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My First Flip and What I Learned

21 Mar

The first post of this blog is entitled “My First Project…”. That’s not exactly true. It is my first project using private funding but not my first as an investor.

I started researching real estate investing in 2001. I finally took my first big leap 5 years later when I bought a house in foreclosure on St. Cloud near Woodlawn Lake. What took so long: a phenomenon commonly referred to as analysis paralysis, which I’ll describe in greater detail in a later post. In short, it’s a condition that can strike anytime you are learning a new skill. It renders you immobilized for fear that you have not considered every possible outcome or strategy. Next thing you know, 5 years have gone by. This was my first blow against it.

Now anyone who invests in real estate knows that one of the most challenging aspects is finding deals and getting the phone ringing. Many investors spend thousands of dollars in direct mail marketing, door hangers, bandit signs, and even billboards and radio ads. I went the direct mail marketing route. The general rule of thumb in direct mail marketing, in real estate investing at least, is that you might buy one house for every 2000 postcards you send out. Imagine my surprise when I found my first deal after only sending out 13 postcards! Things were shaping up well.

The person who called me was the owner’s daughter. Her mother had been ill for quite some time and was living alone. The house was not in terrible condition but it was still more than she could handle. Because of her illness she had stopped working and fell behind on her payments. After inspecting the house and signing some initial paperwork, I had to rush to perform my due diligence before the auction two days later. Once I had the contract signed, I raced to the courthouse to stop the auction and save the house. It was fantastically terrifying and also rewarding to know that I was able to help this family move on and escape the devastation of foreclosure.

I purchased the house using what is called “sub-to financing”. This means that I bought it subject to the existing financing. I just paid her cash for her equity, transferred title to my name, and took over her payments. If done right, it really is one of the best ways to buy real estate with little of your own money.

Once I had the keys I started work on the house. I hired some guys to fix a few low spots in the foundation, correct a few plumbing and A/C issues, and paint the exterior. Everything else I planned to do myself. This was my Waterloo decision. I enjoy doing home improvement projects. I made the mistake of thinking that qualified/motivated me to do the work. I was wrong. I quickly discovered that after 8 hours at the office, the last thing I wanted to do was go work in a dusty, smelly house for another 5 or 6. Long story short, what should have taken about 2 months through outsourcing, took me 1 year through DIY.

After some fresh new paint!

With the extra mortgage payments I just about broke even on the project after flipping it to another investor.

So what did I learn from my first flip? A couple of things: First, being a home improvement enthusiast won’t make you a good rehabber. Your hobby can quickly become your seventh circle of hell if you HAVE to do it. So my first lesson – only buy a house if there is enough room in the numbers to outsource the work. Basically, if the deal needs my labor to make it work, then it isn’t a deal. If I am trading my labor for compensation (even if it is to myself), that’s no better than a traditional 9 to 5 job; and at least in a traditional 9 to 5, I’m guaranteed payment. In this project, I worked all year and endured “those looks” from my wife (love you sweetheart), for nothing. In this project, my boss sucked cause I didn’t get paid!

So what could have saved this deal and made it profitable? That brings me to my second lesson learned – private lenders. The major challenge I faced in buying the house was a lack of cash for repairs. I figured I would just pay for repairs as I accumulated the cash from my regular income. The problem however was time. The longer it took for the repairs, the more mortgage payments I had to make.  Had I lined up the necessary cash from a private lender in advance, I could have paid for all the repairs to be completed as soon as possible and all the payments made to the mortgage company could have gone into my pocket instead. It’s for this reason that, after this project, I decided to step back from real estate for a while until I could secure a private lender. I also wanted to focus on completing my degree.

Looking back I see that I made some pretty rookie mistakes; but for it all, I’m glad I did. I didn’t make any money on that deal but I learned a lot and it gave me the confidence to know that it can be done. I just had to tweak my strategy. That’s what I love about this business and entrepreneurship in general – the ability to experiment, evaluate, tweak, and build your own success, one adjustment at a time.

It reminds me of a quote from Thomas Edison when he was asked about the many times he failed before inventing the incandescent light bulb. He said, “I have not failed. I just found 10,000 ways that don’t work.”

Let’s see if I can at least cut that in half.  🙂

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Posted by on March 21, 2011 in Uncategorized

 

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