota Coburn and I decided a few years ago that becoming a real estate investor was the right career path. I spent 12 month researching, reading, analyzing, going to seminars and even paying for a mentor, which I do not entirely feel like was a waste but I do not recommend it unless you really know what you are doing. Bigger Pockets as well as a few other sites offer everything needed for new investors that the mentors do, and they are all way over priced and usually a scam.
Anyway on to the deal. Denver Property just outside of Cherry Creek. We bought the property from a wholesaler with an estimated return of $50k profit and an estimated rehab of $105k which quickly turned into closer to $130k. We had a time line of three months to do the rehab and get it back on the market in Sept. So we went with a hard money loan and raised $110k from investors. In this deal I had my brother and two friends all very interested in giving flipping a try.
Side note this was the 10th property I had made in offer on during the course of last spring and I had analyzed another 100. So I felt like we had a good deal when we found this property for $445k, adn we were looking at a minimum ARV of $615k.
The problems started right off the bat when we lost our first lender due to low Appraisal, so we had to rush and find a second and got charged an arm and a leg from this lender, but we felt we had a great deal and moved forward.
Next we ditched our GC week one when is estimate for the work was $30k more then we had budgeted. So we decided we could GC it ourselves.
Asbestos came up on inspection and put us 10 days behind right off the bat for abatement period. Which gave us time to find a new contractor. Our first plumber gave us a low ball quote then robbed us of $3500, and we lost two weeks trying to find a new plumber. Our electrician, did decent work but at a snails pace, and decided through one of our partners he was capable of doing the plumbing, which we found out way down the road that he never pulled permits, wasn't licence and did none of the work to code. So we had an electrician doing his work plus plumbing, dumb, a GC that was really just a carpenter, and a guy doing our new load carrying beam opening up the floor plan, that was nothing more then a great wood worker and never followed the plans from the structural engineer to secure the beam properly.
So we did all the work and spent $150k on rehab about ($20k over budget), and we listed two weeks after our goal date. All in all we felt like things were going really well. Meanwhile I had been living out of state and not watching the progress on a daily basis, come to find out a TON of little details got left unfinished or ignored and all the initial hype of the listing was received with feedback of half *** work. I was confused until I was finally able to take a trip back to CO to walk the property and see light fixtures not cut in right, and trim unfinished, etc. We listed at the high end of the market at $700k and quickly dropped to $685, then $675. We ended up going under contract at $615 to find out that permits on the property were never closed and the laundry list of **** that the inspector wouldn't pass would cost about $20k.
Now we have lost two buyers that pulled out due to the open permits and the inability to close the permits on our end. We are at the point of default with our lender and we are negotiating with them to not go into foreclosure.
And to top it all off one of the silent investors is threatening to sue for his losses.
All the fun of a first time flipper. Any suggestions on how to survive this?
Most Popular Reply
#3 Investor Mindset Contributor
- Handyman
- Pittsburgh, PA
Half a million dollar first flip, major renovation, totally hands off with no construction experience, no previous relationships, out of state supervision, partners without clear roles. Yeah, it's not Monopoly money, and you very much set yourself up for this, with the help of whatever lowlife "mentored" into getting burned this bad. Take the gut punch and regather. Thanks for posting, you've done the community here a service.
Take out a loan on your house or whatever reserves you have and get it done.
Wow! These are the risks of flipping, especially OOS.
You have two options - dump the house, take a loss, and loose your friends ... or invest in making the house right and trying again.
First, how much money do you think it would take to close the permits and clean up the half-*** work? I would probably cancel the listing, fix all the issues, then list again in spring for top dollar. Maybe change the wall colors and stage the place to make it look like a new listing.
I'm with Cassie. Bite the bullet and do it right. Never give up on your goal and learn from it. Too bad none of your partners were not in the construction business. I always do my own work and have people who I know to do the trades I am not expert in. It's not the end of the road but the beginning. Better to take a loss than to give up and lose your credit standing for multiple years. Think about getting a construction guy with a track record as one of your partners and really check out who you are dealing with. Wishing you the best and you are almost to the finish line on this one. Get hands on and do it well. Due diligence is key here and everything matters. You got this Dakota.
Thank you @Cassie Montalvo and @Charlie DiLisio I appreciate the advise. The problem is we are super tapped out and we have nothing else to invest in this property. I would love to finish the job and get it finished. We tried to find a way to refi the property out of the hard money loan and turn it into a short term rental. However we were unable to get approved on our own. We asked our investors and some other people in our network and got denied. So we are still left with a firesale option.
@Account Closed
Wow, sorry to hear your story.. I can imagine the stress...
At this point, because there are already too many hands in this - hard money, you, your brother, friends -it is unlikely to get any new money at this point..
Take a firesale, take a learning, but dont give up....RE is the right path, but you need to learn to be more conservative...
My first property that I bought, I am just breaking even today 15 years later... So, your experience is not unique....
Do you have ANYONE you trust on the ground here that can see it through and do it correctly? If not, then I'd call it a loss and move on.
Next! Sorry to hear it because you are so close to the finish line. I started building up my business credit 5 years ago and have about 200,000 in cards with no balance. Something to look into for your future. They don't count against your personal credit and go unreported for your debt to income ratios. Personal credit score is not affected. I use them for re-habs all the time and not for anything else. Wishing you the best of luck and as others have said, stick with it and you will get there.
I would caution first time flippers to jump into such a high end flip right out of the gate. Start small get your systems in place and kinks worked out then shoot for the stars. Holding costs on a loan that high must be insane. As far as defaulting on the loan you might want to contact another lender to take over the fix and flip loan and give yourself more live a 1 year timeline for future flips.
#3 Investor Mindset Contributor
- Handyman
- Pittsburgh, PA
Half a million dollar first flip, major renovation, totally hands off with no construction experience, no previous relationships, out of state supervision, partners without clear roles. Yeah, it's not Monopoly money, and you very much set yourself up for this, with the help of whatever lowlife "mentored" into getting burned this bad. Take the gut punch and regather. Thanks for posting, you've done the community here a service.
Take out a loan on your house or whatever reserves you have and get it done.
#5 Starting Out Contributor
- Real Estate Consultant
- Mendham, NJ
- 7,600
- Votes |
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#5 Starting Out Contributor
- Real Estate Consultant
- Mendham, NJ
There are so many errors in this deal, it's hard to even count them up. You did what these forums and countless books and mentors and gurus are telling everyone they can do, just go for it and if the numbers look good you can't lose. Well, that's complete crap. This is what happens to new investors time and time again because they bite off more than they can chew.
When the property didn't appraise, why in the world would you find a second lender who would close on the property instead of negotiating down to the appraisal value or walking away? Mistake #1. Deciding to GC the job yourselves, with one of both of you out of state. Mistake #2. Loss of oversight and control of the project is the nail in the coffin for first-time investors. Raising money from friends and relatives with no experience flipping. Mistake #3. Giving up complete oversight on the project and allowing workers to double-up on jobs without permits. Mistake #4. Not calling the town out for the C of O inspection and not confirming that all the permits were closed before listing, much less accepting a contract. Mistake #5.
When I read your narrative, everything is your fault. I am sorry to be harsh, but you relinquished control over and over and opted out of the oversight of the project and this is exactly what happens. You have a dead property. Pull it off the market immediately and fix everything, borrow money from a parent or friend if you have to, but fix it and give it a month off-market so it can reset. Once everything is confirmed to be fixed and permitted, put it back on the market. Make sure all cosmetic issues are perfect. If you can't fix it because you are tapped out, your financial future and the relationships you used to put together to deal with friends and family are all at stake.
- Jonathan Greene
- jonathan@trustgreene.com
- Podcast Guest on Show #667
@Dakota Coburn why were you not approved for the refinance?
#3 Investor Mindset Contributor
- Handyman
- Pittsburgh, PA
Originally posted by @Jonathan Greene:
There are so many errors in this deal, it's hard to even count them up. You did what these forums and countless books and mentors and gurus are telling everyone they can do, just go for it and if the numbers look good you can't lose. Well, that's complete crap. This is what happens to new investors time and time again because they bite off more than they can chew.
When the property didn't appraise, why in the world would you find a second lender who would close on the property instead of negotiating down to the appraisal value or walking away? Mistake #1. Deciding to GC the job yourselves, with one of both of you out of state. Mistake #2. Loss of oversight and control of the project is the nail in the coffin for first-time investors. Raising money from friends and relatives with no experience flipping. Mistake #3. Giving up complete oversight on the project and allowing workers to double-up on jobs without permits. Mistake #4. Not calling the town out for the C of O inspection and not confirming that all the permits were closed before listing, much less accepting a contract. Mistake #5.
When I read your narrative, everything is your fault. I am sorry to be harsh, but you relinquished control over and over and opted out of the oversight of the project and this is exactly what happens. You have a dead property. Pull it off the market immediately and fix everything, borrow money from a parent or friend if you have to, but fix it and give it a month off-market so it can reset. Once everything is confirmed to be fixed and permitted, put it back on the market. Make sure all cosmetic issues are perfect. If you can't fix it because you are tapped out, your financial future and the relationships you used to put together to deal with friends and family are all at stake.
Hard and true, sure, Jonathan, but he had help. Somebody very clearly must have told the OP this is how the real winners in real estate handle a first flip. Nobody would start flipping like this without being talked into it by some guru marketing a get-rich-quick real estate system.
#5 Starting Out Contributor
- Real Estate Consultant
- Mendham, NJ
- 7,600
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#5 Starting Out Contributor
- Real Estate Consultant
- Mendham, NJ
@Jim K. I agree. The proliferation of the fallacy that you can be an investor with no money and flip houses easily is what is being offered by "gurus" and "coaches" as gospel when in fact these new people are investing in the guru and not themselves when they hit dirt like this one. To sink 500k + into an OOS property and then check out on the renovations and oversight seems a little far-fetched even for one of these fake coaches as advice.
- Jonathan Greene
- jonathan@trustgreene.com
- Podcast Guest on Show #667
@Account Closed Obviously you need to evaluate the market and the local laws/ restrictions but look more into the rental option to stabilize, rent by room option, rent to own potentially.. no guarantees but just trying to throw out options.
Other than that you have some good advice here, if you intend to invest again I strongly recommend reaaaally digging into re-evaluating this deal. Here is where I encourage over-analysis (on past experiences filled with valuable lessons).
Quick recap on some things to learn, not to belabor the point but the painful review is absolutely necessary in this case:
- Always run your own numbers, and even still.. always be skeptical of them. (Ask people to prove them wrong/ what are you missing)
- Do your best research on how local appraisers approach their work and get to their number. Talk to investors, agents, anyone you can.
- Always evaluate multiple exit strategies (especially in the beginning) and do not buy a deal unless you have multiple, practical exit strategies where you can make money. (fix & flip, BRRRR, turn-key, rent by room, wholesale..)
- Everything takes longer than expected. Also, speed is an experienced flipper's best friend, and a beginner's achilles. Just like golf and most everything else, to be good.. accuracy is always the first step, and speed is developed over time as you learn to keep accuracy high while building in speed.
- Evaluate your contractors at least as strictly as you evaluate the deal itself, and be willing to pay a higher rate for a contractor that surpasses your scrutiny. Mainly licensed, insured, and you spoke with references.
- Early on* never release payment to contractors until work has been reviewed at each stage personally. Or at the very least have someone you trust who has a decent understanding of construction walk the property quick. (Not a bad idea to connect with an inspector ahead of time and over to pay him for walk-throughs after each phase of construction. Factor this cost into your renovations including the cost of the inspector sending you a quick report with photos.****)
- Always get proof of permits being closed out before releasing final payments to any corresponding contractors. (plumber, electrician, GC) And again, have a friend and or inspector send a final report after a walk-through if you are unable to personally inspect the property.
- Start small, keeping in mind you will not get rich off one deal but.. many people have walked away broke from just one (both financially and or emotionally.)
- Finally, you have to take the Cal Newport approach in building and identifying your career capital and always leveraging that to succeed. Everything else is giving luck too much of a role, and it's not practical especially long-term. If you have no career capital in a given field, the only loophole is partnering with someone who does until you have enough yourself.
Again, I hope with is constructive. I am absolutely not at all knocking you, I'm hoping you are able to learn from it without beating yourself up and thinking too negatively about the whole thing. **** happens, you have to learn from it and keep moving.
@Charlie DiLisio $200k in cards? What kind of cards are you referring to? Sorry. I’m not familiar.
Business credit cards. Accumulate all you can over time and don't ever use them for anything but making you money. I have cards from Chase, Navy Federal, Pnc bank, Bank of America, Discover business, Amex, etc. etc. All are 10k or more and most companies give you more than one. It is a strategy very popular but takes time to get. Easiest way to get them is to personally guarantee them because they go by your established credit. Once you get them they do not report to your personal credit and don't care about high percentage use as long as you pay them back on a regular basis and I always pay more than required. After I re-hab a property I pay them completely off. No bread and butter items purchased only business costs to make money.
@Dakota Coburn. Why can’t you refinance? You did just about everything wrong that you could be. You should refinance, or sell. If you can’t do either, and can’t find cash to finish the deal, you’re likely going to get foreclosed on.
#3 Investor Mindset Contributor
- Handyman
- Pittsburgh, PA
Originally posted by @Caleb Heimsoth:
@Dakota Coburn. Why can’t you refinance? You did just about everything wrong that you could be. You should refinance, or sell. If you can’t do either, and can’t find cash to finish the deal, you’re likely going to get foreclosed on.
Caleb, he likely can't refinance because of all those open permits. Either the open permits make the banks stop cold before they commission the appraisal or the appraisals are coming in at $300-400K with those. He's totally screwed.
@Jim K. Yeah I just don’t see how this doesn’t end in either losing a lot of money or foreclosure. There’s so much that go wrong with real estate investing and people just never seem to understand that or even think about it.
When analyzing a flip, you should add 25-30 percent to your estimated rehab budget. Double the estimate Total time and lower your ARV by 20 percent. If it still looks like a good deal, then do it.
#3 Investor Mindset Contributor
- Handyman
- Pittsburgh, PA
Originally posted by @Jonathan Greene:
@Jim K. I agree. The proliferation of the fallacy that you can be an investor with no money and flip houses easily is what is being offered by "gurus" and "coaches" as gospel when in fact these new people are investing in the guru and not themselves when they hit dirt like this one. To sink 500k + into an OOS property and then check out on the renovations and oversight seems a little far-fetched even for one of these fake coaches as advice.
Sure, but of course they pumped him up with the "Impossible is nothing!" crap and some motivational speaking about "Getting past your preconceived limitations!" and "Go big or go home!" along with "Every problem has a solution!" and "Believe in the power of positive thinking!" Made him walk over some hot coals while screaming to focus his chi and sent him home with a bag of McRibs.
When I paid $150 and did the three-day seminar event of a popular flipper flimflam group, just to see how the sausage gets made and people get conned into this, when it came time to talk about flipping, did the seminar leader give us a hint of what could go wrong? Oh no.
The seminar leader did a dance-off. I'm not lying, swear to Christ. The dude called up three people and did a dance-off on stage. And then he gave everyone a big grin and said, "If you can handle the stress of a dance-off, of course you can handle a silly old flip!" He ended with quietly slipping the legal disclaimer slide back up on the overhead projector that read in small letters, "ASSUME THAT MOST PEOPLE MAKE NOTHING."
I'm watching this with my mouth hanging open, three flips and two rental renos into this at the time. That's when I started lurking on Bigger Pockets.
@Dakota Coburn i feel you man! I myself has the same experience with a joint venture to people that has no experience and end up take the loss rather than continue to bleed cash for hard loan interests.
Good luck to you!
Lurking...well put. I knew there was a word for it.
@Dakota Coburn how much more does it require in rehab ?
I think every flipper or investor has at least one story of a deal gone wrong. If anything it gives you some lessons that you can learn from for the next one. It never hurts to overestimate your repairs a minimum of 10 percent.
I lost over 20k in my first deal. Over confident and assuming things would work out great without doing more research really bit me hard. I didn't just lose the money I put into it, but also the house. It looked easy and I read a ton of books. Not so easy in real life.
That was a huge undertaking for your first flip. It should have been about 10x cheaper and in a different market with no silent investors. No amount of learning/mentors can prepare you for the real thing.
Find a way to finish the job properly. Cash out refi your cars, credit card cash advances, whatever it takes. If you foreclose, you won’t be getting financing anytime soon.
Well there is a lot of great feedback here. Thank you all for the brutal honesty. I left out a lot of details and certainly made myself look like a fool. Which I am. I have learned a million lessons from this. The rehab to finish is at least $20,000. The refi won't go through because we have all managed to find our selves in position of not being credit worthy. @Jim K. @Ryan Luby @Jonathan Greene @Matt M. @Eric Mayer @Brent Paul
All in all we tried to over analyze the property, and my hands off approach was still everyday calls to check in. I failed in trusting the wrong people. And not knowing every detail of how to close the deal and having a solid exit plan. I truly appreciate all the input her. I messed this one up bad.
I am working on my first BRRRR/ Rental property with solid success where in live in NH. All lessons learned, I except my losses and hope to never make the same mistakes. I wrote all this for first time investors to hopefully not make the same stupid mistakes.