How To Lose Money Investing in Real Estate
I search through Craigslist for a property to purchase. I find a property for sale for $39,000. I call the wholesaler and tell him I’ll buy.
He connects me with a local hard money company. I sign the purchase agreement and send it over. The property is going to be mine. I call a contractor investor who I previously connected with to let him know the project is his.
Let’s do this.
We close September 27, 2020. The $10,000 down payment to the hard money lender is wired over. The property is mine. Let’s get to work.
I’m excited because the expected rehab is around $64,000 and the appraisal came in at $170,000. This was a monster deal with $60,000 spread. My contractor begins work immediately.
Bug bombs in the basement. Full house demo. The party is starting. He completes work. I submit a draw request to the lender. I pay $150 for the lender to send their inspector to the property to ensure work is completed.
Following the inspection, the hard money lender wires over the money to me for the completed line items. November, 2020. My agent calls me and tells me there’s a property that’s about to be listed down the street in the same neighborhood.
The seller wants $64,000, we estimate $100,000 for rehab, and the ARV is around $225,000. The neighborhood with these two properties, is hot and everything is selling. This is another great deal with around a $30,000 spread.
I was tight on funds but I wanted the experience of flipping houses. I decide to list my condo for sale because I had about $90,000 of equity and could use that money for the flips. We offer $64,000 on the second flip and they accept.
I use the same lender for the second flip. Same terms. $10,000 down payment and the house is mine. At this point, my one experience with a contractor is they buy materials, they complete install, and then I order a draw request.
My lack of experience had me believe that all contractors operated like this. My agent recommended an awesome contractor for the second property.
I call him. He wants 40% of the budget up front which is $40,000. I have $15,000 in my bank account. He agrees that $15,000 is enough to begin.
December 1, 2020. I list my condo for sale. I agree to a lease purchase agreement with my friend to take over his house hack beginning after my condo closes. We agree to a $300,000 purchase price with a $60,000 down payment on the house hack.
The down payment will be paid in three installment payments to coincide with my properties closing.
December 4, 2020. Just a couple days later, I purchase a fourplex investment property using owner carry financing with a $20,000 down payment. This deal took one year to close. Persistence.
February 28, 2021. After sitting on the market for a month and a half, my condo sells for $170,000. I pay my friend $30,000 as the first payment in the down payment installment plan for the house hack.
The remaining money is used to fund the renovations for my flips. From September 27, 2020 to March 1, 2021, I took on $750,000 of debt. Between the four properties, I had roughly $250,000 in equity and expected earnings from the flips.
I owned one million dollars of real estate in the span of 6 months. Fast forward to June 17, 2021, or a day that would change my life forever. 8 and a half months after beginning the rehab, we’re done.
I’m excited to take pictures, list the property, and sell the house. Up to that point, every picture I had been sent looked good. I pull in to work and my agent calls me. He is at the property with the photographer.
It’s a phone call I’ll never forget. He tells me it’s the worst looking rehab he’s ever seen. I’m shocked because all of the pictures I had seen up to that point looked good. It passed 8 different inspections.
But I take full responsibility. I made a beginner mistake of not having people go check on the property. My fault. I was strapped on funds. I had no money.
The second rehab was going fine, but we found issues at the start of the project. Both of these houses were 100 years old and unoccupied for a couple years. There were problems behind the walls, with the roof, everywhere.
If there was an expense with the project that was not a line item with the lender, then you didn’t receive compensation for it. I put a lot of money into the second house that was not on the line item sheet.
I got caught in a moment where I had a lot of my cash in these two properties but one was in the middle of the rehab and the other was not even ready to be listed.
I was all in at around $110,000 on the first flip and the ARV was $170,000. All I needed was it to sell and didn’t have all the cash I needed.
I’m working a desk job, and 2,000 miles away, I have a major problem. I’m out of cash, I can’t trust the contractor to fix all of the defects that he created, and I need this first property sold.
I’m very privileged and fortunate to have had the ability to call my friends and receive some emergency funding. The first house needed someone to redo a lot of work in order for it to sell.
I tell my second contractor to forget about the second flip and do whatever is needed to get the first flip ready to sell. He pulled his guys off the second flip and immediately went to the first flip to help me out.
But unfortunately, this delayed the second flip. I estimated I needed about $20k to finish the first flip. That was on top of the $65,000 initial rehab costs. I also list my fourplex for sale because I need the cash.
After 7 days, I received a cash offer for $310,000 with $5k cash back to the buyer at close. I use the proceeds to pay my friend $25,000 for the second payment of the house hack down payment and any remaining funds will be put towards the flips.
It ended up taking about three months to finish the first flip’s emergency rehab. The second contractor was a life saver and made the house look pretty nice.
We list the property for $160,000. We get more showings than an HGTV house. But no offers. A couple days later, I sell my car for $2,500 for cash just to get by.
My job was located two hours away from my house by bus. I rode the bus four hours every single day. At night, I would ride the bus to the gym, work out, and walk home.
Those were some really long days. Back to the first house. One of the complaints from showings was the next door neighbor had a lot of trash and multiple inoperable cars parked in their yard.
After a couple of weeks, I decide to take some action. I look up the tax assessor website and find the name of the neighbor. I find the neighbor on Facebook and message the lady.
I ask her to clean up her yard and sell her cars. I semi-assisted her in selling one and cleaning up her yard. To make a long story short, the house eventually receives an offer for $130,000 after we dropped the price multiple times over four months.
The buyer wants $5,000 at closing. We accept. Basically selling it for $125,000, much less than the $160k we thought it would sell for. It sold for less for various reasons.
One of which is the house was still not in great shape. To complicate closing, the appraiser seems to think that there’s termite damage in the basement and it could be a structural problem.
I have to order a structural engineer to inspect the property for potential structural problems. Wonderful. Let’s delay closing another two weeks and another $1,500 out of my pocket.
Just as we’re about to close, a little virus from China starts to enter this country. Nothing like adding a little more stress for this property. There was real concern that this would hold up closing.
Thankfully, we were able to close and I was able to walk away from the property. Fast forward a couple of months and I was finally able to complete the rehab on the second flip.
I’m condensing the story for time, but I faced a scheduling nightmare. Because the good contractor took his crew off the second flip back to the first flip, it threw off his schedule and previous contractual agreements.
In order to finish the second flip, I basically had to wait until he had a couple of days to go knock out other items at the house. I also had no money so I relied on him completing work before I could receive the draw request money from the lender.
I can’t explain to you how much magic and personal finance wizardry I had to use to complete a house flip 2,000 miles away with no money and enough debt service to wipe out my net income.
At this point, the virus is shutting down the NBA, people are starting to work from home, sounds like lending is starting to constrict. There’s worry that lenders won’t even lend to new homebuyers.
I’m stressed to the max. And to make this story even more interesting, I got furloughed from my job which eventually never returned. I do catch a huge break.
A lady with my hard money lender is also an agent and happens to have a buyer wanting a new home in the same neighborhood. Before I list the property, her clients view the house and make a full price offer of $253,900 with some money going towards closing costs.
Selling the second house was one of the biggest reliefs I’ll ever experience. Before the house sold, I had to knock off a few remaining items that cost about $5,000.
When the house sold, I was able to pay off my four credit cards that had been maxed for a full year. It took me another month to pay off my contractor in full. Huge relief.
But the story doesn’t end there. With the flips closed, I decide to renovate my house hack. In the middle of renovations, we find an unexpected sewage problem.
I have the plumbing company inspect the plumbing and sewage and I have a $31,000 sewage problem underneath my house. I had a jackhammer in my house for three weeks tearing up my kitchen and two downstairs bathrooms.
They also had to go six feet deep in my front yard underneath concrete that I had just poured two weeks earlier. I replaced the entire sewage system from my kitchen sink to the main street.
I upgraded my water line into the house from the main street, and I had an opportunity to fully renovate multiple bathrooms after they were destroyed.
With the two flips selling in 2020 and the sewage renovations that are a loss on the balance sheet because they don’t add value to the appraisal, I lost more than $100,000 in real estate in 2021.
I don’t know what else to do besides laugh and hope that this learning experience will make me a lot of money moving forward. Sometimes things just don’t go your way in life. I basically made one wrong decision and hired the wrong guy and it cost me multiple properties and over 6 figures $.
If this hadn’t have happened, didn’t be doing really well financially right now. Anytime you start something new, you don’t know what you’re doing and you’ll make mistakes. People starting in real estate make mistakes.
Unfortunately for me, my mistakes started a domino effect that cost me a lot of money. I’m the type of guy who is willing to take massive risks. I take action. Sometimes that’s to my detriment. I’m not afraid of losing money.
All I care about is learning through experience. I’m going to be in real estate for the rest of my life. This was just a temporary setback. I’m bummed that this happened of course. This has been a crazy bull market and a lot of people have made exorbitant amounts of money. I didn’t.
That’s tough to stomach. There’s a lot of people on social media who don’t know what they’re doing, investing in real estate, stock market, and crypto and are making a lot of money.
Serious FOMO has definitely kicked in at times. But I’m really proud of myself. I did not miss a single payment on any of my debt. I did not have a single late payment on any of my credit cards.
I can honestly say that my stress levels were 10 out of 10 for probably 11 straight months while I tried to exit the flips. There were days where all I ate was rice for lunch. It’s all I could afford.
I had to walk home from the gym in shoes with holes in them because I couldn’t afford new shoes. It was a lot of fun when it was cold and wet. Every night I struggled to fall asleep because my mind was racing trying to solve the financial problems I faced.
I rode the bus four hours every day to my job and had to pretend like nothing was going wrong in my personal life while working. I showed up to work every day and was able to mask the troubles that I was facing in my personal life.
I solved all of these problems while working a 9-to-5 and no one knew. I’m sure a lot of people will tell me how dumb I am for flipping houses 2,000 miles away without knowing what I’m doing. It’s cool. I can take it.
This story may look like failure, but it’s actually the exact opposite. Through these tough times, I’m a success story, not a failure. I can’t be anything other than grateful.
I’m making over $100k per year, I have no debt, no health issues, an amazing group of friends, a large social media following, and a pretty bright future ahead.
This experience just made me tougher and more resilient.
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