Post 17

By Joe Firmin          6-minute read

THE OFFER

Oh crap. That sinking feeling hitting my stomach. No, not the stomach flu. That feeling you get when you could have had a better deal…

I had seen the rundown duplex from a Zillow alert a couple days before. I immediately called my agent, David Steele, in Augusta, GA and told him I wanted to get it under contract at the asking price - $100,000. (I had missed out on a few before.)

“Are you sure you don’t want to see it first?” David said.

“Nope, let’s lock it up. If there’s too much work and the numbers won’t work, I’ll walk away.” (conversation went something like this…)

David sent over the offer. They accepted quickly. When David called me with the news, I was excited and then had the “Oh crap” moment. The moment I knew I could have bought it for less… oh well... mistake #1.

DUE DILIGENCE

A few days later we met a contractor (more on him in a minute) and the home inspector at the property. It was rough. I honestly thought, “Damn, I’m going to have to walk away.”

My contractor was a person I’d known in my childhood who was referred to me as a “great contractor and works with house flippers all the time.” He mentioned, as we were walking through the duplex, that most of it was cosmetic and not difficult to improve, “probably around $25-30K.” He said he’d have a quote over to me in 2 days after I sent over to him what I wanted done.

“Fantastic.” I thought, through my rose-colored googly googles.

To step back one second… I had been studying real estate investing, researching areas in Augusta, knew a good deal from a bad deal because I had analyzed over 100 properties in the market, and I had made several offers to this point.

UNCENSORED MISTAKES - PART 1

Now, let’s pause for a moment and get uncensored. Meaning - my mistakes so far:

  • I didn’t know the area as well as I thought, this duplex is on the wrong side of the tracks, probably 5-10 years from being in the path of progress. Not a bad neighborhood, just not great.
  • I didn’t start vetting contractors prior to getting a place under contract. Didn’t have my “team” set, except for my agent David.
  • I did not have 3 or more contractors quote.
  • I did not know that for an investment property loan, you cannot receive concessions to be paid at closing, these cannot be in the contract. They can be off-contract that you settle with the seller, but not in the contract (lender requirements).

OK, so far, so-so… or so I thought.

DUE DILIGENCE (CONT.)

The inspection came back with no major findings, but I requested a repair allowance for $10K for some items (subfloor, hot water heater, etc.). The contractor’s quote came back for ~$30K to complete both sides of the duplex. I was doing new paint, flooring, cabinet doors, new porches, fixed fascia, shutters, porch lights, bathrooms, etc… I should have known the bid was insanely low… My plan was to BRRRR this property. Meaning Buy, Renovate, Rent, Refinance, Repeat. In short, you buy the property right (at least 20% below market value), renovate to improve the value of it, rent it out, refinance and get the cash you invested back out of it, and then using that same cash – go do it all over again. That was my golden plan.

Upon closing the contractor got to work. He made a lot of progress in the first 20 days and I was really optimistic that he’d finish within the 30-45 day timeline he gave me.

THE MONEY - $$$

Meanwhile back on planet earth… let’s talk financing. I went with conventional financing for my 1st investment property. For a duplex, it is 25% down in a conventional loan. I had a friend who works for a mortgage company and she found the loan. We closed no issues. Where did I get the $$$? Once I decided I was going to invest in real estate, I started searching for where to come up with capital, and I found it.

  1. Cash-out refinance on my home

  2. 401K loan

  3. Cash savings

  4. Cashed out an old rollover IRA (paid the penalty)

  5. For above and beyond expenses, sadly, credit cards.

UNCENSORED MISTAKES - PART 2

Before we go further... more confessions: 

  • I didn’t sign a contract with the contractor, idiot - the name "contract" is in the name "contractor" - rookie mistake.
  • I didn’t specify a timeline for contractor work completion
  • I didn’t insist on a bonus/penalty structure. (If he finishes early, he gets a bonus, late is docked a penalty.)
  • I didn’t ask for proof of the contractor’s insurance
  • I didn’t require that I be listed as an additional insured party on the contractor’s insurance policy
  • I only checked 1 lender for financing terms/rates, didn’t shop around.

With all these errors I’ve made, you can see the foreshadowing… it’s ominous...

THE WORK

Work started to sloooow down. Day 60 came and went and the place was not half done. Work then stopped completely and the contractor would not call me back for over a week. When I finally got him on the phone, he dropped a bombshell – his wife wanted a divorce, but he was confident he could finish the job in the next 14 days. I was supportive and understanding.

3 weeks went by and nada, zip, zilch work was done… Now we’re over 90 days in and still only ½ done with the job. I spoke with the contractor and he made another promise to close out the job in the next week. That didn’t happen. Fool me twice… yes, he did. We met at the property and I had to ask him to leave the job.

Given the timing, we’re now almost 120 days into this job, meanwhile, I’m paying the mortgage, utilities and landscaping on a place that is half-way renovated in various stages and parts. It is getting into the early summer and the best time to rent is historically. I really need to get this property on the market.

By this time, I had vetted 5 different property managers and decided upon one. This property manager recommended I use one of his contractors to finish the job quickly. Not having learned from my first mistakes, I eagerly took him up on it. #facepalm

Contractor #2 started work around day #135. His timeline to finish: 14 days. He made good progress the first week, knocked out a few things and then stalled. I called, no answer. The property manager called, no answer. Another week went by, finally the contractor called the property manager. His wife wanted a divorce. I cross my heart, etc. Full truth room… yep 2nd divorce on this job. Having lost all patience, I told him I’d rather he focus on his marriage; I’d find another contractor. Hey look! I learned!

UNCENSORED MISTAKES - PART 3

So let’s reflect on some errors:

  • When a contractor tells you he’s getting a divorce, just say thank you for his work to date and that you need to find another contractor – don’t wait.
  • Bid the job out to more than 1 contractor, get at least 3 quotes.
  • Set clear timelines, objectives, accountability
  • Be clear and strong in your communication, no room for timidity in contractor discussions.

FINALLY

It is now around day 150. I began to vet contractors (6 months late). After vetting 3, I found one that was not the cheapest, but had the best recommendations, was clear with timelines and was willing to include me on the insurance and agree to a bonus/penalty structure. His timeline – 3 weeks to finish.

He did, ahead of time and received his bonus.

I put the duplex on the market (after having to change property managers) and it was rented within 2 months… From purchase to renting – timeline, 7 months.

 

THE NUMBERS

The original quote to renovate was $30K.

After all was said and done, I had spent $56K on renovations, mortgage, utilities, landscaping, etc. over the 7 months.

Both sides rented, one for $850, the other for $795. The latter was due to a 1.5 mo. delay in the market and it getting towards the winter and I wanted to fill it quickly. After getting many lender quotes, and putting together a steller package to convince the appraiser the value was now at $165K, not the original $100K I paid for it, it appraised for $163,500 and I was able to pull ~$45K out of it in cash. A fantastic “finish” to the BRRRR. I thought hope was lost on this property midway through. This property should continue to provide a cash-on-cash return of around 13.5%. Not bad for the contracting debacle that ensued. 

SUMMARY

  • Contractors used: 3
  • Contractors vetted: 5
  • Lenders vetted for purchase: 1
  • Lenders vetted for refinance: 10
  • Property Managers vetted: 5
  • Property Managers used: 2
  • Renovation budget: $30K
  • Renovation dollars spent: $56K
  • Planned Cash on Cash Return: Infinite %
  • Final Cash on Cash Return: 13.5%
  • Mistakes: Too many to count here
  • Education earned: Master’s Degree

My original numbers were WAY off. I made a plethora of errors. Even if the return was terrible, it was a success.

Wait, what???!?! That crap was a success? Yep. Hear me out.

Was it painful, extremely. Did I want to give up and sell it, yes. Did I learn a TON – you bet.

And that’s what my wife and I kept telling ourselves, “We’re in this for the long haul, let’s stay patient, learn from our mistakes and keep moving.” That was like a mantra for those 7 months. It was a massive education in many ways. Not only was it an investment in our financial future, but it was an investment in our education as real estate investors and how to successfully navigate a purchase, renovation, renting, and refinance of a property.

Not mentioned in this story are the myriad of small tasks it takes to take a property from purchase, through renovation, to rent, to refinance, to sale. That process, detailed and the journey it takes, needs a book (might do that later).

If you don’t want to deal with this sort of hassle and would rather let someone who has the experience, learned from mistakes and now has many multifamily units under his belt, along with those of his partners, go the passive real estate investor route and invest via a syndication.

If you’d like to invest in multifamily real estate assets, but don’t want the work, burning the candle at both ends and the hassles of being a landlord, please sign up for the True Freedom Investor Network. It’s free to join with no commitment. It’s also the only way we can send you investment opportunities. We help you pool your capital with that of others to purchase large properties that we can add value to thereby achieving high returns. Join now!

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