Nearing End of First Flip - Thoughts?

Question

SO, my wife and I began our venture into investment real estate approximately 2 years ago with a buy and hold strategy. We decided this year to do our first flip. We bought it for $114,500, put about $50-55k into the rehab, just listed it for sale at $199k, then reduced it last week to be more in line with price per square foot to $189k, less realtor selling commissions and closing fees we'll end up not that great - about $7k in the black, then we'll pay taxes on it leaving us with even less. It's been on the market for about 2 weeks with decent traffic. We were able to purchase with cash, lines of credit and money from family. We're getting pressure from family to get rid of it and get them paid back. I'm considering holding it as a rental until the Spring when the market picks back up. My concern with that is, that we'll end up putting more time and money into it in the Spring.

Is it better to keep the family at bay and stay the course for a sale or should I entertain renting it for the next 6-9 months (assuming I can find a qualified tenant willing to do a shorter term)? Any thoughts or suggestions welcome. Thanks in advance!

Is it better to keep the family at bay and stay the course for a sale or should I entertain renting it for the next 6-9 months (assuming I can find a qualified tenant willing to do a shorter term)?  Any thoughts or suggestions welcome.  Thanks in advance!

Todd English · Answer

Hi @John Knisely, thanks much for your input.  Agreed on all counts.  It was a good learning experience regardless of the financial outcome.  I think it is important to share the challenges equally as well as the successes.  I'll highlight a couple of hurdles we encountered:

1.  House was purchased from HUD, they provided a Property Condition Report (PCR).  Later learned first hand it was garbage.  Boiler didn't work.  Water main was busted.  Report said both were fine.

2.  We expected to spend about half of what we did on rehab.  Due to #1 and a new roof, it doubled.

3.  Borrowing from family can be challenging.  The family member I borrowed from surprised me.  As John said, it can work, but also can strain relationships.  Be prepared.  Fortunately, that piece has been manageable for me.

4.  Things ALWAYS take longer and cost more $ than you think.  Plan on it.

Even the best laid plans can go awry sometimes.  We weren't real estate novices, but had never done a true flip before.

We skinned our knees on this one.  We'll do it again.  And probably again :)

Any thoughts on recourse for HUD's B.S. PCR?  The thought has crossed my mind that perhaps a good R.E. attorney might be worth engaging to try to recover some of the expenses associated with the bogus report.  Not sure if I have much of a leg here though?

Todd English · Answer

Thanks, Gents!  Nobody bats 1000.

I could really go either way. I'm comfortable with dropping price more if needed or keeping it as a longer term rental.  If the latter, I would re-fi cash out, pay off my family, pay off my credit line, put some cash away and look for another deal... there is always another deal!

Hopefully, the next one will be more profitable.

What do you guys think about buying HUD or REO homes?  Should we avoid going forward?

Jesse Sobel · Answer

The way I look at it you have a few options available. You sell now pay back your family and get that stress of your back or on the other hand you can find a decent tenant who is willing to pay off your mortgage payment. I am not exactly sure of your situation but I have had clients in similar situations who refinanced, paid off all of their debt, and then had their new tenants pay off their new mortgage. I feel like that might be a good solution to your problem.

Dropping the price now and selling is not bad idea either. Wether you only made a little bit of money or even lost a few thousand.... It is all a learning experience. Think of it as tuition and do not get caught up in the now. Keep moving forward!

Christian Wathne · Answer

@Todd English; thanks; another way to think about it is, what is the best action to take in order to have lenders continue to lend in the future?

for example; if they are expecting a quick payback and it gets dragged out; they very well may not be interested in lending in the future; however if you do whatever it takes to honor original commitments it will be a reassurance of your credibility.

Christopher Blanco · Answer

Free up the capital you have in it and move on to the next. It happens, normally when you either buy high, grossly mis-estimate repairs, or the "gotchas" pile up. I had all three happen on my first flip.

Todd English · Answer

Thanks for your input @Christian Wathne!  It's great to get feedback from others and their thoughts.

John Knisely · Answer

Hey @Todd English, do you think it will sell at 189k? Not sure what the outlook on property values in the area are but unless you are planning to hold it for a few years I would probably do what I could to get it sold this go around. If you put a tenant in there and they are rough on the place then you just have to deal with that extra hassle next year before selling again.Yes you may not be walking away with a fat check like all of the success story flippers will, but you will likely at least be at a break even, PLUS all of the experience you got. Maybe a good lesson to learn not to borrow from family (it can work, but it also can strain relationships). Renting it is not going to give the family their money back, selling it will.