Unplanned New Build - 2.5 Years of Headache

[Nghi Le]

Now this is the story all about how
Our flip got turned all upside down
And we'd like to take a minute just sit right there
We'll tell you how we lost $60k on a $1.25M flip-turned-new-construction that took 2.5 years

Our cheesy intro got your attention? :-)

But wait, you lost money on this, so how is it a success story?

Well, first off, we're pretty darn proud of the final product:
https://1drv.ms/i/s!AhZSFbwLnVicgcAtM_VH4We2rYNXoA

It is a 3,108 sqft home in the Capitol Hill area of Seattle with 4 bedrooms and 4.25 bathrooms. Each bedroom is its own suite with a walk-in closet and its own bathroom.

Second, it has been a pain on our side for the last 2.5 years. And when we say pain, we mean $8,000+ per month in holding costs, many sleepless nights, and a whole attitude/aura shift (in the negative direction). Ask the local Seattle real estate investors. We used to be a team full of youth, energy, and radiance until this one came along. We were extremely happy to finally be done with this chapter of our lives.

And third, it was full of learning lessons. It was the first time we lost money on a flip but the knowledge we gained from this one alone will save our butts many times over on future flips.

As always, let’s start with the lovely before pictures:
https://1drv.ms/f/s!AhZSFbwLnVicgR34sKLIjhBcRIkz

We do have to warn you that this is a very long post. If you want to just skip all the words and get to the end with the numbers, we don't blame you!

The Original Plan

Purchase: $375,000
Rehab: $175,000
ARV: $750,000

We bought it on the MLS on Feb 12, 2015. The plan was to completely remodel the existing house and build a 2nd story addition in front. Our architect said he had a good relationship with the city and can get us permits in as little as 3-4 weeks. In the meantime, we could start doing some demo while we wait.

A little context of where we were at this point of our flipping career. We had just completed our 1st flip: $145k purchase at auction, $40k rehab, $250k sale price. Since the flip was such a success and we liked working with that GC, we decided to create a partnership together.  – Nghi, @Sara Hoang, @Khanh Nguyen, and our new GC. A GC / project manager was the missing piece of our partnership puzzle because the three of us were all working full-time and didn't know much about construction. The GC would provide construction at cost and share the end profits.

Change of Plans

While waiting for permits in June, our GC got a little anxious and tried to do as much as he could so he demoed the roof, confident that our permit was coming soon. It is now December 2015 and we finally got our permit. It's Seattle’s rainy season, so of course everything got soaking wet. We walked through the house and concluded that we couldn't save any of the existing framing. This was a tear-down.

We ran new numbers. Comps showed new construction in the area going for $900,000. Our GC said to rebuild it would cost $300k. We're like, "All right, numbers still look good, let's do it!"

But what about our permit? It's a remodel permit, not a new construction permit. Well, our GC and a few people told us that as long as you have one wall of the original structure standing, it's still considered a remodel. All right, let's do it!

Oh, and we forgot to mention... because of how awesome that 1st flip went, we acquired a total of 8 properties within a 5-month period after that 1st flip. We discovered we were quite good at finding deals and finding money. We also had a lot of confidence and trust in our GC partner.

The Awakening

Towards the end of 2015, we started noticing an incredible slow-down of all our projects. We thought the GC had too much workload, so we took away half of the projects from him and started finding new GCs for them.

Some of the projects that he took on weren't very visible (i.e. they were far away and we could not drive down there regularly). However, he kept asking for progress checks, so we assumed there was progress. After all, this was our partner. He had stuck with us through hard times and always looked out for our best interests, so of course we trusted him.

It took us by surprise when some of his workers approached us and demanded money. Apparently, the GC hadn't been paying his guys for projects outside of our partnership. He was picking up work outside and deprioritized our projects. The workers thought all the houses they were working on was under our company. The guys shared a lot of interesting stories with us – how he told them to never talk to us because we were unfriendly and ruthless investors and how we owed the GC money and that was the reason he couldn’t pay them. Instead of being an expert in construction and a trusted partner, he was just an expert in deception and lies.

The drama continues with heated conversations, money demands, and threats. Silence followed for a good period until we listed a house and got it under contract, ready to close on the sale. We found out title was not clear - he had put a lien on the house. Long story short, we got a bond for the lien, sold the house, took him to court, won, got our bond money back, and got some judgments on him for fees that he owed us. To this day, we haven't seen any of that.

2016: The Year of Clean-up, Priorities, and Refinances

With our GC out of the picture, we had to scramble to find new GCs for all the remaining projects. New bids came back higher than the original rehab numbers. We had to redo some of his old work, materials on site no longer can be used due to the rain, and our new GCs had to sort through the mess with the city inspectors. Aside from being delayed, we were now also over-budget with rehab. Good thing we were very conservative when we analyzed our deals, so we still were able to make a profit from the rest of our projects.

When you have too many projects going and all don't go according to plan, you need to start prioritizing. We decided to prioritize the projects that we could push out first. Out of the 8, we completed 4 by mid-2016.

What about this subject property? Well, it sat. Not entirely because of the workload but because we had some additional problems with permits. The property is in a high-traffic area, so several city inspectors came by and tagged us. We had to revise our permit, add some new designs for a retaining wall, etc. The city wanted us to get that new construction permit and we were fighting it. While we were able to keep the main remodel permit, we were required to get extra permits (like a Side Sewer permit) that was typical of new construction.

2016 was also the year of playing the game of finance. No hard money lender wants to hold a loan for over a year. After a few extensions, we needed to find a new lender. We talked to over a hundred lenders and no one would take on our troublesome project. Then we talked to a hard money broker who brought us back to a lender that had rejected us previously. This time they took on the deal because of their relationship with the broker and how the broker structured the deal. We never really realized the value of brokers until now.

We ended up refinancing this property a couple of times in the 2.5 year span. We’ve borrowed from a dozen different hard money lenders so far; 3 were from this project alone.

A Reputable GC

While we were settling the permit issues, we came across a GC / investor who was as reputable as they come. He was doing 40-something projects at a time, was an active poster on BP and he was even a BP Podcast guest. He attended all the networking events in the Seattle area and everybody knew his name.

He felt bad for us and offered his services. He'd bring in his construction team to get us past this hurdle. We were thoroughly impressed with his setup, his company, and how everything seemed to run like a well-oiled machine. So of course, we accepted his offer.

It took us a while to get started since he was very busy. But he slowly brought in his team. Very, very slowly. It took half a year to tear down the remaining structure minus a wall (half of the house was already demoed by our old GC) and to do some underground utilities and foundation work. It cost us $86,000.

We started hearing stories from his guys about how things in the company weren't doing so well. Other investors in partnerships with him shared stories about how things weren’t going so well for them either. We found out about lawsuits and investigations from the Attorney General and LNI. And then the GC/investor was gone – he disappeared. Nobody has seen or heard from him for over a year now. He went from posting on the forums 100 times a day to 0 in an instant.

2017: A New Beginning

At this point, we were pretty tired of GCs. We ended up taking a more hands-on approach to this property and really learned the construction side of the business. We met and worked with sub-contractors directly, we shopped for materials and we picked out our finishes. We took over and managed the project scheduling and dealing with the city planning department ourselves.

It was a pain. One of us quit our job to manage all of our projects full-time. BP teaches us to get 3 bids for every line item, every trade. 80% of the time, the subs were either no-shows or extremely late. They also don’t work well together. Every contractor wants to have the house to themselves. When something goes wrong, it's always the other guy's fault and we would have to track it down. A wise investor told us there's not much difference between a real estate investor and a parent.

There were still on-going permit issues with the city, but we realized that the city was much more willing to work with the owner of the property than a contractor or architect. We were able to move through those issues pretty quickly.

Remember that one wall that we had kept up so we could keep our remodel permit? A big winter storm blew it down. The city didn't come after us for the new construction permit; they either felt bad for us or just wanted this thing done as much as we did.

Framing began in Jan 2017, and we finished the build in July 2017. We listed it for $1.3M and sold the house on October 19, 2017 for $1.257M.

The Result

So here are the final numbers:

Outside of this project, 2017 has been a good year for us. It feels like a fresh start. We started a new company with just us three. We've completed and sold all 8 projects except for one which we decided to place a lease-option tenant in. It took us a while to clean up the mess but we’re optimistic about the future. Our 2.5 year journey was rough, but we learned so much and we are stronger because of it. We're back on track and have new projects underway!

We hope you were entertained and got something out of this post. Too often people share their successes but not their failures. But it's in the failures that we learn the most… and we sure learned plenty.

“Our greatest glory is not never falling, but in rising every time we fall.” ~ Confucius