Lessons learned from a first-time investor’s first real estate rehab and turnaround

My husband and I began our real estate investing journey in the fall of 2008 as an important part of our financial freedom strategy. Our real estate investment strategy is a balanced strategy of rental, rehab and wholesale properties. In December 2008, we purchased a distressed property from the bank: a 3-bedroom, 1-bathroom house in South Florida (Sunrise, Florida). We rehabbed the property and sold it to first time homebuyers.

The bottom line: we’re not making any money on this deal. We made some mistakes along the way that served as valuable lessons and we won’t make them again! We are not discouraged, in fact we are excited and working on the next deal. I have written this article to serve as a resource for beginning investors considering rehabbing and flipping a property.

Lesson #1 (and the most important!): When it comes to calculating maximum bids, garbage in means garbage out.

Simply put, we paid too much for the house. In Broward County, property values ​​have dropped dramatically in the last 6 months. At the time we made an offer and signed a contract on the property, we did not factor in significant price reductions in just 3 months and a rush of new REOs onto the market within a mile of the property.

The reason we probably couldn’t find a wholesale buyer is because it wasn’t a good enough deal based on these facts.

The truth is, if we had taken these facts into account, we would have paid $40,000 for the house instead of $60,000…regardless of the exit strategy…and could have sold it wholesale…and if not , we would have made a minimum of $20K (and even more if we had avoided some of the other mistakes).

We use a formula for our maximum allowable offer: After Repair Value (ARV) * .65 – repairs. But I learned something early on about math formulas… Garbage in, garbage out. our trash? Our assumed ARVs were too high and our estimated repairs were too low. We should have been much more conservative with our ARVs due to our rapidly declining market and rising foreclosures…we have done this with all of our offerings that we have been doing since getting mentors 🙂

Know your market! Adjust the general formulas accordingly.

Lesson #2: When listing agents say “Give us your highest and best,” don’t do it.

We have easily made over 100 deals since we started this real estate investing journey late last summer. About 40% of listing agents ask for “highest and best” after submitting their low offer, claiming multiple offers/substantial competition.

Even if this is true, it doesn’t matter. Do not give your best at the beginning of the negotiations. That’s what happened with this property…we had a lower offer in the mid $50’s and after a best and highest request we went up to $60,000. Who knows? We could have had this property for $55K. And that small amount of money would have made the difference here…. we actually would have made a profit even with all our other mistakes 🙂 Either that or we would have lost 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 budgeted for the rehab, we budgeted for some unforeseen expenses…but not enough considering it was our first rehab; It was also the first rehab for our general contractor in Sunrise (he works primarily in Miami-Dade), so he didn’t know some of the insane expenses that would result with respect to permits and inspections.

These were some of our surprises that were added:

(1) When you do a rehabilitation, there is a lot of garbage. Duh. But if you don’t schedule the roofing job (if applicable) with the other demolition, you’ll have to rent an extra dumpster and pay to have it dropped off and towed away. I didn’t think this was a big deal, but you know it cost us almost $600? Oh! Expensive mistake.

(2) If you have city code enforcement officers who are completely inflexible and potentially unreasonable, you will have a lot of extra costs for inspections and permits. Long story short, we spent an additional $1700 in this area. $1700!!!

(3) Landscaping. We paid too much for this. The job was done beautifully, but if we spent a little more time looking for cheaper grass, we could have saved another $500.

(4) New Plumbing Problems. The plumbing was perfect before the rehab started, but we had an incident when one of the assistant roofers (used his socks as toilet paper, can you believe it? But we couldn’t prove it) that led to a new plumbing problem that cost us another couple hundred bucks.

(5) Materials. We pay for the materials ourselves vs. Let the contractor pay for them. He was even cool enough to hook us up with all of his discounts and comparison shop with us to get the items. The problem was that at first we chose some things that just cost too much compared to what they do. what we budgeted for: floor tiles, kitchen and bathroom were the main culprits, but there were a few others. Excessive spending on materials for approx. $2000.

(6) Maintenance costs. Having maintenance costs was not a surprise, but having them for 6 months (when we only expected 3, 4 at the most) severely reduced our profits. These costs included interest on the hard money loan (next time, I’m using private money or a lender that has a 6 month payment option) and utilities (which frankly cost more than I expected).

So those were the key lessons we learned… there were also a number of additional positive outcomes from this experience. Namely,

• Learned how to run a 3 day auction to sell a house – awesome experience we will do again…didn’t work out for this house only because top 2 winning bidders couldn’t confirm financing
• We have the beginnings of great relationships with several vendors (and some really awesome people at Home Depot)
• We were forced to talk to local bankers and hard money lenders.

I hope this article is helpful to other people looking for rehab. If nothing else, I hope our attitude about experience is motivation to keep going despite the obstacles because, as many more experienced investors will tell you… it just keeps getting easier! All things happen for a reason and I am thankful for this experience and ready to win big in the next round!

Happy investing!