Lessons I Learned From My Failed House Flip Deal
My kids love showing me “Epic Fail” videos on YouTube. They are the most viewed videos on YouTube simply because people love seeing other people failing at something they are doing.
The videos range from wardrobe malfunctions to the Brazilian soccer goalie that kicks the ball in the opposite direction. These “Epic Fail” videos are even more popular maybe because people watch and say “thank goodness that wasn’t me”.
I hope people watch those videos because they want to learn from other people’s mistakes and not just for amusement. Humans typically learn more from failure than from success and the same case applies to real estate investing.
It’s not possible to hit a home run on every house flip and you are bound to mess up in one deal or another. When one house flip fails, you just have to pick yourself up and learn from your mistakes.
The Importance Of Not Breaking House Flip Rules
I have to admit that I do not follow my own advice sometimes. One of the rules I have broken is the one that says “stick to your numbers”. My father used to say, “Do as I say not as I do”. He was right. I have come to realize that
the longer you invest in real estate, the more mistakes you will make and the more you learn from them.
My Epic fail house flip happened a little over three years ago. I broke my own rules and I should have known better. But in the process I learned some valuable lessons.
Vital Stats
Where. 2 bedroom, 1 bath. Buzzards Bay, Ma
When. Mid 2011
Financing. Private lenders.
Projected ARV. $170, 000
70% Rule. $119, 000
Projected Expense. $17, 000
Projected Profit. $34, 000
Estimated Repairs. $50, 000
MAO. $69, 000
Projection Summary
As you can see, I got funding from private lenders. My private lenders were friends, family and other people I knew through networking. I have previously talked about how it’s possible to flip houses with no money. This flip may have been a mess but the financing part was solid.
I managed to negotiate favorable interest rates with the lenders I chose to finance this deal. I paid out all my interest at closing. If I’d gone to a hard money lender, my margins would have been slimmer even though it would have been a great way to flip without money.
So What Went Wrong?
I didn’t stick to the rules. Since this epic fail, I have never deviated from the rules or tried to adjust the numbers to make it work. The simple rules I stick to are:
- Avoid over inflating your ARV
- Sticking to the 70% rule
- Sticking to your MAO
Here’s a breakdown of my numbers.
MAO
Actual. $74, 000
Projection. $69, 000
-$5, 000
Cost Of Repairs
Actual. $56, 473
Projection. $50, 000
-$6, 473
Other Expenses
Actual. $17, 515
Projection. 17, 000
-$515.
ARV.
Actual. $162, 000
Projection. $170, 000
-$8, 000
Profit
Actual. $14, 012
Projection. $34, 000
-$19, 988
Why This Was A Messed Up House Flip
As you can see from the stats, most of the numbers don’t look so good. Every aspect of the project had cost overruns. These are the mistakes that I made:
MAO
I paid +$5000 on MAO. There are many reasons why this happened but none of them are good. I believe I was overeager to make this deal happen. The seller stuck to his price and I figured I could make up the difference on the repairs. Of course that never happened.
ARV
My realtor had given me a number less than $170, 000 but I did some eraser math and thought I could sell it for $172, 000.
Cost Of Repairs
I did some more eraser math on the cost of repairs. I never factored in framing problems which I knew were there right from the start.
The Importance Of House Flipping Formulas
Even though I made a profit of $14, 000, it was an epic fail for me. I didn’t stick to my formulas and principles. From the look of things, you can tell that if I had stuck to the numbers, I would have made a bigger profit.
You can bend the rules a little but only if you know what you are doing. If you completely break them you could get into real trouble.
Ever since I messed up this house flipping deal, I’ve always stuck to my rules 100%. When you stick to the rules you can make a profit of more than $14, 000.
If you are new to house flipping, don’t give in to the temptation and break the rules. I have outlined many of the house flipping rules here and the more you stick to them, the more money you will make.
If you’ve made it this far, please leave a comment below. I’d love to know which mistakes you made and what you learned from them.
