Want to share my first flip, project. Even though it did not go as planned and we turned out to not be profitable, I think it's just as important to talk about our failures as much as our successes. I am still grateful for the lessons that this one taught me, and will serve me well in all my future endeavors..
Getting into the story behind this one..
This deal was sourced from a large corporate wholesaler (no names)
Originally listed as 179,999 as a "wholetail" deal with an "ARV" of 250,000
I walked the house and estimated it needed little in terms of repairs, though I knew a realistic ARV was between 215-230
However, there were tenants in the house without a lease agreement with the current landlord.
I spoke to them, and they agreed to move out. Which made me feel comfortable moving forward. I negotiated the price down to 176k and put down my EMD, thinking I just made a deal for myself lol. Little did I know, that I just entered into a highly dysfunctional situation where the seller has already been brought to court to sell and was refusing to sign the closing documents. The wholesaler has been in escrow for 3 months before me, and then I was in escrow for 2 months waiting to close. And then, the last day, right when my EMD was due to be refundable he signs. Funny how that works. Begrudgingly, we acquired the property.
Once the tenants vacated, I realized I severely underestimated the amount of wear and tear the property sustained after they've lived in it for over a year. Vacating them was not an issue thankfully, but it added a wasted month of holding time.
I hired a local handyman by father knew to 'save on repair costs' as opposed to going with one of my usual GC's. This turned out to be a mistake since the rehab ended up taking 2 months and he underquoted me for the work. In the end, I likely lost a good chunk of time and money by choosing price over performance.
When it was time to sell, I knew I was in a position where I was barely squeaking out a profit if any. I considered listing as 'for sale by owner' to save on commissions, and even put up Rent2Own signs which did get a lot of interest in the first weekend.
However, after looking at the refinance term sheet from that weekend, I decided to just cut my losses short and sell. Even if it's for a loss.
Luckily, I got connected to an investor-friendly agent (Shoutout Sheryl) who agreed to list the property for 1%.
Initially, we listed at 230k. After getting a lot of interest the first weekend on market, no offers came in. For the first time, I became the motivated seller.
We decided, after 2 weeks at 230k we drop to 220k. We got an asking offer in 2 days and went with it.
A few electrical and plumbing issues were found during the inspection which again had to be repaired (payback for skipping on a good contractor) but we closed on-time and I was out of the deal.
Here are the numbers on that deal:
Purchase Price + Closing Costs (buy): 181,291$
Total Rehab: 18,145$
Holding Costs: 6,013$
Closing Costs (Sell): 12,564$
Sale Price: 220,053.42
Profit/Loss: -7,939.41
Key Lessons I learned:
1) Be wary sourcing deals from wholesalers. Verify all information and don't be pressured into doing a deal with them. Not saying that all wholesalers are bad, but having that barrier between you and the seller increases your risk and decreases your margin.
2) Stick to your numbers. Just do it, or don't do it. When I ran my initial numbers, my target acquisition was actually 165k. I should've just made that offer and walked away if they said no. However, I was weak in my negotiation and convinced myself into a bad deal.
3) If your acquiring a distressed property with tenants, overestimate your rehab budget. Give yourself a buffer for them to move-out and all the little repairs that will add up and affect your bottom line. After this experience, I wouldn't even consider if the property wasn't in a landlord friendly state.
4) Hire a contractor based on value, not price. Always get at least 3 quotes when interviewing contractors. Look at their price, but also consider their skill and their ability to get the job done quickly.
5) Find an investor friendly agent. Without Sheryl, I'm not sure this project would've made it to the finish line in the time that it did. I communicated that I was preparing to take a loss on the flip and she agreed to list for a 1% commission. The price paid was easily worth the work of showing the house and negotiating with other agents. Hopefully, through all this mess, I have a partner we can do continued business with.
I hope this post helps investors avoid learning these lessons the hard way.
I hope it also sheds a light on some of the challenges faced in real estate. The disciple, tenacity, and maturity it takes to succeed in this industry truthfully isn't talked about enough.
Please comment, and feel free to add me on Bigger Pockets or my socials
Even with the outcome of this project, I still love this game and believe it is the best vehicle to retirement 100%!!
