$50k Loss on First Two Flips | Out of State Investing Gone Wrong

[Spencer Cornelia]

** This is part 6 of me documenting my fun and often stressful real estate journey

The nightmare is finally over.

Today I close on my second flip ending what will hopefully be the roughest period of my investing journey. I detail here how my first flip essentially bankrupted me which resulted in this house losing money as well.

It’s easy to blame others for all that went wrong. Making the wrong hire, overlooking the risks, taking on too much debt. But ultimately the responsibility lies in my hands.

I jumped on a seesaw of risk hoping that the momentum would catapult my bank account into six figures only to find out the hard way that flipping houses isn’t as easy as I had predicted.

This house was purchased for $64,000 with an expected rehab of $100k to $120k depending on how much work the dilapidated and neglected house needed.

The midwest is lovely but the houses carry the weight of weather storms nearly a century old leading to more damage than a beginning investor could expect.

The appraisal came in at $225k for my lender meaning our all-in cost would be around 85% of the sales price worst case. That number seems high but the neighborhood was “hot” and houses sold really quickly.

What I cared about most was completing my second deal to gain experience. I actually didn’t care about making any money. I simply wanted to exit two deals to begin gaining credibility in the eyes of hard money lenders. I knew the value of exiting deals as a beginner. Experience carries more weight than a few numbers on an appraisal.

Everything was going smoothly for the first 4 months. We were lined up to have this project complete by August which would still be in the prime time frame for selling this house.

TLDR of my previous post - I ran into troubles with my first flip which was going on at the same time as this project.

I had to pull my contractor from this house to save the day on my first flip. Two months and $20k later, I was out of money and now my contractor for this house was pulled into other projects.

I don’t blame him. I was out of cash and he needed to get paid. He had other projects that he committed to.

Want to play a challenging game? Try to rehab a house 2,000 miles away with no money as a beginning investor.

I basically had to run a pyramid scheme in order to finish this project. I used my tenant income and w2 income to put towards the next phase of rehab. When that portion was complete, I could then receive draw money which allowed me to pay my utilities, taxes, and mortgages. In layman’s terms, I took all of my earned income to continue with the rehab only paying down my debt when someone else paid me (my lender via draw money).

I won’t bore you with the details, but this lasted about 6 months. I ate nothing but rice and black beans and protein shakes. I had to sell my car. I rode the bus 4 hours a day - 2 hours to and from work.

I had to walk to Wal-Mart to get groceries and had a lot of fun walking back. I had holes in my shoes but came to not mind it because I couldn’t afford to buy new ones.

One day I wanted to go watch a movie. I arrived at the next stop with 48 minutes to spare. The next ride would take me straight to the movie complex in 20 minutes. But the next bus wasn’t arriving for 52 minutes. So my only choice was to walk. Just another few miles added on to my weekly odometer.

But I made it just in time. (I wasn’t going to miss Uncut Gems)

But I’m proud. I wasn’t late on one credit card payment. I didn’t miss one mortgage payment. Everyone got paid. I paid all of my utility bills. I had enough food to get by.

And I had to deal with a worldwide pandemic slowing down the economy when it came time to list my house.

But life has a great way of balancing out the good and bad. This house actually didn't even make it to the MLS. A lady who works for my lender had a buyer walk the property before it was complete and made a full list offer.

The payoff at closing will completely wipe out all of my debt that I’ve been holding for 16 months ($50k) and get me back to $0. I’ll never be so happy with $0 in my account.

I was close the other day. I had $0.30. That was fun.

Because of this setback limiting my ability to leave my house, I sunk more time into my YouTube channel where I’m seeing exponential growth and am on pace to make over $6k this month from ad revenue alone.

Life is good. I may have lost all my money and my car, but I can hang my head high knowing that I did it.

I completed two flips 2,000 miles away without any prior experience.

After every dark night, a brighter day appears.

[Kevin Wyn]

@Spencer Cornelia I just listened to your podcast episode two days ago and read through your 6 part series. It is crazy how similar my process has gone. I just closed today on the sale of the second house and have ended the nightmare!

Similar to you I was doing well in real estate, had 3 cashflowing properties as well as my primary home and then thought it would be a good idea to flip some early 1900's homes. I bought these two houses that were next door to each other with a partner using hard money (3pts, 13% interest, and 1% extension fee every 3 months after the initial 6 month term). The plan was to have the properties completed in 6 months make some money and be on our way to real estate riches.

Turns out a lot of the framing was rotten and we had to completely reframe the back of one of the houses. This along with a multitude of other issues ate through every bit of reserves we had before we made much of a dent in these rehabs. This lead to piecing together payments here and there and drastically slowed the construction process and major cost overruns. I even sold my townhouse rental  just like you sold your 4-plex to keep the process going. The first house sold after 15 months and the second was today after 20 months. All in all I will be loosing 10's of thousands.

This process killed all of my real estate momentum, but has ignited a drive to succeed. I learned so many lessons and the unfortunate thing is most of them are things I have heard or read before. We all hear great advice on the podcasts but until you go through the process it is hard to know what to do. After listening to @Brandon Turner and @davidgreene do the recap it is true that you sharing your story will save BP member millions of dollars. I know it would have helped me.

Now that I am out from under these two properties I am waiting on a HELOC on my primary to get approved I will be getting right back on the horse but with much smaller rehabs.

Below is the house that sold today.