All Forum Posts by: Derek Tonn

@Aaron Farr Now for the rest of the story...I am the partner working on this project with Aaron. Specifically I provided the funding and Aaron managed the project and was responsible for selling the property. The $515k sale price included a house just down the road on the river that was valued at $300k. The other $215k was cash. The second phase of the project was recently wrapped up with me selling the newly rehabbed house for $550k cash to my private lender. I wanted to post the rest of the story since there are a bunch of lessons learned and I find that many investors only want to highlight their "wins" and paint an overly rosy picture of the end results. On the first sale that Aaron described above, there was an offer from the private lender to pay cash for the house I received in trade for the $300k value. Basically just a straight across deal that would have allowed me to exit this high risk market segment (high end waterfront properties) with a nice profit for me and my business partner. Of course I got greedy and listened to what turned out to not be great advice and pushed for a wholesale fee from the private money lender. He balked and walked away explaining that $300k was basically full retail value for the property. Turns out he was right. So we pushed forward with a massive rehab costing $250k. We turned a 900 square foot house into a 2,200 square foot brand new hpuse. It turned out amazing. Now comes the second big mistake...the valuation of the property. We thought that because we sold a 1,400 square foot house for $515k that a 2,200 square foot house would sell for over $700k. Wrong again! The house was listed for over 6 weeks and not a single serious offer or any real sign of interest. I got calls from my private lender who owns high end water front properties in the area and he said we were crazy and were not even at a price where a serious negotiation could be started. I called a few other realtors who had sold this type of property in the past 3 years and all were in agreement that the house was priced at least $100k to high. It made me really question the advice I had been getting all along and led me to a tough decision. I also realized that my interests and my partners interest had become very out of balance. I was on the hook financially and with holding costs approaching $5k per month, the need for me to offload the property even at a loss was more important than chasing some unrealistic sale price. My partner was betting on a high priced sale for their profit and I think was blinded to market realities by that. I did have some flexibility in terms of taxes. I had a big tax bill coming due in 2019 on capital gains from 2 other properties I sold earlier in the year so I knew I could take a sizeable loss on this second river house and be ok (capital loss offsetting capital gains) . So the offer on the table from the private lender was $550k cash and close within 1 week. The other option was to hold on to the property that was ridiculously overpriced and pay $5k per month in holding costs plus buyers realtor fees and closing costs. The way my CPA calculated it was that I would need to sell the house within 3 months for $650k to be equivalent to selling within the week for $550k cash. I made the tough decision and took the cash sale. We signed last Friday. So on paper, the second river house was over a $50k loss. After taxes it is essentially a wash. My partner put in a ton of work and was counting on a split of profit for compensation. Since I sold at a loss, I offered him $10k and he accepted (not that he had much choice). He was cashed out on his percentage of the first deal as well so all in all I think he did just fine and cleared around $30k. So in the end, I spent over a year building 2 houses on the spokane river with countless hours driving back and forth checking on things and working on the property and did not make one cent. I live over 2 hours away in the Tri-Cities. I did gain some good contacts and learned so many lessons about real estate, business and people. In the end this is an epic story of how to turn a good deal into a bad deal just to try and squeeze a little more money out. It is a story of conflicting interests. It is the true story of a real estate investor...not some stripped down version that paints an overly optimistic picture of the process and outcome. Sometimes I see what people put out on social media and in these forums and it can be very misleading. I have no regrets and will remain in real estate. Overall I have done very well in this game but I felt it necessary to share the whole story so hopefully others can learn from both my good and bad decisions.

I will keep you all posted!  Thanks for the encouragement.  

Hello Bigger Pockets Community,

I wanted to share my experience so far on a fix and flip that has gone WAY over our initial budget.  In October of 2017 I closed on a 2 bedroom 1 bath house in Millwood (Spokane), Washington.  The house was in need of some serious work but was on a gorgeous lot right on the Spokane River.  

I had been looking for a deal and looked at several properties.  I partnered with a local realtor that I had developed a,relationship with who has been serving as the project manager and will be responsible for selling the house when the time comes.  He has no money in the deal and we will be splitting any profit.   We picked the house up for 235k from a wholesaler and houses with similar square footage on the river have sold recently for $450k on up.  There are larger homes in the $600 to $800k range that surround this house.  

The initial estimates were that it would cost 80 to 100k to renovate the property.  We decided to do a,small addition and enclose the breezeway to make a 3 bed 2 bath house and to add square footage.  Now that we are almost 4 months into the project, costs will end up being closer to 160 or 170k.  Yikes! 

The project is financed through a local private lender and he has extended additional funds for the additional construction costs.  He thinks the house will be worth at least 450k so he has a comfortable margin in case of default.   There has been a ton of interest in the property and we plan on listing at $499k.  

With projected holding, construction and selling costs, the current breakeven is around $450k.  So what was originally projected to be a solid return is threatening to be a huge loss if the market tells us we are overpriced.  I am mentally prepared to lose money as that is a risk of investment and it may all work out in the end but it has been a roller coaster of emotions!  

At this point I am planning on doing as much of the finish work that I can to limit any additional capital into the project.  I am trying to stay positive but wanted to share my experience to this point on how a renovation project can spiral out of control quickly especially when you are dealing with a seriously run down property.  

I have been investing in real estate for over 12 years but this has been my first foray into flipping.  Buy and hold might be more my style after this experience!  

Hi Dan,

I would be interested in taking a look at some of your wholesale deals as they become available.  Thanks.

Hi @Tony Woolridge.  I have put a couple offers in on triplexes.  The first on was an off market deal that my realtor brought me.  The seller changed his mind at the last second.  The second one I was 2nd place out of 5 offers.  A cash buyer came in offering to buy property with no inspection contingency.  My offer was slightly higher but I wanted an inspection done.  I am still on the hunt.  The realtor I am working with is Aaron Farr from 4 degrees realty.  They have a property management division also.  

Hi,

I am actively searching for buy and hold deals in Memphis. I flew down there last week to see the city and meet with a company who specializes in investment properties. They handle the acquisition, rehab, and property management functions. They offer both turn key and off market deals where you pay cash for the property and renovation. I am very interested in the BRRR strategy which is why I am most interested in the off market deals.

My specific question is what due diligence steps should an OOS investor take when looking for deals?  

Speaking with different people in the market (property managers, appraisers, realtors, etc) I have received widely different opinions on values and market rents.  Generally my philosophy is trust but verify so I don't want to just rely on one source especially if they have a vested interest in the deal.  

Any feedback would be appreciated.  

Hello BiggerPockets members!  My name is Derek Tonn and I live in Richland Washington.  I have been a buy and hold investor for almost 8 years now with properties in the Tri-Cities (Richland, Pasco, Kennewick).  I am looking to expand my portfolio and have been amazed how difficult my home market is for buy and hold investors right now.  Prices have gone up quite a bit over the past 5 years.  This is good for people holding property over that time period but not so good if you are trying to acquire new properties right now.  

Having listened to several of the podcasts, I was given the idea of looking outside my immediate market.  This brought me to looking more closely at the Spokane market.  One of my son's plays basketball and we seem to have a couple tournaments a year there.  I also have been getting season tickets from my brother in law to the Gonzaga Bulldogs basketball games (Go Zags!) so I have been traveling to Spokane quite frequently.  I also have a sister in law who currently lives there. 

Based on my initial research Spokane appears to have some solid opportunity for a buy and hold investors. The BRRR strategy might also work well here given some of the prices I have seen. I understand that a big factor will be the specific location of the property as just a couple blocks can make a big difference in desirability. Recent news articles say that the rental market is very strong and prices are much lower than what I can purchase for here in the Tri-Cities. I really love the downtown area (have spent several nights at the Davenport). It has a vibrant college community and I believe they are establishing a medical school. I know a big local employer is the hospital system but beyond that I am not sure what the major economic drivers/trends are in Spokane.