Top 10 Lessons Learned on House #1
Anyone who has followed this blog for a while knows that we have gotten pretty good at flipping houses. We are good at estimating rehab costs, staying on budget, getting rehabs done quickly, estimating our resale values, etc.
And while we have gotten good at those things over the years, it hasn’t always been that way. Case-in-point is our very first investment property — The Corn House. We bought this house in August 2008, spent about 4 months rehabbing and then couldn’t sell the property. We did a lease purchase for two years before our lease purchase buyers left. Then we did a complete second rehab, relisted it for sale, and finally sold it in April 2011.
We made a LOT of mistakes on this project, and learned a lot of lesson. In this article, I want to enumerate the biggest of those mistakes and lessons. Hopefully new and experienced investors alike can learn from some of our mistakes on this project and not make the same mistakes themselves.
Without further ado, here are the top 10 mistakes we made on House #1 and the lessons we took from them:
- Money is made when you buy, not when you sell. In other words, while you can’t control the sale price of the property (to any large degree), you can certainly control how much you purchase it for. And if you overpay for a property, you’re doomed to little or no profit (or worse!). [We paid $63,500 for House #1; if we knew then what we know today, we wouldn’t have paid more than $40,000. In fact, we probably wouldn’t have purchased it at all.]
- Don’t trust anyone besides yourself to analyze comps and determine ARV. Ultimately, it’s your investment, and if they’re wrong, you’re the one who’s going to lose money, not them. [In the case of House #1, the wholesaler who sold us the property provided us all the comps before we put in an offer. While the comps were all decent, he conveniently left out the comps that didn’t support the sale price we needed. We even had a real estate agent pull comps, and she was very aggressive in her estimation of ARV as well. Had we pulled our own comps, we would have realized that the resale value was about $10K less than what we had planned.]
- Verify your rehab costs before you determine your offer price. If you guess how much you’re going to spend on rehab and then realize that you’re off by $5-10K (which is very possible on a first rehab), you can eat up your entire profit. [On House #1, I was HOPING rehab would be about $30K. I got it to nearly that price ($33K), but had to cut corners and leave some important stuff out.]
- Learn what types of houses are (and are not) selling in your area, and focus on the types that are selling. For example, if all the buyers in your area seem to want brick ranch houses, don’t make your first purchase a split-level or a cottage. [House #1 was a 30 year old “raised ranch” house. House that age and style aren’t overly popular in my area these days.]
- If you don’t have confidence in your contractor(s), get rid of them! Even if you think it’s going to cost more time/effort/money to replace them, what you’ll find is that bad contractors will cost you in other ways. [Our House #1 contractor was slow and not very detail-oriented. I was on the verge of firing him about a dozen times and could never pull the trigger. I really should have.]
- Don’t put off necessary repairs just because you didn’t budget for them. [House #1 needed a new roof, mold remediation, new front steps and some other work; we didn’t do it on the first rehab because we didn’t think we could afford it. Turns out we couldn’t afford not to do these things and ended up doing them the second rehab.]
- If your neighbor’s yard is a pig-sty, either don’t buy the house or have a contingency for how to deal with it. [For House #1, the neighbors were very nice, but their yard was a horrible mess. We asked them to clean up, and they said they would…but they didn’t. We talked about putting up a fence, but decided to let the buyer ask first. Ultimately, we lost at least one serious buyer because of the neighbor’s yard, and probably more. We put up a 6-foot privacy fence for $3000 for the eventual buyer; we should have done it 2 years ago.]
- Find a great agent to handle your sales. Don’t rely on someone who is “decent” or “adequate” or “good enough.” Ultimately, those types of agents AREN’T good enough. [On House #1, our agent — who is actually pretty good compared to most — put the house on the MLS and waited for buyers to call. They didn’t. Ultimately, my wife ended up getting her real estate license after the property had been listed for a couple months, and we had more showings the first week she started to market it than we had the previous two months combined.]
- Lease Purchases are not much better than just renting your house. I know a lot of new investors who believe that a lease purchase is a great alternative exit strategy if they can’t resell a flip. These same investors would never consider renting their property though. In reality, lease purchasing your house will often end up with the exact same result as a renting it out. Most lease purchase buyers don’t do what’s necessary to improve their financial situation and don’t close. I’ve heard numbers as low as 10% for the percentage of lease purchase buyers who actually close the transaction. [For House #1, we thought our lease purchase buyers were fantastic. Ultimately, they turned out to be pretty good. But, they never got close to being able to buy the property. We started with a 6-month lease purchase time-frame, and ultimately it got extended to 2 years before they gave up and left. While they took care of the house and we made some extra money on lease option fees, ultimately it wasn’t much different than having a rental for those two years.]
- On your first deal or two, expect to be wrong on every front. Expect that you will overpay, expect that you will underestimate rehab costs, expect that you will over- or under-rehab, expect that your expected ARV will be too high, expect that your holding time will be longer than planned, etc. Then factor each of these overages into your analysis and make sure you STILL can make a profit. [For this house, we overpaid by about $15-20K, our rehab was over by 10% and then we had to do another rehab at the end, we didn’t do everything we should have done the first time around, we thought we could sell it for 10% more, and we held the property for 2 years longer than we planned. But, we still made $3000. Conservative analysis — especially on the first couple projects — is a virtue.]