Losing Money On First Flip: Part One - The Details

So this time last year, I was almost a full month into my first flip, and it was such a blast still at that - the perfect blend of excitement, optimism and sheer roller-coaster E-ticket ride terror.  It didn't go well, but really, the more I look back, the more I realize that it really could have been so much worse.

This is a post that I have been promising myself that I would one day sit down and write.  I've been dreading it for months now, putting it off, for obvious reasons.  I lost money, and nobody wants to admit stupid mistakes like the ones that I made.  But I had already committed myself to doing this, like some form of cathartic healing process, so here we go.

Let's start with the project particulars.

2910 Ashford Trail, Houston TX 77082

https://www.redfin.com/TX/Houston/2910-Ashford-Tra...

Just a standard 3/2 SFR with 2182 square feet, nothing spectacular -- except it does have a sunken area in the living room and tall open ceilings with skylights everywhere.  The floor plan made it unique in that regards, and I knew that somebody would love it or hate it right away on entry, once they stepped in the front door. 

I found the house on a local website here in Houston.  A small wholesaler had gotten this place under contract from a seller living out of state.  It was a probate deal and they were eager to just get out from under this burden.

The house was clearly in a moderate state of disrepair, with some foundation issues being most evident, but it wasn't all that bad.  It did need some updating, without a doubt, as do all homes built in 1982.  And no flooding!  Remember hurricane Harvey had just passed through just a couple months beforehand.

So the contract was offered to me at $140K.  I figured ARV would be about $195K, and the renovation would be minimal, maybe $15k or so.  That didn't leave much for profit so I asked the wholesaler for a break on the price.  I managed to get it for $137k, which included his fee of $7k.  

Then I went to a local hard money lender.  They didn't like my deal much, they felt that my renovation estimate was far too low, and in fact they didn't really care much for the fact that I was trying to manage the renovation myself (this being my first project).  But we did agree on the ARV, so they said they would fund it, if I really wanted to go forward with this project. 

Originally the plan was to break up the work into various parts and hire it out to various tradesmen and handymen that I knew.  At the behest of my lender, I went out and requested quotes from general contractors as well.  Even finding a contractor to come out and provide a quote was a major achievement in those days in Houston; remember that we just had the worst hurricane ever, with epic flooding of biblical proportions.  I was able to find a couple, but all came back with renovation quotes well over $60k. Again, I decided this was due to the fact that they could basically charge what they want, and proceeded to 'do it my way' by hiring it out in sections.

The first job was easy -- the wholesaler had provided me with a quote on the foundation work from a reputable local foundation repair company, so all I needed to do was call them.  A week later, they were there working.  Two days later, they were done and gone.  Easy.  

So then I was ready to really get started in earnest.  I hired a neighbor of mine, Ed, who had done some work for me at my own house.  I knew already that Ed is excellent at installing doors and windows.  But being handy like that, I knew that he was able to do a lot of other renovation tasks.  Ed knew all summer that I was looking for a project, but then after the hurricane he and his brother Jorge had gotten busy, with all the demand for renovations here in Houston.  Still Ed agreed to work on my project, but he wanted a daily rate for him and his brother.  I agreed, and off we went.  Ed and Jorge were a great help in getting started, getting materials to the jobsite, and generally getting the work lined out.  

It was during this process that Ed and I started finding the extra work items that I didn't have in my original scope of work.  The house has skylights in it, and Ed noticed that several of them had cracks in them.  So I had to order a half dozen new ones which was another $2k that I didn't have in my budget.  Other items continued to crop up along the way, although minor in comparison.

Then I assigned Ed and Jorge to do something they weren't really good at.  I asked them to sand and repaint the cabinets in the kitchen.  They said sure, agreed to do it and in fact, they gave me every indication that they would do this with ease and skill.  They didn't.  It proved to be a slow process, after three weeks the cabinets were still not done, and worse, Ed was not making much headway with the door and window replacements he was doing.  So eventually, it became clear this was not working, so I told Ed that I appreciated his help and I would find some other guys to do the rest of the project.

This is where I really ran into some bad actors.

This next crew I found on social media (facebook), and really I should have known better.  But I was talked into it.  The guy came out, and started by helping me out with uninstalling/removing a rather expensive step-in shower, which had been installed by the previous owner.  I'd sold it at a huge discount, used, for $900 to some lady across town that really needed, and she was super pleased to get it so cheap.  So I thought I was really getting off to a great start.  And Dave, this new contractor, only charged me a couple bucks to do this!

Well, a week goes on, and another, and everything seems to be going OK.  Except that Dave and his guys are not always there.  One or two guys will show, then they all show for a day, or part of a day, and knock some items out.  I'm OK with this, but I'm continually asking them to focus on the bathroom.  They don't.  They instead do the other stuff, in other rooms.  I put up with it, however, because he isn't charging me a lot, and he tells me one of his guys, Lucky, is super excellent and laying tile, and as soon as he finishes up at another job, he'll be moved to my project.

This is pretty much how it went.  A lot of promises, and a lot of delays.  And gradually the bills at the end of the week started to get higher.  And my bathroom projects aren't getting done.  Of course, they were all about texturing, painting and doing all manner of other jobs.  So eventually I gathered that they were just doing the easy stuff, getting as much of the 'good work' they could get from me.  

They did finally do the shower and some tile work in the hall bathroom, and it wasn't good.  Finally I had to let him go.  He charged me for two toilets that I never received.  I wrote it off.

Also, concurrent with this, I'd hired an electrician that worked extra jobs on the weekends.  This guy Dave referred him, actually, but it worked out alright.  We agreed on a list of items and a price, and he knocked it out with a couple helpers in one Saturday. By now I am starting to learn some lessons on how to pay these guys, and how not to pay them.

Now it is Christmas, and the house is empty, devoid of activity.  Worst holiday season I ever had.

So the 2018 rolls around and I need to find new contractors.  The first guy I hired was an AC guy to help me install a new AC unit.  Again, I saved some money there by getting a guy that had some extra time that he needed to fill.  This guy worked 10 months, but sat idle during the winter months.  He and I made a deal and he did the job as agreed.  So the new year was starting off right, but I still needed some crews and my project was now a good month behind schedule.

This AC contractor has now in my good graces, and since he had some extra time on his hands, he expressed interest in some other work, like painting and building the wood deck in the back courtyard.  I agreed and we proceeded with that.  This didn't go as well as I had hoped, but we got through it.  Since we had agreed on a price, I held him to it.  It wasn't the best workmanship I'd seen, certainly nothing like the professional job he did with the AC installation, so I again, I learned a good lesson about hiring people that actually have experience doing the work they say they can do.  There is a big difference between doing it efficiently and just getting it done the best you can.

As this was going on, I made it a point to go back to some of my contacts in the insurance business, and asked for a referral or two.  They gave me one, a guy named Ruiz that runs a roofing and exterior business.  I had roof patching and spot repair to flashings that needed to be done, and some additional exterior work here and there, so I decided to give these guys a call.  At least this Ruiz fellow had insurance, I knew that much.

Mr. Ruiz and his guys really worked out well.  We set up a 1-2 week scope of work for the roof and the exterior work, and they knocked it out on time.  They saw that I didn't have anybody working inside the house yet, and asked if they do some work in there for me.  I said sure, but only on a week-by-week basis.  We would agree on a scope of work for the week, and a price, and I'd pay them.  I buy the materials and his guys did the work.  This worked well, and we did 3, maybe 4 weeks like this.  At that point, they sensed money was getting tight, and they politely moved on to other jobs that they had lined up.  But my project was getting close now.  I could almost see the finish line.

From there I just hired my best friend Craig, who lives across the street.  However, having learned my lessons from Ed and the others, I made it clear to Craig that I'd pay him by the job, on completion.  Do this, get paid that.  Plus I knew him to be super handy.  I'd promised him from the start that he could do the flooring installation, since he was a professional at this and he did my floors in my own home.  But there was a lot more 'little stuff' to get completed before that flooring, so we set to work making a long list of items.  

The most maddening thing about Craig, still to this day, is he will never answer the question when asked how much he will charge for X services.  He just won't.  Maybe because we are friends, and so he doesn't want to overcharge, but he needs the money at the same time.  The whole discussion was just like pulling teeth.  But we got there, and he set about doing the work.

Craig helped me across the finish line, battered and bruised, and flat broke.  We hired the real estate agent lady that lived next door, and she listed it for us right in early April.  She paid for all the staging and professional photos, and we listed it at $214,700 if memory serves.  It sold in 3 days, having gotten a couple offers.  We accepted an offer for $210,000 with no small feeling of relief.

We did end up having to negotiate away $3000 in seller contributions, after the inspection report came back, but that is pretty par for the course, I think.  

In May we went to the closing table and the whole ordeal came mercifully to an end.

My wife and I lost about $19,000 on this flip.

The renovations, all the materials and labor and other charges, once added up, all came in just short of $60,000.  So now I am at $197k in cost.  Thank God we sold it for higher than we originally anticipated.

Add in the utilities and the cost of the hard money loan - which had to be extended to allow for a traditional 45-day closing -- and all the realtor commissions and closing costs on the back end, and there is your loss.

This little adventure turned out to be expensive tuition.  However, tuition is only worth paying if you plan to use that knowledge later in life.  I am now all that much more determined not to let this experience go to waste.