“OUCH! Losing SIX FIGURES on One Deal… and Six Lessons YOU get for FREE.“

[Alex Ficco]

Some deals are better than others. And some deals sting for a long time afterwards. Although I learn something on just about every single deal we do, usually the ‘stings’ come with a lot of education, so I’m here to pass it on to you guys.

For context, my partner and I own a direct-to-seller SFR flipping and wholesaling company. We've been able to keep some rentals along the way, but operating in a west coast market (Reno, NV - median home value of $525k), and even finding our own off-market deals, it's REALLY rare where we can fully cash out refi an SFR deal to pay off the short term debt and have the rents cover the new mortgage… even when rates were half of what they are today.

When we HAVE had those in the past, we’ve kept them. But even being able to do a full cash out, it's hard to pass up the $40k-$60k pay day for a rental that produces negative cash flow. (Yes, I know my 60 year old self will call me a dumbass for this, but that’s for another post).

Rewind to February 2022, a 6 unit pops up on the MLS. Super clean brick building, under rented, and sitting on some good zoning that will allow more units in the future with no parking requirements. Bingo! We'll keep this one forever and develop it later. We offer non-contingent and go into contract for list… $825,000.

With the current cap rates for multifamily in Reno, checking the rental comps, and after a light rehab and re-leasing at market rents, there's NO DOUBT that this building is worth $1.2mm, even without the zoning! *Laughs in DSCR at 7%*

If this is true and assuming 75% LTV on the refi, our new loan amount would be $900k. Full BRRR after the estimated $50k rehab!

After doing about 50 SFR flips, how are we going to fund this thing? Well… the same way we've funded every other deal in the past… with 100%+ financing of course! Private money, high interest, and a 1 year term! $550k in first position and $300k in second position to be exact.

After raising the $850k and paying for closing costs, we close on the deal and get a check BACK at closing to start the rehab. Common practice for us in the flipping world. Let the lessons begin!

Was the building what we thought it was going to be? Yes. Was the rehab what we thought it was going to be? Yes. Were the rents what we thought they were going to be? Yes. Sooo what happened?

Our first mistake (we just didn't know it yet) was how we funded this deal. We would have been far better off bringing in an equity partner up front and using less debt. More on this later.

Lesson number 2. For our specific situation - running the flipping company full time, having other rentals, having a team in house - we would have been better off leasing the units ourselves after the rehab and THEN passing it off to a property manager. I’m usually one to pass off everything I can, but for this deal and the resources we have at hand, we would have had the building leased up WAY faster and probably would have had better quality tenants too.

Number 3. Location, unit type, and rents! Reno is kind of a unique market in the sense that there really are no “war zone” zip codes like other cities. There are worse parts, but there’s really no part of town everyone stays away from completely, at least in the flipping world. This building wasn't in the best area, but we’re going to keep this thing forever right? It will get better!

All 6 units were studios. And of course, we’re doing all of this work to get the highest valuation possible, meaning we need to push the top of market rents… right? Well we did. We got the rents we wanted. But interestingly enough, we also got some pretty low quality tenants from that as well. It almost seems backwards, but with such low inventory, anyone who DID have options probably just skipped the studio and went up the street for a 1 bedroom unit for $100 more, or to a slightly better area. Just a hunch but I think we got some people who had no other choice.

Lesson 4. The market and not understanding commercial refi products. I don’t blame us for getting caught in a shifting market. We were just doing what we’ve always done. We’ve done this before with small multifamily and it was fine… but we definitely got a first hand lesson on what happens to refi products when there's a shift!

The previous two lessons added to this one though. Getting better tenants, and getting them much FASTER would have put us in a better spot in the market cycle to start the refi. By the time we had all the units rented and started the refi, it was too late.

Basically, this was right at the peak of fear locally. Late summer into the fall. The "oh ****" had set in for all of the flippers and retail buyers alike after seeing our market literally take a 10% hit in most SFR product overnight in June… and it had been continuing to drop since then.

The only halfway reasonable refi products we could find for this deal were DSCR, and with rates as high as they got, the building ended up only qualifying for right around a $550k loan amount. Enough to cover our first position lender, but remember, we still had another $300k of debt in second, plus some of our own cash we'd put in for the rehab above that.

We looked at it every which way we could; Bring in an equity partner now. Not a good deal for them. Refi and pay off the lender in 2nd out of pocket. This would basically bankrupt our business to keep one property. None were good options for anyone. But the building is still worth $1.2mm right? Lets just sell it, pocket our $200k+ in profit, and use it to keep building the business!

Yep, sounds good…

Until lesson number 5 came around. Buyers for multifamily are not retail buyers. Even though multifamily in Reno has been absolutely insane for the last 5 years, the potential buyers knew what was going on as inventory started to creep up…

The longer they waited, the better deal they were about to get. And more options kept popping up in better areas.

So wait they did. And so did we. And after several months of price cuts, we still owned the building. Funny, if we would have listed for $1mm right away, it probably would have sold at that price right away. But that was breakeven for us. No way! This is a good deal… until it's not.

Lesson 6. Chasing the market down. Luckily, we didn't run into this issue on any of our SFR flips during this time period. We priced aggressively and were able to move all of them pretty quickly, even the few that we lost on. But with this bad boy… chase it down we did!

We end up selling the building for $875k. A net loss of $110,000. That really hurt going to the bank and getting a cashier's check for $53,000 to take to the title company… to be able to SELL the deal. "Due From Seller: $XX,XXX" is never something you want to see on a HUD 😂

So is there risk in real estate? Of course. BUT… every deal works with a long enough time horizon. We got ****ed on this because of being overlevered with short term debt. If we could've held on even until now, it probably would sell $1.1mm or more. The market came back a bit. But it was looking pretty bad when we were listed!

So when you hear the guys talking about all of the distressed multifamily deals that are going to be coming soon because the operators can't refi out of their 2 and 3 year bridge debt they used to take down the deal in 2021 or early 2022… Yep. I just took you through a mini case study of what they are talking about.

All in all, it's all good. We lived to ‘buy’ another day. We’ll be in the game for life and it's a blip. I’m glad that happened to us when it did (not on our first deal) and we know a lot more now for next time than we did about a year ago. MOST importantly, we did right by our private money lenders. They trusted us enough to give us a lot of money for this deal, and even with the things that happened out of our control, both of them got paid back in full with the promised return well before the note was due.

Hope this helps.