Postmortem of My First Real Estate Financial Partnership

[Account Closed]

As a new investor with no real experience, but with some money available, I though being the financial partner in a real estate rehab to be a good way to both gain experience by working with a seasoned investor, and earn some money in the process. The following post is an overview of how the deal worked, and the results it produced. Let me know your thoughts, ideas, and any constructive critiques you may have.

The partner in question was someone who had approximately 10 years of real estate experience, and who had completed many profitable rehabs. We met at a local real estate investing association, and after several months becoming acquainted, decided to partner in a deal when an opportunity arose. The premise of the deal was he found the house, I bought it using my money, I funded the rehab, he managed the rehab, managed the sale, and in the end we would split the profit evenly. He would make more money than he would if he wholesaled the property, as he couldn't fund it himself due to multiple rehabs going at once, and I would be able to make money and learn in the process.

To begin, I had some money available, but not a huge amount, therefore, the house in question was a lower value home in an area of the city, that although itself was decent, was near the drop off point of where homes go from being majority owner occupied to majority rentals with a corresponding loss in quality. The house itself was a nice three bedroom, one bath ranch, all brick, with a two car garage on an alley. As it was brick the exterior was in good shape with minimal work required except on the trim and the garage, however, the interior had been updated for 30 years, so everything had to be redone.

Being that the house was in a marginal zone, the ARV was approximately $90,000.00. It was purchased for $27,000.00, so, using the 70% of the ARV rule, the rehab amount should be approximately $36,000.00. The goal was to clear $20,000.00 after paying all the commissions, pro-rations, title work, closing costs, etc, so, after splitting, each side would clear $10,000.00.

The about is how, in an ideal rehab, everything would have, turned out. Below is how it actually went, it was not a disaster by any means, but, it was not as profitable as desired.

To begin, the rehab was begun in winter, the beginning of January, which wasn't the biggest deal, since the vast majority of the work was done on the interior. The demo was done immediately, however, we couldn't park the dumpster in the yard due to a lack of room to maneuver the truck, so, street permit was needed, and since we only had a one week street permit, another dumpster was needed for other stuff later, so tack on $575.00 to the rehab cost. (a small amount I know, but this being a lower value deal, anything over budget will have a 50% greater impact on profits, than for example a $130,000.00 ARV rehab where you could make $30,000.00). The interior work went smoothly for the most part. The only real change was it was realized the furnace was older than initially though, and, since we were going to add central A/C, the HVAC guy was able to replace both for $2,400.00, a good deal, but still $900.00 more than the $1,500.00 anticipated for the A/C alone. Flooring was also more expensive than the initial $2/sq ft anticipated, so instead of $2,400.00 for a 1200 sq ft house, it was $3,100.00. After the interior work was complete it was time to move on to the exterior.

It was mid-February by this time, luckily it wasn't a brutally cold Wisconsin winter, so work could be done to the exterior. The principle exterior work was needed to the garage. The roof needed to be replaced, and it was initially though, the siding repainted. Unfortunately, we were only half right. The contractors realized there was significant rotting to the wood siding due to poorly maintained gutters, so the siding would need to be replaced instead of repainted, so, $1,200.00 for the shingles and siding plus labor for both re-roofing, instead of just re-roofing and paint. I'm not certain the exact amount this worked out to be, but probably $1,000.00 more. There was also a broken planter on the porch that needed $800.00 of repairs, which was $300.00 more than originally though. Over all this work went relatively well, and except for the additional garage expenses, no major problem. However, the weather decided not to cooperate, and it remained too cold for landscaping, then cold rain began, further preventing landscaping, for the ensuring month. So, add more holding costs (property taxes, insurance, utilities, etc) at ~$430/mo.

The weather finally cooperated, landscaping was done, and a few odds and ends were completed around the house. It was mid-April, the contractors all did good work, the house looked great, and it was time to hit the market. At this point I made the regrettable decision not stage the house since we were already over budget, and I didn't want to spend more. We also listed it for a bit more than $90k at $99k since it looked so nice, and we wanted room to negotiate a price to $90k. We received some initial showing, no offers. A week went by, nothing, We dropped the price a bit, a couple of showing, nothing, more time went by, another small price drop, nothing. After a month, and another $400.00 in holding costs, I became more inclined to spend the $800.00 in staging fees, and after realizing several other people did over the winter rehabs in the same location, thereby putting a glut of inventory on the market, and preventing anyone from getting a higher price on their finely rehabbed house, it was decided to list it at the original price of $90k.

After doing this, and getting new pictures of the staged house in the MLS, we had a flurry of showing, and an offer in two weeks. After a bit of haggling, a price of $88,500.00 was agreed upon with us paying closing costs, so we'd clear ~$85,000.00 before commissions and pro-rations. The offer used a VA loan which had a $1,500.00 funding fee, which the seller wanted us to pay as well on top of the other closing costs. The inspection came back, more expenses to the tune of ~$800.00. Closing time was 45 days, and at this time my partner in the deal had a serious health problem develop, which luckily he is recovering from. I belatedly realized though that I should have had a plan to deal with a circumstance like this ahead of time. Luckily it occurred after all the real work was completed, but a disaster could have ensued if it occurred earlier, so I guess the lesson is have a plan in advance should you or someone else become incapacitated in the middle of a business deal.

Finally it was time to close. After working out all the details of the closing costs, pro-rations, commissions, title work, etc. we cleared about $7,500.00, so we split $3,750.00 each, well short of the $20,000.00 goal, but profitable none the less.

Overall, the deal took 7 months to complete, 2 more than planned, 1 of which can be attributed to me for balking at paying $800.00 in staging costs (live and learn I guess), and one of which was outside anyone's control, and the bane of most rehabbers, the weather. It also only made $7,500.00 instead of $20,000.00, some of this was due to a lower purchasing price and more holding costs than anticipated. We ended up putting ~$41,000.00 into the rehab, instead of the $36,000.00 originally anticipated, a difference of $5,000.00. Some of these things should have been foreseen, others were outside anyone's control, some improvements we added on, the inspector wanted some repairs, additional closing and holding costs, and some of the estimates just cost more than originally though.

The deal was profitable, so I am not disappointed, I believe also I gained a significant amount of knowledge concerning the rehabbing business beyond the monetary gain. I also took a number of key lessons from it, particularly:

1. Prepare for the worst, hope for the best. If the heath scare issue occurred a month of two earlier the entire project could have turned into a train wreck, so plan head, even if your partner looks young and healthy.
2. On low value rehabs the 70% of ARV rule isn't going to work, you have less room for overruns, and unanticipated expenses than you would have on a higher value rehab, either buy lower, or don't do them.
3. Try to do higher value rehabs, you'll make more money, you have more room for error, and cost overruns/price drops have a proportionally lower impact on your profit.
4. Stage immediately.
5. Price to sell.
6. Watch to see if a bunch of other houses in the same area have sold for the same price, in the same area, at the same time that you bought yours. Some of these may have been bough by rehabbers as well, they will be your competition. You can check for some of this on the MLS, you won't see the private transactions, but it will help.
7. Don't loose money, despite the fact that the deal wasn't as profitable as anticipated, we still spend significantly more than originally budgeted, took two months longer to sell, took on more holding costs, and sold for less than hoped, and we still made money.

If you made it this far, thanks for reading, let me know what you think.

[Ramon Jenkins]

I agree with key point lessons #2 through #7

I’m not going to comment on lesson #1

-> since I believe I know who you’re talking about

Just an ideal :

~~~~~~~~~~~~~~~~~~~~

rehab higher end properties

buy-hold low end properties

Maybe the following people can weigh on

this thread since they perform local partnering on deals :

@Dawn Anastasi or @Robert Taylor

[Dawn Anastasi]

@Account Closed I only do partnerships on buy-and-holds, not flips, so it's tough to comment. I started one rehab with the intention of flipping, but it turned into a buy and hold. So I would not be the person to ask about flipping.

[Joel Owens]

Hi Matthew,

I am not a rehabber or a flipper.

I will say that if your partner has completed multiple rehab deals then they should have used numbers that had contingency repairs built in to the profit model.

The extra costs you are talking of should have been planned for in the beginning upon a walk through.

Sounds like to me your money was at risk and maybe the rehabber had other projects going on with their money on the line and this project was an after thought. A 3/1 is much harder to sell. Typically when you start out new with anything you go basic (3 bed - 2 bath) and then you get more aggressive after time and experience. This way you are not too deep in a complicated deal.

I have no clue on what happened but timing the rehab, completing on time, and on budget is critical. Did you validate your partners (body of work) going in to see with each project if they met profit and time line goals??

An experienced rehabber wouldn't be making all the kinds of mistakes you posted about. So the completed a bunch of rehabs and the mistakes made with your project do not align with each other.

[Brandon Turner]

Awesome story, @Account Closed thanks for sharing! I feel for you! I've been in this very situation a few times, and although it sucks not to make what you are hoping - the good thing is: YOU DID IT. 99% of people never get off the couch. In fact, many people PAY $50,000 to learn what you just learned. So congrats on doing it, on learning the lessons, and making some profit. Best of luck on your next one - it will be better!

[Robert Taylor]

I always kid myself about my sometimes LOOOONNNNGGGGG posts, but you've got me beat, that's the longest one I've seen yet! Just giving you a little kidding there, I see you had a lot of info to get across there. I have a few thoughts, since I was mentioned in a reply, yes you ALWAYS run into things that take you over the original budget, I mean I suppose theoretically you could put a budget together where you totally overcompensate in each line item, so as to build yourself an inevitable cushion, but its easier to just put in a "misc" or "contingency" or whatever you want to call it and hope you don't use it all up. I guess it just comes from experience to get better and better and pegging those numbers.

As far as staging goes, I now agree 100%, its worth it! Being a realtor as well, I've heard so many people say that they can "envision" an empty house all furnished or whatever, but my experience shows me that staged houses do just sell faster and likely for more. I had one that I did last year that I certainly thought was fairly priced and we had quite a few showings right off the bat that ended up sitting for months and selling for a fair amount less, it wasn't staged. I had another that sat for a while and we finally had it staged, got an offer right away, now I totally believe in staging.

Higher value flips can be more profitable, but you still have to watch the same stuff and face other decisions as well. I did one on the east side of Milwaukee, a half block off of Lake Michigan (a very pricey area of older homes, for those not from here) that I posted on here a while back. We did make a profit on the place, but its easier to get "lost" inside of much bigger project like that. It was a nearly 5,000 sq foot 1920's home that we kept adding more and more parts to the project. Are people in this price range going to expect better bathrooms? Hmmmm, so we end up gutting and totally renovating both upstairs full baths. Well, in this price range, we can't just go to Home Depot and grab some ceramic tile for these bathrooms either, so we ended up installing all natural stone and marble in them, the master bath took over $8K in just the raw tile, no installation, no backerboard, etc just in tile alone. Quite a bit different than trying to decide between getting the tile for 79 cents a foot or splurging on the 99 cent stuff! Another thing was the interior paint, I think I'm fairly good at picking colors for an "average" flip, but for this house we used an interior designer to pick the colors and she did a great job, she had us painting sample colors all over the place, looking at them during the day and night, etc. until she made her final choices which tunred out to be great. In the end, we spent WAY more time and WAY more money than we ever anticipated, yes we did make money in the end, but looking back, we probably could've done just the basics and made just as much in a much shorter time frame, but hindsight's always 20/20 of course!

Finally, one note on Joel's comment. I can probably guess one of several areas this house you're talking about might be in Milwaukee and 3/1 houses are quite common, a 3/2 with 2 full baths in such an area would be very rare. Even a 3/1 1/2 bath house would be somewhat rare, so I don't have a problem with that. These are usually somewhat older homes, so the whole extra bathroom craze hadn't quite caught on yet!

Matthew, if there's ever any other questions you have or if you need a realtor's help, let me know!

Wow, looks like I wrote another one of my long posts again!

[Jimmy Hong]

Hey @Account Closed , thanks for sharing your 1st rehab experience. Glad you made it out okay, great points to share afterwards. Just curious and I don't know who your partner is but after your experience, do you plan on doing another joint project with him again?

[Usha Angou]

As the saying goes "Rough seas makes a better Sailor" Your have clearly depicted the reality of the "Real Estate" for beginners. I would see it as a very big lesson learnt with a student stipend for the 7 month duration.

My Guess is you will definitely keep looking for more projects in the coming months and that is the way to go! Good Luck!

Be a go-getter, never give up. Best Wishes!

[Tom Goans]

@Account Closed,

You mentioned your project was profitable.

If you factored in the risk and time-value-of-money, would the project still be considered a good investment?

The lessons learned have value. I too have many school of hard knocks under my belt. Good lessons learned. Just an expensive way for me to learn them.

[Nicole Pettis]

@Account Closed Thank you for sharing!! Good to hear how others are doing with the first experience, especially for a newbie!

I, myself, have always believed in staging homes. Coming from an artist/graphic designer background I have learned that its hard for people to visualize what the finish product might look like. Also staging creates a warmth and homeyness that empty house don't. You have to figure that majority of the decision makers are going to be women & you have to appeal to them with emotion & staging does that...as you have learned:)

But congrats on taking the step and going for it! Much kudos to you! Hopefully we will see you next Thursday.

[Nicole Pettis]

Oh! I had one more question/comment.

I noticed on a few replies that it was mentioned that you should buy & hold the lower end properties. @Ramon Jenkins

My question is with being a rookie/newbie & having a limited amount of funds for your first flip, the little cape cod starter homes are a good place to start. And I have noticed that with many of the successful REI's they invest in those type of homes in the beginning. Starter homes that fit the first time home buyer target market. Also, many have said that you really need to add a 2nd Bath or 1/2 Bath to help with the sale.

So just curious about those comments.

Thank you!

[Ed Long]

@Matthew Rutter

Thank you for sharing your story. I have a few just like this. I've never seen a flip cost less than anticipated.

Geography is so important, I wish I lived in So Cal during the good years, because flipping a $500K house there was similar to a $100K house where I am, and what you find is that the rehab cost is essentially the same (sheetrock to sinks costs the same, as well as labor), but the margins are larger, balanced against the need for more cash to get in.

I've yet to come across a $90K house that has been very profitable in flipping and have stopped at that level of the market and I can say that $10K was about the avg. profit made.

[Stephen Roy]

The dry-rot in the siding should not have been a surprise. Did you have a WDO inspection?

[Nicole Pettis]

@Ed Long ..as they say its when you purchase, not when you sell. So are you saying that if a house sells at $90k and you purchase it at the right price(i.e. the flipping formula) that you won't make more than $10k profit on average? And on that note are you saying it isn't worth the time?

In my mind walking away with a $10k profit is better than walking away with no profit or a negative loss. Also, everybody has to start somewhere. Not everyone has the money to start working on the big $150k rehabs. Plus I would rather make mistakes and loose money on the smaller deals than loose on the bigger ones.

With Matt's story, its sounds like a few things happened. 1.) Maybe they should have purchased the house cheaper or included a contingency fund within the budget. 2.) Staging would have sold the house quicker, which would have meant less holding costs. 3.) Seven months is a long time to fix and flip, which doesn't help with holding costs either.

To me, they would have made more, if the rehab had gone quicker and they could have sold quicker. But you live, learn and move on at least Matt made something and he learned much from the experience.

[Account Closed]

@Matthew Rutter Good Post! Thanks for posting details of each stage and what can go wrong in rehab? But as other people told you earlier that it is good to make some profit while learning and I am sure that in next deals you will keep on increasing your margins based on just more experience

@Robert Taylor Don't worry about long post as long as it has values and I read few posts of yours and they are good..so continue doing so and help others as you do anyway...

[Ramon Jenkins]

@Nicole Pettis -> Okay , what I was trying to say in the

current market to me personally low end properties

have great cashflow versus middle income properties

bring in higher rehabs profits

Maybe because it’s more competitions

here locally flipping under $99,000 properties

Less competition here flipping $100,000 - $500,000 plus

Yes we all need to start somewhere

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

low -> medium - > luxury properties

sfr -> small apartments -> medium-> 100+ units

100 plus units -> medical complexes -> strip malls

strip malls -> new development ( etc )

As everyone said a lot of single hits our better than

sitting on the couch

If I had a five million dollars today:

I would invest in both low and middle income properties

How can I say this without hanging myself :

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Dawn A. performing buy-hold mostly under $100,000

J Scott & Robert Taylor mostly performing $100k - $500k+ flips

So when you’re hitting singles then move

up to home runs remember us small people :)

[Robert Taylor]

@Account Closed -hey, thanks for the props on my LOOOOOONNNNNNNGGGGGGG posts, glad to hear that someone enjoys them! I'm always glad to share some of what I've learned and also glad for the advice I get here whenever I have a question, because I'm still learning myself too!

[Dave Carpenter]

@Matthew Rutter - thank you for the post! it is a great example of what seems all too common. So often I listen to posts about million dollar flips, and dream about the day. This one really seems like something i might experience in the next month or two. It is a great reminder to analyse and plan for contingencies, but also to get out and do it. At least you did make some money, and I imagine the next time you will be that much wiser for the experience. Good luck on the next one, maybe someday we will be working on a project together!

[Account Closed]

Thanks everyone for all the comments, helpful information, and I enjoy reading them.

@Jimmy Hong I'd do another partnership in the future, I'd just make certain to apply the lessons learned from this deal to any future ones so they turn out better.

@Tom Goans I think the house was bought low enough to eliminate the risk of loosing money, it could have been bought lower to ensure a better return on the money, but in 7 months I probably made as much or more that I would have with the money any other way.

Thanks again for the input everyone.