@Melanie Stephens
We've got a good one for you, our first deal (just about to close) and it's been a wild ride.
This was a flip house we found off the MLS, listed for $50k, we had a 45k offer accepted, then negotiated down to $41,500 after a termite inspection (win). MLS listed it at 1650 sf, and we estimated ARV to be 170-180k. Expected total rehab was 75k, which would put us at about 116,500 for cost. We financed this through a small local bank, which required 15% down and a 1% loan origination fee. So we were expecting to make between 35-45k on this deal (after realtor fees, etc.), assuming everything went as planned...
To keep it short I'll just highlight our lessons learned, if you would like more details, feel free to contact me!
Mistake #1: We trusted that the contractor had our best interests at heart.
--We explained to him that this was our first deal, and we were going to do more, hinting at future business. We made the mistake of using his contract, without having an attorney review it (big mistake). In addition, while we did get a detailed scope of work, we never got a cost breakout of labor, materials and our choices (paint, vanities, cabinets, etc) which led to number changes mid deal, etc. that made it very stressful and ugly.
Lesson Learned: Trust but verify: We should have had our own contract, or at the least had our attorney review it, this would have highlighted several flaws in his contract, the biggest of which was a lack of payment schedule, which put us at his whim of when he gets paid. Never assume a contractor cares about you or your project: we initially thought he would want both of us to succeed, so we could do this again. Long story short, he ran over budget and took it out on us by changing our allowances for items, e.g. vanity was originally $800 then magically changed to a $500 limit. These both led to hostilities and ultimately (in addition to quality/time of work issues-2 months behind) led to us firing him before completion.
Mistake #2: We budgeted room for surprises, but didn't do enough digging to find these before we started the job.
--I could make a laundry list of surprises, but the biggest of which included: New Septic tank required ($5500 job) Entire new plumbing required (100% new plumbing for about $3400), electrical panel needed to be replaced & grounded ($2800 job), gas line for furnace needed replacing (roughly $800), flooring beneath bathroom needed replacing (we swapped a built in shower/tub for a fiberglass insert to save $)
Lesson Learned: If something doesn't look right, it probably isn't. We trusted that because the inspector didn't say the septic needed replacing (he did caution us that he couldn't inspect inside to know for sure), that it was fine. We trusted that because the electrical worked, it was fine. We trusted that a small leak under the sink would be a minor repair. These all were signs of much bigger issues. Demo before doing a detailed scope of work. We learned this from a BP Podcast after the fact, and will implement in in future deals, contract the demo first, then go back through and do the detailed scope of work; that way there are no surprises after you have a contract to do the work which require more changes, negotiations, delays, etc.
Mistake #3 We trusted the MLS square footage
--This was the BIGGEST mistake we made. MLS listed it at 1650', when we listed it to sell with our realtor, he pointed out that it was actually not 1650, because that # included the 1 car garage. Subtract about 220' and we lost 20k in our ARV just like that.
Lesson Learned: Verify all measurements before you close on the house, we should have caught this and re-negotiated the price down lower. This eliminated nearly all of our profit, a simple mistake we should have caught on the front end.
Mistake #4: We assumed the contractor was reasonable and not confrontational
--After we fired the contractor, we hired out the items he did not finish, or did sub-par. We thought it would be easy to let him know we would give him his final check of what we felt he owed him and be done, even our attorney said that they just accept their check and move on. This was not even close to what happened. I'll skip the detail here, but again, long story short... we are currently suing him to remove a fraudulent lien on the property which he claimed the $ value at nearly 3x what was actually owed since we fired him, and almost 2x what was contractually listed at.
Lesson Learned: Always keep detailed records of everything you discuss. Luckily we did keep pretty good records, but a lot was discussed in person that was never recorded. I'd highly recommend and what we will do in the future, is if discussing items in person, write out what was agreed upon and have both parties sign it. Always use a Lien Waiver with every payment, had we done this throughout the process, this would have prevented him from ever filing a lien for anything more that what was contractually owed (legally at least) and made the process significantly easier.
These are the biggest mistakes, we made a personal list of lessons learned for this whole process that was nearly a mile long. We felt like we got a very difficult deal as deal #1, but at the end of the day we are going to still make some profit and get paid for all of our education that this deal gave to us. We have a huge amount of confidence going forward, as this was a full gut job gone wrong in as many ways as possible almost.
We have several pictures of before & after if desired, please let me know if you would like any more detail!
Thanks!
-Kyle & Tanya Jones
