Flip went terrible and still came out ahead

[Devan Mcclish]

We all have that bad investment or that project that turns more into a nightmare than anything. The key is to cut your losses, swallow your pride, and move along on top of having a short term memory for the next investment. Remember, investments do not always result in a homerun. Always BUY RIGHT to hedge against risk. 

My very first rehab I every embarked on FINALLY sold. That's right. This was a nightmare but a great lesson that every investor needs to learn at some point. Check out the details and learn from my mistakes :)

1. How I found the deal - I found the deal on my mailing list campaign. I was targeting owners who had owned the property for over 30 years in two zip codes I liked. On the second mailing, I got from the owner of the property. Her mother had passed away about a year ago, and she had just finished probating the property. Her siblings were not helping with tax bills, utilities, grass cutting, etc. She wanted out of this property ASAP. One obstacle with this deal that I ran into is there is always one sibling who thinks the property is worth a million dollars. You have to learn how to overcome this. Luckily, that sibling was not the executor of the estate. After showing the sibling comps and what everything around it was selling for, she deferred to the executor. She sold me the deal because I promised not to tear the house down, and agreed to have her be the first one in the house when it was finished.

2. Numbers - 

Purchase - 155,000

closing costs - 1,500

estimated rehab - 60,000

ARV - 330,000

House specs: 

1595 sf

4 beds

2 baths

Sounds like a great deal right? It was. It was a solid investment. Your investment is as solid as your contractor when it comes to a rehab. I had to quickly vet contractors and we met one we liked. He said he could do the job for 60k, it might turn into 70k if we run into problems, which I fully anticipated. This was mainly a cosmetic rehab. We did not have to replace the roof, the hvac, the plumbing or a lot of the electrical. We did need to move a few walls, one which was load bearing.

During the demo of the house, everything was great. We were moving along smoothly. As we hit our inspection phase from the city, the project slowed down tremendously. I thought this was going to be an 8 week process. After all, we were not replacing the major systems. We did have to tear off the entire front side of the house though :/ 

Long story short, the rehab quickly went on for 3 months, and then 4, and then 5. We finally finished October 30th, the worst time to put a house on the market. Not only did it take 5 months, the invoices got less and less detailed, and we made the mistake of trusting the contractor too much. We hit 60k, then 70k, and it went to 80k and we still weren't finished. Once it hit 80k, we refused to pay the contractor for anymore work. I went to his subcontractors and asked for receipts. Turns out our contractor was marking up everything at minimum 100%. IE: Electrical invoice was for 1,500. He charged us 5,000. Back then I did not know what electrical costed. He charged us a markup of 500% for framing, again rookie mistake!!! He threatened to sue us when we stopped paying. Once he found out we had obtained the receipts, he went silent and finished the job quietly.

We sat on the market all winter long. We listed at 340k. An investor friend of mine had sold one in august down the street (basically the same house) for 340k, I thought it was a solid comp. We had very few showings until february. We dropped the price 10k every two weeks after February. We ended up at 289,900. So not only did I get screwed by a contractor for 15k plus, we lost 50k in market value. The sub market had been overinflated over the summer and it corrected itself over the winter, and we were in the crosshairs. 

We ended up selling for 285,000

285,000 

less 7,800 in concessions

17,000 commissions (I am the listing agent)

closing costs - 1,500

less 84k (rehab, staging)

less 8,000 (holding costs)

less 157,500 purchase 

Net profit = 9,300

We held this house for 10 months 

3. lessons learned

1. Don't trust contractors and vet them well - we have one now that I love and he is fantastic. Spend time to figure out who you are getting into bed with. This is a crucial step to this process. Don't be lazy on this whatsoever!!!!!!!!

2. BUY IT RIGHT - If you buy it right, you can hedge against risk. I went into this deal thinking we were going to make a lot of money. In the end, I am just glad we did not lose money. We did everything wrong in this house and we still came out ahead. Buy those deals, stay away from marginal deals.

3. Pay attention to detail - I did not mention this above, but pay attention to the details. We did not have a very good pantry, a yellow and red exterior is a bad choice, make sure you have a drier vent, make closets big enough, trim trees to add curb appeal, expand living space if possible. This list can go on and on. But moreover, the contractors craftsmanship sucked. Make sure your contractor takes pride in their work!

4. Bite the bullet - If the market turns just bite the bullet and get rid of the house. It's not worth scratching over a few thousand while the market is going down every month. Listen to feedback, if you are not getting showings or offers, it is time to go down in price until you get an offer. 

Moral of the story, buy it right to mitigate risk and loss. Always expect the worst case scenario. I hope you all can benefit from my experience. I will be glad to answer more questions, as I am sure I left something out! :)