Those of you who know me, either in person or by my blog, you know that the best way for me to learn from advice is to not take it. I am the queen of WTF decisions. The good news is that I am also the queen of learning from that same smh, wtf, have you been sniffing glue, moment.
Additionally, I have walked beside, behind, and in front of many investors throughout the years. Some I have trained, some have trained me. Some have been friends and some I have just observed. The recurring theme for those days where we say “Why did I leave my job for this?” generally come down to one of these things.
1. Over estimating the ARV for flips. Let me tell you how much narcissism we all like to have towards our own flips. We see our little, cute flip baby all bundled up in bad carpet and a 1970’s wallpaper and see, like any good parent, the next Taj Mahal.
It is human nature for us to see that one super high comp and make it our only comparable sale. I tell my clients if there is a com that is considerably higher or lower…toss it. Throw it out!! This property is an anomaly. The outlier. It has to go.
When you sit down with your ARV, keep it real. Your wallet will thank you.
2. Under estimating repair cost for rentals and rehab cost for flips. So I have been doing this for almost 20 years. I have two partners in one of my investment companies that aren’t new. I cannot recall how long they have been investing but we have been flipping and holding together for 8 years.
We bought a rather high-end home in a very sought after area in a cute historic district in Richmond, VA. We were very excited about the potential profit off this beauty. We had to replace a rotten floor, do some structural work, add a bathroom, build a roof top terrace… You know the usual.
One day I walk in and hear water running. Then I see water cascading out of the stairwell. It is coming from three flights up. We forgot that the flipping boiler is like 1,000,000,000 years old. I think its same model Noah put in the Arc.
To see a crappy video of this click here.
Now we have to replace, not, one, but two entire HVAC systems. How did we forget to even think of that??
Guys, this just happened. Like this summer. We all screw up at times. Did this mean that now we are not going to make any moola? No way!!!
Why? We figured making mistakes into the offer. The standard ARV – repairs X 60% (or 70%) is not really going to cut it when you hit a big speed bump.
Make sure that you allow for human error or even just something nobody could forecast.
Once I took a wall out to open the kitchen to the dining room and found asbestos. That jacked my rehab and holding cost significantly. There was no way to see that coming. You have to plan for the unexpected.
I would rather write more offers to get a REALLY good one than to have lots of accepted offers for some mediocre flip. You work just as hard to make $10,000 off a flip as you do for $40,000.
3. Not planning for bad tenants and tenant/buyers for held properties. Another funtastic recent story…I do a lot of owner financed and lease purchased homes. So I am holding but not really very active on the property.
I also have a policy that allows persons a shot at repayment if they fall behind allowing them to stay in the home with the requirement of an inspection to ensure that they are taking care of the property.
This one lady has been behind, rather far at times, since she moved in a couple of years ago. I inspected the main floor of the tri-level, satisfied I left.
They did not follow the terms of the repayment agreement, like the repayment part, so I got the house back a couple of months later. I thought I was walking into an episode of Hoarders. Trash EVERYWHERE!!!! The place was trashed!!! If you want to see me bitching about this click here, and here,wait here,and still here.
The point is that I was due a balance when she left, she trashed the house; this could have been an extremely upsetting and stressful time for me. Luckily I had learned by lying awake at night wondering how I would make ends meet due to situations like this to plan for them. They WILL happen. Seriously!! They will.
As an investor you need to be able to look at more than just ROI to see if this works. You need to plan for lost rents and tenants that plan to “show you” for kicking them out by deliberately trashing your house. Make sure that if you are not in a position with reserves, you are not taking property to hold that you cannot afford to pay for if no one else is.
If you are not there yet, flip or wholesale.
4. Not planning with escrows. On a similar note… When you are in a position to buy that rental or start holding owner fi’s; build a reserve out of escrows. You should pay your reserve account at least 10% of total monies collected for the property until you have a MINIMUM of $5,000 per property.
This covers you against delinquency and vacancy (if it is long term) but also capital repairs. This includes a roof, HVAC system, and horrible tenants like we saw above. Big ticket items.
5. CYA. We all know that that means but just in case you don’t, allow me to introduce you to www.urbandictionary.com. If you are innocent enough to not know this site or CYA, please do not start looking up the names of songs by Niki Minaj on Urban Dictionary. For real… don’t.
Ok so you don’t have to be tempted to always have a jaded opinion of anything on a French menu involving truffles CYA is cover your assets.
This is best practiced with a lawyer. Their job is to look for exposed assets either to cover them or claim them. You need to be sure that you have as many ducks as possible in a row before you do ANYTHING!!!
Look at the standard repayment agreement I use. I inspect the property, get cash , and a signature immediately. (Yes, I was a slacker and did not walk past the immaculate living room and kitchen..#stilllearning #stilllazysomedays) Additionally I have them sign a contract agreeing to allow me to take possession of the property in court as well as agreeing to judgment in the amount of the past due balance. In exchange, they get to stay and I do not garnish their paycheck as long as they comply with the agreement.
If they do not pay the agreed amount I do not have to go back to court to kick them out.
This is one example. There are TONS!!! I recommend meeting with your lawyer to see where your asset is showing. ;)
Happy Investing My Real Estate Junkies!!
I was born an entrepreneur. I am pretty certain that I was peddling passies in the hospital when the nurses left the room.All of the other kids in the neighborhood were riding bikes and playing with dolls I was selling jewelry out of a catalogue and creating a back yard consignment shop. At 21 I became a real estate investor and fell in love. This was/is/ and always will be my passion. I have been madly in love with flipping, holding, and writing offers on real estate that seem crazy for 18 years. Ladies and gents I am willing to share the love of my life with you. Maybe its polyamory maybe its jut because I can’t shut up about it. Either way I will be sharing every mistake I ever made and the lesson that came from it. I love questions. Please ask away!!!