Well, here we go. My biggest mistake(s) bled over two properties.
-I bought a house with a capital partner in River Forest, IL for $305k (PP included architectural plans). Since the plans came with the property we were VERY confident in our rehab budget. The problem was that the plans weren't approved by the city. By the time the city got done changing the plans, our rehab budget went from $90k to $154k.
-I hosted 5 local high performing brokers approx 6 weeks before completion. 2 said they predicted a sale of $625k, 2 said $650k and 1 said $615k. We hired one of the Realtors that predicted $650k. We ended up selling at $550k, but the worst part about that is it took 7 months for us to listen to the market...while the HML 12% interest was running the entire time.
Lesson: Value is based on what someone will pay, regardless of how much you feel it's worth. Drop the price aggressively until it sells. Time is just as important as the profit.
-After we received the BPO's for River Forest (but before sale), we were presented with another opportunity in Wilmette, IL. The same capital partner and I decided to purchase and get the next one started...like a well oiled machine. We decided to finance the purchase and a portion of the rehab with the idea of rolling the River Forest profits into the remaining rehab funds needed to keep the high percentage loan down. When River Forest sold for $550k, the holding costs and interest ate up all of the profit leaving us without the construction start up costs (HML works on reimbursement). I was able to contribute $10k and my partner put up $5k (initially) to get the project started. Needless to say, the rehab took forever @ $15k at a time on a $250k project. Instead of being able to send full crews in there, only one trade could work at a time. When they finished, everything stopped for inspections and draw requests. Each time we stopped, it was 1-2 weeks before we received the draw and could continue. We added more money throughout to cut down on draw requests but we limped through that project from beginning to end. The property took approximately 15 months to complete. We initially planned to be in and out in 6-7 months.
Lesson 1: Do not count your wins until the property has closed.
Lesson 2: When a seller includes unapproved plans, that is a huge red flag to dig deep into why they aren't doing the project themselves.
-For anyone reading that is looking for closure, Wilmette was purchased for $525k, rehab was approx $250k and we sold @ $875k...despite having a $950k appraisal. Again, costs of the project ate all of the profits. Money lost aside, that was 2+ years of expected income gone and created a big hole I had to get out of.
Lesson 1: While they look official, appraisals are just one person's opinion.
Lesson 2: As soon as we realized that we didn't have the sufficient funds to get through the rehab properly, we should have sold the project.
Notable project mistake made:
-I JV'd with two inexperienced investors (2 males). One of their wives wanted input on finishes. We had nothing in the agreement that allowed me to prevent this. At the end of the project, the investor wanted to purchase the property with his wife at a significant discount. The relationship soured when I refused. The property was in North Center in Chicago.
Lesson 1: If you're going to JV, there should be one person in charge. It's extremely difficult to rehab by committee.
Lesson 2: I now structure my agreements with investors so that I get paid for work performed rather than an equity stake. This gives the investor complete control over the project and control over the exit strategy as well. At that point they can keep it for themselves, keep it as a rental or move into it if they prefer.
While I don't necessarily like putting my dirty laundry in the street, my hope is that someone reading this can avoid my mistakes.
