Failed BRRRR in Dayton

[Arthur Wong]

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $18,500
Cash invested: $30,000
Sale price: $55,500

I recently exited a deal that I started back in November 2019 (it is under my investments under "other"). I was hoping to BRRRR this house in Dayton, Ohio. I bought the house through a "facilitator" from Ontario, Canada who had developed relationships with wholesalers/renovators/property managers in different cities. The company I was hooked up with seemed to be okay when I spoke to him and after checking a reference (a fellow Canadian). That company (let's call the company and the contact there MW) seemed to wholesale the property, had contractors to help flip the house (that needed a full gut) and was originally going to serve as my property managers. Everything seemed to start out okay with the purchase price being $18,500 and a stated renovation cost of $20,000 with 10% contingency. MW said it would be done by February. This timeline seemed very optimistic.

Problems started with the delay in the timeline. By April 2020, MW had stated that the house was pretty well completed except for the furnace and a/c. I was getting stories that both were delivered and just needed to be installed. By June 2020, I was getting antsy about why the furnace and a/c weren't installed yet. Turns out nothing was at the house and it just felt like my house was forgotten for a few months. By the end of June, I really put some pressure on MW that everything needed to be finished and I was promised that he would do a "full court press" to complete my property and get it performing. Then I couldn't get a hold of him. No return calls or emails. I found a realtor who had sold a house in the neighbourhood to take a look at my house.

I had been sent some pictures of the rehab by MW and was pretty happy with the work. That changed when the realtor I sent in (Saunya) showed me pictures that there were some major deficiencies. The basement didn't have any windows but yet you could see sunlight while standing in the basement (foundation issues). The back door was hung improperly and there was a hole where the door knob would usually be. Some eaves were missing. The concrete side deck was crumbling along with the steps leading to that small side deck. There was lots of garbage left in the "backyard". And there were a few random smaller esthetic issues inside the house.

Then randomly in late August, MW calls me and says he has found a tenant willing to pay $1000/month. I asked to see her application and MW never sent it. When I asked Saunya to go take a look at the house again to see if MW had performed some repairs I demanded that he do before I pay any additional payment, she found out that the tenant had already moved in.

I found late that (I'll include these in point form to try to keep this from being a 100-page read):
-tenant had moved in by the time MW told me about this potential tenant
-tenant had paid a $2,000 security deposit and close to 2.5 months rent all of which MW pocketed as his claim that I still owed him money (I refused to pay him anything until all the deficiencies were completed)
-I still don't recall signing a property management agreement with MW so somehow he just rented out my house without my acknowledgement and of course pocketed the rent money and the security deposit

I don't know why it took me so long but by the end of October, depending on who you talk to, I either fired MW (even though we didn't have an agreement) or MW fired me as an owner. I hired Saunya as my property manager and she met with the tenant. The tenant had a long list of complaints including the furnace not working along with promises that MW had made to her. After fixing the foundation issues ($6,500), I started having tenant issues. They included:

-she was so upset with MW, she didn't want to pay any rent as the furnace wasn't working
-she ended up paying $800 for November after the furnace was fixed (we had agreed to this due to the inconvenience of the furnace)
-she got COVID and lost her job
-tenant missed three months of rent
-tenant wanted to stay and agreed to pay $1300/month until she was caught up
-tenant pays $1300 in March 2021
-tenant pays $1200 in late April 2021 (if I remember the date correctly)
-I never see another dime of rent
-tenant eventually leaves (I forget if it was the $250 I offered her for the keys or Saunya's threats of evicting her)
-tenant has close to a $3,000 water bill that was outstanding!

I fixed up the house a tiny bit and put it on the market and sold it for a loss.

Lots of lessons learned here but the main ones include:
-never trust a home inspection report when you didn't hire the home inspector
-never trust a salesperson's ARV when that salesperson is trying to sell you the property
-always get a second set of eyes on a project as I felt pretty helpless sitting in my house outside Toronto and only hearing from one perspective
-get the lockbox code from the start so you don't have to ask for it later

Incidentally, I could've exited this project with a potential profit. MW offered to purchase the property from me for 10% more than all the money I put into it but I would need to take a 100% VTB at somewhere around 8% interest until he sold it in six months time. Basically, I would've made $250/month in interest and hopefully a 10% return (this was before I paid for the foundation issues and some other work on the house) assuming he could sell the house for a profit after the six months. I didn't take that deal because by that time, I didn't trust MW as far as I could throw him. The potential $250/month in interest wouldn't make up for any trouble that I foresaw with dealing with MW. Even though I lost money in this deal, I still stand by that decision even though - who knows - it could have ended alright.

Don't let the numbers fool you ... I lost money on this deal.

[Bonnie Low]

Wow, that really stinks, Arthur. We're out of state investors, too, so I can see how this could happen. I personally don't trust "turnkey" operators because their definition of turnkey rarely matches ours. They tend to gloss over necessary repairs, focus on paint and carpet, underestimate costs on any repairs they do take on and do a poor job of managing subs and making sure things like liens are released and tax docs are in order. Obviously there are some good ones out there, but I'd rather rely on my own eyes and due diligence processes. We are experienced BRRRR investors here in CA, but I've yet to see the numbers even come close to working on those really cheap, dilapidated properties in OH. The ARV just doesn't support the cost of the repairs and the rents aren't high enough to cover the higher mortgage at the time of cash out.  Sorry this happened to you.