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.]
The big mistake on my first investment property was biting off more than I could chew. I got a great deal on a property with a duplex and two houses but they needed everything. I almost lost it all when the bottom fell out of the market and banks stopped lending.
Totally agree with you on number two on market research. An investor can do a better job of analysis than an appraiser or realtor doing a CMA.
Very good post!
Under point 8, “Ultimately, my ended up getting her real estate license.” I think you meant to add “my wife ended…”
So if you had to do it over against would have you rather sold the house at break-even or small loss versus the lease option?
The biggest mistake I made early on was over improving a property and unnecessarily involving the City with lofty plans of additions and upgrades.
Steve –
Thanks for the correction! Updated…
Actually, if we had to do it over again, we would have lowered the price 5-10% and waited it out about 2 more months; I have a feeling that between the time of year (spring) and the price drop, we easily would have had the property sold for about the same profit — maybe a bit more — than we made by holding it. Unfortunately, it was the first house and we got scared and impatient, which is why we agreed to the lease purchase.
If I had to add #11 to the list, it would be “Have patience when faced with a tough sale.”
J, I am a big believer that you learn as much from other people’s failures as you do from their success. Though I would not consider this a failure at all, the fact that you share your mistakes makes us all reading this better investors.
Much to my surprise my first flip (see link) was one of my most successful ones. Call it beginners luck but that house was a home run by all accounts. So not everyone should assume that the first one is going to be a bust. However, my busts came afterward…so they will come at some point I guess.
Amen on #1 and #2 I agree 101%. The trick part is that determining the ARV first of all is the most important part of the flip equation. If you get the ARV wrong everything else is downhill from there. On top of that is also one of the hardest things to get right. In this market, with prices still declining guesstimating the ARV is a true challenge. Wouldn’t you agree?
Forgot one important thing. If it wasn’t for you, Carol, Nate and this blog my House #1 would not have been a success. Heck, I wouldn’t even had the guts to try it. 🙂 Keep it up.
Luis –
First, thank you for the nice words…
I completely agree with your point about ARV. This is by-far the biggest mistake I see new investors making — they incorrectly estimate ARV. I don’t know if it’s not having the right tools, trusting the wrong people, wishful thinking, or what, but so often I see new investors assuming an ARV that is 10-30% above what it actually is. Perhaps they just assume that because they’re doing the rehab that the value will come in at the top of the range…but in my experience, good rehabbers always assume the value will come in at the low end of the range, and if it comes in higher, that’s a bonus!
I haven’t bought my first property but I went to this process with my mindstate at %10, which is why I havent pulled the trigger. I am pretty sure I am going to get alot wrong so if the margins are thin, I don’t feel comfortable jumping in.
I think alot of people have too much confidence in themselves sometimes, including myself, but I am being really conservative.
J, very insightful stuff, you truely give investors great infomation they need to consider. I always thought the arv was the most trickiest to nail down. We have bandit signs all over town making claims on good investments based off their arv estimates. Keep up the good work!!!
Mark.gmarlington
Another big mistake I made was hiring a family member to help with the renovations.
Your whole list should be copied and reread by everyone regularly.
I regularly make the mistake mentioned in number 7 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.
It usually goes like this. “Hey honey, guess what? I bought another great deal today and can’t wait for you to see it.” We then head over to the house and when we pull up she just sits their glaring at me. “What’s wrong?” This is where you wonders why I didn’t mention anything about the super dumpy neighbor next door that will make her life miserable when trying to sell the house. I’ve been better about it lately.
This one also is similar to making sure you account for when houses back up to, or face busy streets, huge apartment complexes, railroad tracks, airports, etc. These things might be obvious while reading this, but if your brain wants to buy that property really bad because you really want to make that huge profit when you sell, you might convince yourself that it’s really not that bad.
Thanks for the great list.
Great article… I’m curious what your wife did differently than the other real estate agent you used in order to get more showings? I have my real estate license and am going to be marketing my frist flip for re-sale in a couple of weeks. Do you have tips on how to generate more traffic/showings?
Thanks for all the info you share, Jon
Hey Jonathan –
There are a LOT of things we do ourselves that I can’t imagine other agents would do for us (and it makes sense, as the commission they’d get off our sale wouldn’t be worth the time and energy they put into it)…
Among those things:
– Staging. Every house is professionally staged by my wife, and she is meticulous about details. I personally believe that staging accounts for much of our success in this tough market.
– Preparing for Showings. We treat every showing as if it’s for the eventual buyer. When we sell a house, we ask in the listing that the agent call 30 minutes before showing the property. Then, when an agent calls, we have time to have one of our employees drive over to the property, turn on all the lights, open the mini-blinds, ensure that the staging is perfect, ensure the air fresheners are filled, ensure that there is no debris in the driveway, ensure that there are flyers on the counter, ensure there are pre-filled contracts for buyers who want to make an offer, ensure that the flowers look fresh, etc.
– Pictures. My wife spends a good bit of time getting GREAT pictures. Part of it is being a good photographer, and part of it is being good at Photoshop (not changing anything material in the image, just cropping and playing with contrast, color, brightness, etc to make the pictures look awesome).
– Building Relationships. Every time we sell a house, we build a relationship with the buyer’s agent (and the buyer), and we expect that relationship to help us in the future. We often have agents calling us to know if we have anything on the market, as they have a buyer and they know that if we a property for the right price and in the right location, it will be an easy sale for them. We keep mailing lists of people we’ve worked with, and when we have a new house, we send an email with pictures, virtual tour, etc. A very high percentage of our early showings come from this marketing blast to those we’ve worked with in the past.
There are lots of other things as well. Here are a couple articles I’ve written on the topic that you might want to check out:
http://www.biggerpockets.com/renewsblog/2010/03/03/traits-of-a-great-real-estate-agent/
http://www.biggerpockets.com/renewsblog/2010/08/11/is-your-agent-a-great-agent/
Thanks for all the thoughtful content you put into ALL of your postings. With so much ‘charlatanism’ out there with real estate investing your website is a wonderful resource.
Thanks Brian…I appreciate the kind words!
The tip about doing your own comps instead of just being gullible and relying on others for comps, or wholesalers for the “turn-key” deal is a huge one!
With overvalued ARVs and under-valued rehab costs, you’re twice as likely to “lose money when you buy”. On the very first wholesaling deal disaster, I was 100% sure I couldn’t possibly make a lower offer…and then I realized after my first buyer backed off that I should probably have asked the seller to “pay me” to take the property of their hands.
Great post.
There is absolutely no doubt in my mind that I avoided some of these mistakes by simply reading your blog not to mention other help y’all have given me. BTW I’ll still buy the book when you get it published .
Just came across your blog today and love it! Great work! Our group is a real estate association out of Oakland County Michigan in of the hardest hit regions in the U.S. right now in real estate. Many individuals are buying properties here while they are at their lowest and hoping to make a profit selling them once the market recovers or by using the home for rental income so this blog offers a lot of great tips for this growing trend in our area.
Being able to properly manage your budgets, expenses, and accounts receivables are crucial in business, yet it seems a lot of times real estate investors often struggle with their necessary book keeping.
Your blog and updates on the budgets and final project outcomes is a realistic approach I think less experienced investors looking to flip a home can benefit a lot from.
One tool we also use that is a god send to many in the business that we work with is a tool called the 360° Real Estate Investor Accounting Module which helps keep track of, (and remind you of) who owes you money, who you need to pay, and it will even alert you to any cost over runs that occur. It’s an easy to use feature allows people to run their real estate company with a lot less stress and time on account deadlines and without paying a full time book keeper.
As far as point #6 goes, I find it best to do as much up-front research as possible and even bid the job to as many qualified contractors as possible so you know you are getting the right guy at the right price.
I have to disagree with #9, your opinion on a lease purchase. Of course its better than renting out. You get up front money, at least $5000. the lessees are in the mind frame that they will own this home one day, therefor they take care of it better. And, also if they do default, you get your house back and keep all the extra mula!. Its so much better than renting
Great list. We haven’t done a flip yet, but are planning to next Spring in Duluth, Mn. This website is a great help!
On #8 – what was it that your wife did differently than your previous real estate agent that got you more showings? Thanks for all of the great info!
Ashley –
Networking, networking, networking! The great agents know all of the high-volume agents and brokerages in town and aren’t scared to pick up the phone or send an email letting all the other agents in their network know about the new listing. Also, the personal relationships make it easier to offer buyers and their agents incentives without having to offer them to everyone (by just listing it in the MLS listing).
I know I’m a little late to the party here, but I bet there are more people like me that are just finding your excellent site now and will be reading this article at some point!
One lesson that I have learned that I’d add here is to stick with your original goals for your finished product right up to the end and never let up on the details of a rehab. By the original goals, the common example that anyone could fall into is where the actual costs of a project exceed the projected costs by a decent amount or more (which I think happens on nearly every first project!) and when you are maybe 75% of the way through the project it really hits you that you are getting quite a bit over your original budget, so you immediately begin to cut every corner you can find and the parts of the project that are in that last 25% of the job are really compromised. In my projects, I often leave selecting the lighting fixtures until near the end of the job (except for recessed lights which usually need to be installed earlier in the project) and I must resist the urge to just slash the lighting budget to try to make up for other cost overages, because I think the lighting is a very important part of the finished product and its something the buyers will definitely notice right away.
One other thought is always to watch the details as close as possible and don’t let up at the end. One temptation I have found is when a project takes considerably longer than projected (also something that likely happens on nearly every first project) when you are getting closer and closer to the end and the place really starts looking like someone’s home again, it can be easy to want to kick it into overdrive and rush, rush, rush to get it on the market asap. On my first project, I did just that and skipped just a few relatively minor details, such as a newly installed back door that wasn’t quite adjusted right, so it didn’t shut quite right, you could see a little daylight through space between the door and the frame, etc. This and just a couple other relatively minor details definitely derailed at least one buyer and maybe more. I always ask for feedback from every agent that shows my projects. (I’m a realtor as well, so I’m always the listing agent) Its funny because they ALWAYS say they will definitely give feedback, but I’m lucky to get it from half of them in the end, even after I end up calling them a few times asking for that feedback they said they’d be glad to give! On my first project, one of the agents I did get feedback from said that her buyers really liked the house, thought it was fairly priced, etc etc BUT when they got to the poorly fitting back door, they noticed the issues and just that one detail caused them to question the workmanship on all of the work we did! I think we had 5 or 6 showings in the first 2 weeks on the market and NO offers, so I wouldn’t doubt that the back door, as well as a few other minor issues, scared away other buyers as well!
Bob –
Fantastic suggestions and I completely agree! These are two mistakes that a LOT of new (and some experienced) investors make, and then they wonder why they can’t get the house sold at their original estimated resale value.
Thanks!!!
I have a question. what are ways that you pull your own comps. and determine your own ARV with out the listing agents or realtors info..
Hey Eric,
While there are some free, public sites available where you can get some resale data (Zillow, Trulia, etc), they aren’t very reliable in some cases and they aren’t always current. The only way to be sure that you’re getting accurate comps and resale estimates is to use the MLS, which means either getting your real estate license or working with a real estate agent.
I actually strongly recommend that all serious investors get licensed, partly for this reason.
Thanks for the advice guys. We have done a few rehabs but they have always been for rentals, never for rentals. Were looking for our first house but are having a bit of trouble finding the first one.
Do you have any marketing strategies that have been effective for you ?
Hi J Scott! Just devouring your site – such wonderful information.
I’m very close to beginning my rehab career, and I will be working primarily with wholesalers to find my deals. Something that’s been perplexing me is #3:
“#3 – Verify your rehab costs before you determine your offer price.”
How does one go about this? Surely you can’t get your contractor to go on every showing with you before you make an offer to get the ERC, so I’m at a loss how I can accurately do this myself before I make an offer?
Any advice would be much appreciated.
Hi Sharon –
When I say to verify your rehab costs before you determine you offer price, I should have said before you FINALIZE your offer price. Nothing wrong with estimating for the original offer, but by the time your due diligence period ends, you’re going to want to ensure that you know how much the rehab is going to cost. Once you get the property under contract, you should be comfortable getting your contractor(s) in there to give you bids/estimates.
And, as a shameless plug, if you want to learn to estimate rehab costs yourself, check out my book on estimating rehab costs: http://www.biggerpockets.com/flippingbook
Fantastic site that I’m absorbing as fast as I can. Your books are on the way. I’ve done slo-mo flips, remodeling a house I lived in and then selling after a period of time but don’t want to do the work myself this time. What advice would you give newbies for finding a good contractor?
JH – Check out Chapter 15 of the book!
These are all great, thank you so much for sharing.
Regarding number 9, why would you consider it a mistake? Ultimately, you made decent money. Was the rental income covering for your financing? Your taxes are also lower after you hold your properties after a year aren’t they?
Ps. Currently reading your book “the book on estimating rehab costs” and It’s great! Again, thanks for sharing
Hey Daniel,
I know there are a lot of investors who LOVE lease purchases, but personally, I’m not a fan. For those houses where I want a short-term gain, I’ll flip. And for those houses where I want long-term cashflow, I’d rather rent and not take the risk of a buyer executing the option and buying the house.
Just my personal preference…
My wife and I are getting into this venture and your website as been an awesome inspiration. We’re reading your book and studying your projects at the moment.
Question: We would like to turn our first flip into a rental and use it as equity for future properties which we would buy, rehab and sell. In your experience is this a good model. Funding from the first one is coming from investors, so there is a likely hood we’ll be able to fund it 100%. Your thoughts on this are greatly appreciated.
Great Site!
My wife and i are wanting to get into the rehab/flipping business sin Houston Texas.
I am a contractor so i expect to do most of the work myself and with my employees.
I have been told by others that i should not waste my own time doing the contracting work myself rather hire sub contractors and spend my time focusing on the rest of the business…What are your thoughts?
Here you go:
http://www.123flip.com/education/your-business-philosophy/