I’d like to tell you a cautionary house flipping story about the worst deal I’ve ever done. Some would call it a nightmare real estate deal. It’s the side of the business that the shiny HGTV house-flipping shows rarely show you. This was the first fix and flip that I ever attempted and everything that could have gone wrong – literally everything – did! If you want to know what a “trial by fire” looks like, then let me paint you a picture.
It was Spring of 2010. I already owned a bunch of rentals and had gotten my feet wet with rehabbing, but I was still a relative novice. The housing market was pretty depressed in Richmond, but that meant you could get really cheap houses.
So I come across this two story colonial that needs a lot of work but can be picked up for just $44k.
I was going to do a basic renovation and turn it into a rental, which was my strategy all along.
But then I got greedy.
You see, retail sales just started to slowly creep back in. And, this house was located on an edge of a pretty desirable neighborhood. And, I saw that an almost identical house across the back alley from this one just sold for $260k! And it wasn’t even fully renovated!
So, right off the bat, I made three key mistakes that would determine the trajectory of this deal.
Mistake #1: Not sticking to my sandbox and my house flipping strategy.
Mistake #2: Getting greedy
Mistake #3: Not doing my due diligence, researching comps accurately, and consulting with experts to determine my ARV (After-Repair Value – resale price). I misfired here in a big way (more on this later).
But my stupid house flipping mistakes were only beginning.
My buddy at the time found this contractor that he absolutely swore by! The guy was Costa Rican – I remember him vividly because he had the world’s most terrible haircut. Bill was his name. When you met him, he struck you as the Rico Suave type that would be 50 years old and hitting on 20 year old college girls at a neighborhood bar (unsuccessfully). Think “Fonzie” but over the hill.
Anyways, Bill was renovating houses for my friend at some pretty crazy low prices. I was totally blown by the numbers Bill was charging, so I decided to get him to look at this flip I was about to do, prior to making an offer.
Sure enough, Bill told me he could fully renovate this 1600 sq. ft house for $27,000 top to bottom, including granite and stainless steel appliances! For those keeping score at home, that’s less than $17/ft for an almost complete gut renovation!
“Holly shit!”, I thought to myself. “I am going to retire on this deal!” Yachts, helicopters and hot chicks, here I come!
Buy for $44k, put $27k into it, another $5k in closing and holding costs. Sell for $250k. That’s a $174,000 profit! I was going to laugh all the way to the bank. And then all the way back from the bank. And then the rest of that day, I’d still be laughing. Like a crazy person. Crazy rich that is!
Mistake #4: If something is too good to be true, it usually absolutely totally is. Almost always.
So I close on the house, hire Ricco Suave Bill, write him a $5k deposit check to get started with demo, and think I am on my way.
If you think it’s bad so far, wait until you hear the rest of the story.
So Bill gets started on the demo with a $5k deposit, which should have covered demo and framing. Half way through the demo, he calls me and says: “I need more money.”
So obviously a red flag immediately goes up in my head and I say “Are you saying we’re already going over budget?”
“No no, we’re still on budget, but I need more money to pay my guys”.
“But that $5k was supposed to pay for demo and framing”, I say. “I am not giving you more money until demo and framing is done”. At least I had the common sense to do that.
So halfway through demo, with my $5k, Ricco Suave Bill walks off the job never to be seen again.
I now have a half-gutted house, no contractor, and this sinking feeling that the real cost of renovation is going to be much higher than $27k.
Well, being a resilient person that can adapt to situations and who is not willing to lay down, naturally I went out and found another general contractor. This time, I checked references, created a detailed draw schedule that we all signed, as well as a contract.
And his bid was much more in line with reality, though luckily he was still on the cheaper side (around $75k vs. the $27k magical fairy bullshit bid that I fell for with Ricco Suave Bill).
Even with those numbers, I was sure I’d make plenty of money given a projected $250k resale price!
Little did I know….
So this new contractor actually turns out great. He does good work. Does what he says he’s going to do and stays on budget and on time.
We complete the renovation and get ready to put the house on the market.
But just when I think things are finally going my way, two totally messed up things happen that fully complete this “renovation circle of hell” that I’ve invited myself into:
When it came time to list the house, I called an experienced agent over and told him I wanted to list for $250k.
He started laughing so hard I thought he was going to have a heart attack.
While I was getting ready to dial 911, his face straightened out and he proceeded to explain to me that while the nearest comps indicated a $200k+ resale value, NONE of them were on this busy street across from a shady, crime-ridden apartment complex.
Then he dropped the bomb on me. He said “I don’t think you’re getting anything over $150-$155k.”
Mistake #5: I failed to realize that a house on a nice, quiet street will sell for much more than the same house on a super-busy and highly trafficked street, directly across from a huge, shady, low-income apartment complex. Even if those houses are just an alley from each other. It’s night and day!
Check out this pic:
I was using comps for this property from the surrounding area but they were all on MUCH nicer blocks.
All those comps came in in the $200k+ range. If I calculated my ARV for this house correctly and knew my market, my ARV here would have been in the mid-150s!
So we listed the house at $160k (wishful thinking) and then, because the agent said we must, I spent $1500 to stage the house with furniture and accessories.
It was beautiful. Master bedroom was fully furnished. Couches and a coffee table in the living room, beautiful dining table down to actual dinner ware and napkins, etc!
Now it was time to sell this freaking thing and try to make a small profit (I was looking at $30-$35k profit at this point given the money already spent on renovations).
That’s when the 2nd really really really crazy bad thing happened, just as we were crossing the finish line.
I remember it like it was yesterday.
It was Friday afternoon around noon. Sunny and beautiful outside. The house has been listed and staged for about 3 days at that point, when I get a call from one of my contractors that goes something like this:
“Hey, Daniil. I just came over to Chamberlayne ave to take care of the punch list…and…well…you need to get over asap. I’ve already called the police”.
You NEVER want to get a call that starts like this.
So I jump in the truck and rush over to the house. As I walk in, my heart literally drops to the floor.
In broad daylight, someone pulled up with 2 trucks (as I later found out from a neighbor who sat on his back porch and watched this).
They took every single piece of staging furniture out.
They took every piece of staging ANYTHING out – down to the plates and the napkins.
They took all the new stainless steel appliances.
They took the washer/dryer.
They then took both of the heat pumps (the outdoor AC units).
But it gets even worse:
They ripped the dishwasher out of the wall and left the water line to just spew water out all over the kitchen and dining room floor, pouring down into the finished basement.
So in addition to all the theft, I had damaged flooring, water-soaked insulation in the attic and ruined sheetrock.
But wait wait wait! It gets even worse!!!
Ready for this?
After I got over the shock of the sheer screwing over that I just received, I finally settled down and said to myself: “No worries. I have insurance. I am covered”.
Oh boy how wrong I was!
I called my insurance company who promptly dropped another bomb on me (that seemed to be a pattern lately): staging furniture, appliances, even heat pumps were considered “personal property” and not part of the structure itself. And my coverage for “personal property” was limited to $5,000.
Read that again. Between appliances and heat pumps, I was already out around $10k. Then I had to pay $3k to the staging company to pay them back for the stolen furniture.
So I was taking an $8,000 hit on this daytime visit from the robbers!
So how did this nightmare house flipping adventure end, you may ask?
I replaced the appliances, paid back the staging company, got an ADT security system, and then had this house sit on the market for another 5 months waiting for a buyer to come along.
That’s what happens when you try to flip in a bad location.
Finally, a buyer came along who loved the house but wouldn’t pay asking. We ended up closing at $142,950 after I gave up a bunch of concessions.
So let’s recap this real estate deal:
Closing & Holding: $5,000
Net Profit: $174,000
Rehab: $80,499.50 (included all the stuff I had to replace not covered by insurance)
Closing & Holding: $8,444
Net Profit: $-2,000 (after commission, concessions, etc)
Not taken into account in this $2k loss: The huge amount of my time, frustration, headaches and more. But also, many, many lessons were learned. They were learned the hard way. But learned nevertheless.
Lesson #1: If you’re going to switch strategies and move away from your core competencies, do your research extra carefully and really make sure you understand the numbers and the risks! There’s nothing wrong with expanding your exit strategies – just do your homework and really understand the math. That’s where the Rehab Valuator software comes in!
Lesson #2: It is ALL about the ARV (After-Repair Value). If you get the ARV wrong, results can be disastrous, as in this example. I only lost $2k but it could have been much much worse! Know your market block by block. As you saw, just moving from one street to the next can have a drastic impact on your resale value.
Lesson #3: Learning how to properly forecast repair costs is just as important as knowing your ARV (see Lesson #1). And if something seems too good to be true, avoid it. It’ll bite you in the end.
Lesson #4: Insurance. Review your rehab, new construction, and vacant policies carefully. In my particular case, I got bit in the ass by the “personal property” distinction and the $5k limit. After this incident, I fired my insurance company and switched to a really good local insurance broker who has been doing all my policies ever since 2010. Find someone really good to work with that gets your business. Then ask as many questions as possible: “What if x happens?”, What if z happens?”, Etc.
Lesson #5: Bad, frustrating, unexpected things will happen in this business. They happen in any business. You have to learn to take it on the chin, adapt and keep going. Period.
Lesson #6: No matter how many stupid mistakes you make and how many bad, unexpected things will happen during your project (like robbers taking everything inside and outside the house), you will greatly protect your downside if you buy cheap. In my case, I only lost $2k because I got the house at the right price. So know your values, learn to negotiate and always buy right.
Oh and by the way, whatever happened to Ricco Suave Bill the Contractor you may ask? Well, I went to the local DPOR, filed a major complaint against him and they took away his contracting license. I saw him at Lowes a few years later and it took every bit of self control not to body slam him into the power tool isle. But I took satisfaction in knowing I already gotten payback against him.
This nightmare real estate deal took place a long, long time ago (2010 – seems like a lifetime), but since then I’ve made many other mistakes. And that’s ok. The key is not to not make mistakes. Everyone does. The key is to learn from them and not repeat them. My goal every day, every week, every month, every year has been to get just a little bit better and a little bit smarter than I was before. As long as you’re constantly improving your skillset and your knowledge-base, you’re moving in the right direction!
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