December 2018

When Plans Don't Work Out As... Planned

I've Always Said You Don't Make Money When You Buy

I believe it is a common misconception; You make money when you buy. I've never made money "buying" anything. All it ever did was cause me to take on more debt, risk, and usually headache. I make money when I sell. Period.

I went into this particular deal back in March. It was going to be a very profitable fix and flip in a very desirable area. The house was tenant occupied so I expected to be able to start working on the house before June. I'd have it rehabbed by the end of August and on the market just before kids went back to school. That was the plan....

I called up one of my buddies who had just sold a large commercial property and was about to go on a long trip. I figured he'd like a nice return on his money while he was out of the country. He lent me $280K on a $300K purchase. I figured the property would be worth around $425K when it was ready for market, and I expected to make about $50K on this house. Not a bad deal.

The tenants accepted $2,000 cash for keys and moved out the end of April. That gave me a bit of extra time I thought would be beneficial to get the house on the market earlier in the summer. That was the plan...

As is often the case, the tenants had been in the house for over 10 years, the rent was about $1,000 below market, and it was a complete disaster. This is what I refer to as the tenant landlord stand-off. The tenants have super low rent so they don't complain about repairs needing to be done. The landlord doesn't raise the rent because she (in this case) doesn't want to have to spend a bunch of money on repairs that the tenants will surely bring up. The victims are the house and ultimately the equity. The house falls apart and the equity gets wiped out to cover the rehab. And this house was a disaster.

My contractor got to work. It was nothing but problems from the start. I sent him a picture, the SKU and the name of the flooring I wanted. He got the right product, but the wrong color. I wanted a ceramic tile floor that looked like wood. He installed the product I wanted, but instead of the wood color, he used gray. Gray floors throughout the house. It looked horrible. The cabinet company custom built the kitchen cabinets and island. I picked out white. When I went to see it, the whole kitchen had this weird shade of blue tint. Gray floors and an off white / blue tint kitchen. Things just couldn't get any worse... Or could they?

I hired a specialty contractor to redo the fireplace with stacked stone. This was the center of attention in the living room. It had to be spectacular. There were so many gaps and bad cuts it was spectacularly horrid. I hired another guy to rip it all down and redo it. Then the tile contractor who worked on the bathrooms did one of the worst jobs I have ever seen. I don't know anything about cutting or installing tile, but I know I could have done a better job. It looked so amateur. Ultimately, I ended up paying another guy to redo it all. I basically had to rehab this house twice.

I finally got the house on the market and into escrow. Then the buyer did their home inspection. The inspector found about 20 items that were all quite minor, but they were things my contractor should have discovered and fixed during the rehab. The buyer cancelled escrow. I couldn't believe my luck with this house. I hired another contractor to come in and repair every item on the list. Part of that was fixing a bunch of slipped tiles on the roof, and he strongly suggested repainting the inside. The gray floors, gray walls, and blue kitchen were so depressing. My new contractor found a wall color that worked. He fixed all the home inspection items and a lot of other stuff he thought should have been done better by the first contractor. It cost me another $10,000.

I put the house back on the market and got a super low offer. I countered the buyer and we went back and forth. Finally we settled on a price that got me and my partner our of the deal without losing any money.... on paper. My time and focus on this deal surely cost me $100K or more. The deal closed. Everyone got paid back. We made a few grand. Life goes on. Can't win them all.

I definitely picked up some education on this deal. Have you ever had one turn out not quite as expected? Please share with those you think may benefit and leave any comments down below.

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