My "First-ish" Flip - Success!

[Shawn Lowery]

In 2006 I graduated with my MBA from Villanova University, ready to take the world by storm, scoop up my next pay raise at my 9-5 finance job and gain clarity in life only an MBA degree could provide. 2 weeks later I quit my job to pursue real estate investing. So much for that MBA. I was spending every waking moment as it was on sites like Bigger Pockets, local REIA groups, reading investing books galore, soaking up all the knowledge I could. I attracted like minded people. We masterminded over Rich Dad Poor Dad, Think and Grow Rich, the Cash Flow board game. My heart was set, I was never more excited, until I actually started buying property.

Remember, this was 2006. The moment the real estate market decided to shift gears a bit. I’d soon be gaining a valuable life lesson or two.

Flip attempt #1 was a neighbor that had passed away. I knocked on their door, palms sweating, made an offer to the family (I think I just guessed at a number), they kicked me out, and a week later changed their minds and accepted. All right! One step closer to financial freedom...or so I thought. It never flipped. I still own it to this day as a rental, albeit w/ cash flow of $150/mth and $50k equity. It’s never had a vacancy, so not too shabby, just not the original plan (is it ever?).

Flip attempt #2 I bought through an attorney referral, 75 minutes away. Oh boy, that was a joy. That never flipped either. It became a rental. I became a long distance landlord and took a crash course in the importance of tenant screening. 2 evictions later, city fines galore, I finally sold it and broke even, at best.

Wholesale attempt #1 I actually got a lead from a lead funnel website my buddy had created. A great family was in dire straits. They were desperate to sell fast. I used some random 1-page contract to lock up the house on an option contract. I handed them a $1 bill for consideration. It was weird. Lo and behold, we get an offer from another family to buy the house. I was so shocked this was actually working out I bailed on the endeavor and referred them to an agent I knew.

House hack #1 was great at first, renting rooms to friends while we were young with low standards, living nearly mortgage free. Ultimately, I got married and moved out. It has since lost $60k in value and has had a litany of repairs and extended vacancy. The peak of the Philadelphia market was September 2005. We bought that in September 2005. It’s underwater. Go figure.

That brings me (finally), to my “First-ish” flip today.

10 years went by, I appraised hundreds of homes. I sold hundreds of homes as a licensed agent. Vertical income was good, but that investing bug and desire for passive horizontal income, and financial freedom, was still in me, despite how hard I tried to smother it with fear. I was finding deals for my investors and wondering why I wasn’t taking advantage of them myself. I started dusting off the old real estate books. Listening to every investing podcast I could find. I found an amazing mastermind group, GoBundance, chock full of investors killing it all over the country. Proximity is power, and their accountability and support got me back in the game.

In August 2016, I bought a 4/2.5 detached colonial for $203,500 cash. I found this house on the MLS. The listing price was $185k within a $330k-$350k neighborhood. The house needed $69k in rehab (or so I thought). The projected ROI was enticing enough for me to jump at the opportunity. Without hesitation (not to mention without $203.5k in cash!) I submitted my bid, using a buddy's proof of funds, waived my own commission to sweeten the pot, and got the house!

It was a leap of faith. Now I had 30 days to raise $290k! The amazing thing was I had spent 10 years preparing for this moment, 10 years letting limiting beliefs hold me back, and yet, at that moment, I had complete confidence I would raise the funds. The deal itself was sound. I had a track record of sales in that area and I always lead with integrity. It finally clicked.

I hustled to present the opportunity to those I knew, and compiled a crew of 5 unrelated investors, some seasoned, some newbies, raising $290k to cover purchase and rehab. The last 2 capital checks came in 2 days before settlement, just in the nick of time.

Deal Summary

Projections

Purchase Price: $203,500

Closing Costs In: $11,100

Rehab/Holding: $70,913 (includes 10% contingency)

ARV: $340,000

Closing Costs Out: $11,642

Profit: $55,290

Time: 180 days

Investor Cash-on-Cash ROI: 11.0% (23.5% annualized)

Actuals

Purchase Price: $203,500

Closing Costs In: $8,382

Rehab/Holding: $90,563 (oops)

Sold Price: $353,900 (that helped)

Closing Costs Out: $14,866

Profit: $49,034

Time: 165 days

Investor Cash-on-Cash ROI: 10.0% (23.5% annualized)

Structure

Using OPM, and given my limited track record, I wanted to structure an offering that limited investor downside risk and gave them confidence to take a bet on me. I seeked out a $50k minimum investment and offered an 8% preferred (backed by a personal guarantee) return + 30% of any remaining profit. I would keep 70% of any profit after the pref was paid. Worst case, the deal loses money, I was on the hook. I laid it on the line to get buy-in, as I had complete confidence in the project, with buffer. I ultimately reduced this to 56% to round my investor’s return to 10%, simply as a thank you for their faith in me on deal #1 (of many I hope!).

Details (Nitty Gritty!)

For those of you that love full transparent details here are all the number, original projections and actuals on the back end. The first chart shows what each partner invested and their actual returns. The second chart is a detailed budget analysis showing projected expenses vs actual. In the end while I was WAY overbudget, I was conservative on the ARV and sold well above the original projected price. All said and done, I was short $6,256 off my original projections shared with investors. For the first deal, I'll take it and the tons of knowledge gained!

Lesson 1: Where there is a clear and compelling will (oh, and viable deal), there is a way.

Lesson 2: Don’t paint the entire house BEFORE doing rough electrical and plumbing work.

Lesson 3: Read J Scott’s rehab book multiple times, and actually implement what he recommends. Use a scope of work and detailed schedule. Efficiency was lost by not having a crystal clear plan of attack, as we had to backtrack on several occasions, losing precious time.

Lesson 4: Contractor’s work better with accountability (not micro-management) and clear communication. Without oversight, you will show up to an empty house days or weeks on end. My contractor was just as excited as I was the house sold quickly with multiple offers, however we both agreed we can improve many aspects of the process the next go around.

Lesson 5: Use change orders before approving extra work. ⅔ of my overage was due to extra work that was not clear in our original scope. I had no idea what I’d be charged until I received the final bill at project’s end. Big mistake. I want to pay my guys as soon as they get a phase of the job done, but having to negotiate that final bill was a time killer, stressful and avoidable.

Lesson 6: Use licensed reputable electricians for electrical work and licensed reputable plumbers for rough plumbing work. While your GC can assure you he’ll get it done, you have no oversight as to the quality of the sub he brings in. Another portion of my overage was attributable to cleaning up the mess my GC made by doing a sub-par job. As I find better contractor’s this will become less of a concern.

Lesson 7: Ask the neighbors to keep an eye on the house. Be respectful. Get them on your side. While it opened the door for them to call me more than they otherwise would have to complain about petty things, they also called to keep me informed on what days my crew would and would not show up. Extra set of eyes for oversight and security. They care about their neighborhood, leverage that.

Lesson 8: Surround yourselves with people that have been there done that. Add value to their lives however possible. Ask for help. Ask great questions. Show you care and are passionate. People want to support you if you express a genuine desire to move your own life forward, and take them along for the ride, profitably of course!

The list could go on and on. Ultimately, taking action was the most rewarding aspect. I am the poster child for “Paralysis by Analysis.” Knowing I was fully capable but letting limiting beliefs rule my decision making (“what if I screw up?” “where will I get the money?” “where will I find a good contractor?” “what is the market slows down?” “what if...what if...what if???”) was in the end the fuel I needed to prove myself wrong.

In the midst of this deal, I purchased another property, a $120k cash purchase w/ $205k ARV and $35k rehab (update: pending at $208k!). A snapshot of that deal is coming soon. I also locked up two multi-units, a 4-unit and 6-unit building off-market from the same owner closing Feb 2017. They will be my first taste of a value-add opportunity in the multi world. I consider dress rehearsal to do bigger and bigger deals as time goes on.

My vision is to pay out $1,000,000 to my investors over the next 5 years, between profits on flips and cash flow on apartments. Focusing on helping my investors build wealth was the mindset trigger I needed to stop worrying so much about ME. I can’t wait to help my investors get their fair share of this extra income and build their wealth as I build mine. I truly believe the more I give others what they want, the more I’ll receive for my family what we desire in return.

Paid to Investors to Date: $29,050 of $1,000,000 (goal by 12/31/21)

BEFORE & AFTER PHOTOS

BEFORE AFTER

ON TO THE NEXT!