First Flip Failed, $1M+ ARV

[Josh Wyant]

The flip I worked so hard on for my first time failed, and now the bank is selling it full price without me. I am now 26 years old, >$100k in debt, and my credit is shot.

Here's the house:

Jamestown House on Zillow

And here's my story...

I had been interested in real estate for a while. I tried Fortune Builders in 2014, paid for coaching, and went to a wholesaling summit in 2015 where I decided to start an LLC. For a year, I networked and kept my eye on deals.

I got a lead from NetWorth that seemed great. Comps were going for around $275 sq/ft in this neighborhood of Dallas, and there was a big yard, so I could add on about 1500sqft. I got approved and bought the house for $445k in April, 2016 using hard money - it was appraised for $1.075M ARV, way more than I thought, and I was able to get 65% of the ARV in funding, about $695k. The repairs were estimated at $250k, which included completely redoing everything and building the addition. We estimated that it would take about 4 months, more or less, to finish and sell, and that would generate $250k in profit for me, more or less. So, I borrowed $15k from my roommate for earnest money to secure the property, advanced another $15k or so from my credit cards to cover points and closing costs, and advanced another $20k buffer (using 0% interest promotions on the cards -- I also had perfect credit), and bought it and celebrated.

I had a contractor lined up that was a referral by my realtor, who had sold me my own home. The contractor even agreed to take credit cards, which meant I would earn cash back, and I could build business credit with my Amex charge card.

Then the first red flag came with the contractor. All of a sudden, he couldn't accept credit cards. I wanted to pay him right away to draw up architectural plans and secure permits, but he delayed. He eventually talked me into drawing the money from the repair funds directly at the bank, after the house closed.

I got a call from my realtor a day or two later saying that he had news about the contractor. He had been hearing from other clients that the contractor wasn't paying his subs. The realtor told me to tell the contractor that if he screws up once, he's fired. I should have listened to him. The contractor strung me along for more than a year.

There were so many excuses, no-shows, no subcontractor receipts, unpermitted work, mistakes and do-overs, the architectural plans were delayed for 6 months -- I can't even begin to describe all the problems we had. So instead of getting started on the addition from day 1 and working in parallel, that part wasn't started until at least 6-8 months into the project. Eventually he disappeared when I finally started looking to replace him, and I had subcontractors showing up looking for him, because he owed them for other jobs.

At this point we were 75k over budget, and only had $75k left in funds, and I was paying $7 to $8k a month on mortgage interest. But because the profit margin was so wide, it seemed worth it to keep working on the property. I had been able to afford the mortgage interest all this time because I was an hourly self-employed software consultant, not taking taxes out of my income yet. (that was also a bad idea)

Since I was 75k over budget, the bank wouldn't advance any more funds until we were back under budget... but I didn't have any extra cash. I went online and found the best-reviewed contractors I could find, and vetted them. We worked out a deal to get the work done for $75k, and they would get a bonus on the back-end when it sold (another $75k), contingent on timeliness and completeness.

Everything went great at first. Then, dates started slipping by a lot, I noticed they were substituting cheap materials, and they weren't doing some things I asked for. Nevertheless, the house was 97% complete, and the project was well over a year in.

When we significantly passed the date on the contract, they were sure they weren't getting their bonus, and I finally had run out of money to keep paying the mortgage. I had even sold my own home to keep making the payments for the previous 6 months, as I was no longer consulting as I was now focused on this project full time. I reached out to the contractors for help, but it was already too late. They could still get the bonus if they spotted me on the mortgage payments, but they pulled back because they assumed the worst of financial troubles. Everything finally spiraled into oblivion from there, and I could not save it. The contractor filed a lien for the bonus and stopped working, even though they didn't earn the bonus according to the contract. We listed the house frantically (1% commission), staged it a little early on net 60 terms, and did several open houses, decreasing the price dramatically in hopes that I could get out quick and at least break even. But the house wasn't finished enough for the price point.

Then, a couple months (and $150k of my own money) later, I moved to California to start a new job, and it was all finished. It foreclosed. The bank called me to thank me for working with them every step of the way, and that they were not going to report the foreclosure to my credit. But my own credit was now destroyed. I'm now paying a credit counseling agency to pay off $100k of closed credit cards at reduced rates. I had already missed 3 payments before things balanced out. If I filed bankruptcy I'd still be paying most of it back. Plus, I now have to worry about taxes for 2016 where I potentially owe $24k, and paying back my roommate... I am also facing shutting down my LLC.

The 2nd contractor called me later and told me she was suing her manager because of the shoddy work and paying people under the table, so now I have to show up for a court date to testify. She says she wants to compensate me in the suit, and send her my credit report to repair my credit for free, and give me half of the $75k bonus because she'll file a lien on the property, but I'm skeptical she might be trying to turn around and sue me, the way things are turning out.

Otherwise, things are mostly okay... Just on a 5 year repayment plan, paying about $1900 a month, plus paying back a few other people. I don't have much free money for myself anymore since I am in the bay area now, paying $2k a month for a room, and I'm upside-down on my car, paying $1300 for the Hellcat I bought 2.5 years ago.

So I kind of feel like my life is ruined at 26, but I would really like to start over if I could. Maybe I could try out wholesaling in the bay area and rapidly pay everything off if that goes well, or I could make it big with a good software pitch or something.

I poured my heart into that house, and it makes me sad to see the bank profiting from my blood, sweat, and tears. They finished the remaining 2% of the work mainly by just painting the exterior and fixing the pool. That's why the 2nd contractor said she was going to re-file the lien.

Anyway, so much of the design and work was based on my own diligence, and this house is my brain child. I just wish it paid off.