Lessons Learned From a Newbie Investor"s First Real Estate Rehab & Flip
My husband & I started on our real estate investing journey in the fall of 2008 as a major part of our strategy for financial freedom.
Our real estate investing strategy is a balanced strategy of rental properties, rehab & flips, and wholesaling.
In December 2008 we purchased a distressed property from the bank -- a 3 bedroom, 1 bath home in South Florida (Sunrise, Florida).
We rehabbed the property and sold to first-time home buyers.
The bottom line: We are not making any money on this deal.
We made some mistakes along the way that served as valuable lessons and we won't be making them again! We're not discouraged, in fact we are excited and working on the next deal.
I've written this article to serve as a resource to beginner investors who are considering rehabbing and flipping a property.
Lesson #1 (and most important!): When it comes to calculating Maximum Allowable Offers, Garbage in means Garbage Out.
Simply put, we paid too much for the house.
In Broward county the property values have dropped dramatically over the past 6 months.
At the time that we made an offer and signed a contract on the property we did not account for significant price reductions in a mere 3 months and a flood of new REOs on the market within less than a mile of the property.
The reason we were probably unable to find a wholesaler buyer is because it was not enough of a deal based on these facts.
Truth is, if we accounted for these facts, we would have paid $40K for the house instead of $60K..
..
regardless of exit strategy..
..
and we would have been able to wholesale it...
and if not, we would have made a minimum of $20K (and even more if we avoided some of the other mistakes).
We did use a formula for our maximum allowable offer: After Repair Value (ARV) * .
65 - repairs.
But I learned something early on about mathematical formulas...
Garbage In, Garbage Out.
Our garbage? Our assumed ARV was too high and our estimated repairs was too low.
We should've been much more conservative with our ARVs due to our fast declining market and increased foreclosures..
..
we've done this with all of our offers we've been making since getting mentors :-) Know your market! Adjust general formulas accordingly.
Lesson #2: When listing agents say "Give us your best and highest", don't.
We've easily made over 100 offers since we started on this real estate investing journey at the end of last summer.
About 40% of listing agents request "your best and highest" after you send in your lowball offer, claiming that there are multiple offers/substantial competition.
Even if this is true, it doesn't matter.
Don't give your best and highest that early on in negotiations.
That's what happened with this property...
we had a lower offer in the mid $50s and after a request for best and highest we went to $60K.
Who knows? We could've had this property for $55K.
And that small amount of money would've been the difference here..
..
we would've actually made a profit even with all our other mistakes :-) Either that, or we would've lost out on the property and that's not the end of the world either because there's always another deal.
Lesson #3: Things always cost more than you think When we put a budget together for the rehab we did budget for some unforeseeable expenses...
but not enough considering it was our first rehab - it was also our general contractors first rehab in Sunrise (he works mostly in Miami-Dade) so he didn't know some of the insane expenses that would result with regards to permits and inspections.
Here were some of our surprises that added up: (1) When you do a rehab, there's a lot of trash.
Duh.
But if you don't time your roofing work (if applicable) with the other demolition, you're going to have to rent an additional dumpster and pay to have it dropped off and taken away.
I didn't think this was a big deal but do you know that it cost us nearly $600? Yikes! Costly mistake.
(2) If you have city code enforcement officers who are completely unbendable and potentially even unreasonable, you will have a lot of additional costs for inspections and permits.
Long story short, we spent an extra $1700 in this area.
$1700!!! (3) Landscaping.
We paid too much for this.
The work was done beautifully, but if we spent a little more time shopping around for cheaper sod, we could've saved another $500.
(4) New Plumbing Issues.
Plumbing was perfect before the rehab started but we had an incident when one of the roofers assistants (he used his socks for toilet paper - can you believe that? But we couldn't prove it) that led to a new plumbing issue that cost us another couple hundred dollars.
(5) Materials.
We paid for materials ourselves vs.
having the contractor pay for them.
He was even cool enough to hook us up with all of his discounts and shopped around with us to get the items.
Problem was that early on we choose a few things that simply cost too much vs.
what we budgeted for - floor, kitchen, and bathroom tile was the biggest culprit but there were a few others.
Overspent on materials by approx.
$2000.
(6) Holding Costs.
Having holding costs was no surprise, but having them for 6 months (when we only expected 3, 4 at the most) severely cut into our profits.
These costs included the interest on the hard money loan (next time, I'm using private money or a lender who has a 6 month no pay option) and utilities (which frankly cost more than I anticipated).
So those were the key lessons we learned..
..
there were also a number of additional positive outcomes from this experience.
Namely,
If nothing else, I hope our attitude about the experience is a motivation to keep moving despite obstacles because as many more experienced investors will tell you..
..
it gets easier each time! All things happen for a reason and I'm grateful for this experience and ready to make some serious money the next go round! Happy Investing!
Our real estate investing strategy is a balanced strategy of rental properties, rehab & flips, and wholesaling.
In December 2008 we purchased a distressed property from the bank -- a 3 bedroom, 1 bath home in South Florida (Sunrise, Florida).
We rehabbed the property and sold to first-time home buyers.
The bottom line: We are not making any money on this deal.
We made some mistakes along the way that served as valuable lessons and we won't be making them again! We're not discouraged, in fact we are excited and working on the next deal.
I've written this article to serve as a resource to beginner investors who are considering rehabbing and flipping a property.
Lesson #1 (and most important!): When it comes to calculating Maximum Allowable Offers, Garbage in means Garbage Out.
Simply put, we paid too much for the house.
In Broward county the property values have dropped dramatically over the past 6 months.
At the time that we made an offer and signed a contract on the property we did not account for significant price reductions in a mere 3 months and a flood of new REOs on the market within less than a mile of the property.
The reason we were probably unable to find a wholesaler buyer is because it was not enough of a deal based on these facts.
Truth is, if we accounted for these facts, we would have paid $40K for the house instead of $60K..
..
regardless of exit strategy..
..
and we would have been able to wholesale it...
and if not, we would have made a minimum of $20K (and even more if we avoided some of the other mistakes).
We did use a formula for our maximum allowable offer: After Repair Value (ARV) * .
65 - repairs.
But I learned something early on about mathematical formulas...
Garbage In, Garbage Out.
Our garbage? Our assumed ARV was too high and our estimated repairs was too low.
We should've been much more conservative with our ARVs due to our fast declining market and increased foreclosures..
..
we've done this with all of our offers we've been making since getting mentors :-) Know your market! Adjust general formulas accordingly.
Lesson #2: When listing agents say "Give us your best and highest", don't.
We've easily made over 100 offers since we started on this real estate investing journey at the end of last summer.
About 40% of listing agents request "your best and highest" after you send in your lowball offer, claiming that there are multiple offers/substantial competition.
Even if this is true, it doesn't matter.
Don't give your best and highest that early on in negotiations.
That's what happened with this property...
we had a lower offer in the mid $50s and after a request for best and highest we went to $60K.
Who knows? We could've had this property for $55K.
And that small amount of money would've been the difference here..
..
we would've actually made a profit even with all our other mistakes :-) Either that, or we would've lost out on the property and that's not the end of the world either because there's always another deal.
Lesson #3: Things always cost more than you think When we put a budget together for the rehab we did budget for some unforeseeable expenses...
but not enough considering it was our first rehab - it was also our general contractors first rehab in Sunrise (he works mostly in Miami-Dade) so he didn't know some of the insane expenses that would result with regards to permits and inspections.
Here were some of our surprises that added up: (1) When you do a rehab, there's a lot of trash.
Duh.
But if you don't time your roofing work (if applicable) with the other demolition, you're going to have to rent an additional dumpster and pay to have it dropped off and taken away.
I didn't think this was a big deal but do you know that it cost us nearly $600? Yikes! Costly mistake.
(2) If you have city code enforcement officers who are completely unbendable and potentially even unreasonable, you will have a lot of additional costs for inspections and permits.
Long story short, we spent an extra $1700 in this area.
$1700!!! (3) Landscaping.
We paid too much for this.
The work was done beautifully, but if we spent a little more time shopping around for cheaper sod, we could've saved another $500.
(4) New Plumbing Issues.
Plumbing was perfect before the rehab started but we had an incident when one of the roofers assistants (he used his socks for toilet paper - can you believe that? But we couldn't prove it) that led to a new plumbing issue that cost us another couple hundred dollars.
(5) Materials.
We paid for materials ourselves vs.
having the contractor pay for them.
He was even cool enough to hook us up with all of his discounts and shopped around with us to get the items.
Problem was that early on we choose a few things that simply cost too much vs.
what we budgeted for - floor, kitchen, and bathroom tile was the biggest culprit but there were a few others.
Overspent on materials by approx.
$2000.
(6) Holding Costs.
Having holding costs was no surprise, but having them for 6 months (when we only expected 3, 4 at the most) severely cut into our profits.
These costs included the interest on the hard money loan (next time, I'm using private money or a lender who has a 6 month no pay option) and utilities (which frankly cost more than I anticipated).
So those were the key lessons we learned..
..
there were also a number of additional positive outcomes from this experience.
Namely,
- We learned how to run a 3-day auction to sell a home- awesome experience that we WILL do again...
it didn't work out for this home only because the top 2 winning bidders could not confirm financing - We have the beginnings of excellent relationships with several vendors (and a few really awesome folks at Home Depot)
- We were forced to talk to local bankers and hard money lenders
If nothing else, I hope our attitude about the experience is a motivation to keep moving despite obstacles because as many more experienced investors will tell you..
..
it gets easier each time! All things happen for a reason and I'm grateful for this experience and ready to make some serious money the next go round! Happy Investing!