5 Secrets To Not Lose Money On Your First House Flip

Mike DeHaan: [0:00] I've wholesaled or flipped over 500 houses in the last four years. And in that time, I made a lot of money and built a relatively successful real estate business, but it didn't start out that way. And on my very first deal, I almost lost really badly because there was a handful of things that I didn't know about how flipping properties work. And so in this video, I'm going to talk about the five things that really caught me off guard on my first deal. And my hope is that you cannot make the same mistake that I did, and so you can have a more profitable first endeavor. Alright. So number one was that I did not fully understand all the closing costs associated with buying a flip property like this directly from a seller. And so with this, I I guess I had an agent that was involved, so it did kinda help out. But when you buy a property direct from a seller, there are some different expectations that are set versus when you were buying property that's on the MLS. And primarily, that is around how the loan is funded and how exactly you get the loan, what kind of loans look like, and then also who exactly pays the closing cost. So when you buy a property from a distressed individual or distressed property, typically, a part of the reason they choose to sell at a discounted rate is because the buyer is willing to pay some of the closing costs so that they are going to be able to walk with a little bit more money on top of the big hit that they're taking on the equity by selling at a discount. And so in this specific case, I basically agreed to pay those costs. And a big item that caught me off guard was what we have in Washington state, which is called excise tax, which is a 2% tax on the sale of any property in the state of Washington. And so, when I went and I closed on this property, there was an additional 2% of the purchase price, which was about $4,000 that went out the window before it even started. Right?

Mike DeHaan: [1:42] So when I ran my initial numbers, I didn't account for this $4,000. And surprised, there was also an additional excise tax at the end of it when I sold that I was not expecting. And it did this didn't show up on my calculators or anything else that I found online. This is something that's very specific to Washington State, and so why would it be on a random calculator that I got from a website. Right? And so that was one big thing that caught me off guard. The other thing was that I got a hard money loan for this deal, which is a cash type loan that is user flipping properties. And in these closing costs for the hard money loan, there was several different doc fees and underwriting fees I wasn't expecting. And those as well cost me well over a thousand dollars of money that I was expecting to be have towards the renovation or towards the project. So when you're buying a property, always make sure you understand the entire amount of cost, and like all the different costs you're gonna have with buying the house, because it can really affect you down the line. Alright. And then item number two, and this is one that is super common when people are starting out, is I didn't check the five main items that can really bite you if there are anything that goes wrong with them. And those items are plumbing, HVAC or heat source, your electric, your roof, and your windows. K? And so most people understand the roof because you can see that when you pull up to the house and you can look at your window and you can see, you know, that roof looks like it's gonna need to be replaced.

Mike DeHaan: [2:58] That's honestly the easy one because it's also typically pretty easy to replace. You can find tons of companies that will be willing to do it for you. The thing that got me on this one was the plumbing. And so plumbing is always a weird one because you can't necessarily, like, seed the plumbing when you walk through the house, and it's hard to know if there's problems. And so on this one, what got me with the plumbing was well, this is the first one I had actually plumbing and HVAC on this property. First thing with the plumbing was that I bought the house in February. I live in an area where there is winter, and I didn't understand that if I go and buy a house in the winter that has not had anyone living in it, not had any sort of heat source, that the pipes will freeze and all of the pipes will burst. And so when I bought the house, I went and turned on the water, and immediately all the house the all the pipes in the house burst, and I had to replace all the pipes in the entire house. And it cost me, like, $18,000. It's been crazy to do it. And that ate an incredible amount on my margin right away, and there's no way of going around that. And then the second thing that I missed on this one was I failed to recognize when I was walking in the house initially because it was abandoned, that there was no HVAC or heat source at all. There was no furnace, and there was no venting to even install a furnace. And there wasn't even baseboard heat, which is usually what there is if there isn't a central heating system in a property. And then because the local code, I could not add baseboard heating anymore.

Mike DeHaan: [4:19] So what I had to do was I had to add an entire furnace and ducting system, which cost me, like, another $12,000. K? And so just between those two items, that was $30, and that was pretty much the like, a huge portion of my profit I was expecting to make that was out the window right away just because I didn't know what I was doing. One of the most common ones that I see a lot recently with people is the windows. Especially buying older houses, it's really common for the windows to all need to be replaced, and that can easily be a 7 or $10,000 job. Just make sure that you understand all of those things when you're buying your first property. Item number three was that I paid some of my contractors too early, and they stole my money. And so this is like a classic one that new people run into when they don't really know what they're doing, and they meet a smooth talking contractor or they even get a referral to a contractor that promises them the best in the world, and then they say, hey. All I'm gonna need is a $6,000 deposit so that I can go and buy all the materials to do this job. Don't do that because there's a greater than average chance that they will just take your money and you will never see them again.

Mike DeHaan: [5:19] And this is a very serious issue. This can happen even with very established contractors that have good reputations. And so what you always need to be doing is if they need money for materials, you actually go and buy the materials yourself, have them give you an order of what they need or, like, a list of what they need from Home Depot or Lowe's, whatever you're choosing to do. You can get the entire list of items. You go to Home Depot, You go to Lowe's. You can do this online, and you place the order of those items yourself, and then you have them delivered to the property for the contractor to do the work. Then once they do the work, you wanna set milestones. Basically, figure out what halfway done means, figure out what 90% done means, and then you pay them that amount of money when they reach those milestones. So let's say you're hiring someone to do flooring, verify with them beforehand, hey, need the kitchen, we need the living room, we need to do, you know, these two bedrooms, we'll consider that half done. Then I will give you your money, and then figure out what 90% done is. And then always make sure that you go and you personally verify that everything is perfect before you pay them their final percentage. Otherwise, they take the remaining money and not come back and finish the job all the way. That's always almost more of a pain in the butt because then you gotta find someone to come back and finish a 95% finished job, and that's just a really bad place to be in. So trust but verify. Do this especially with new contractors.

Mike DeHaan: [6:34] Once you have someone that you've worked with quite a bit and you know they're legit, then you can have a little more flexibility, but really resist the urge starting out to be paying contractors of fund no matter how much they beg you to do so. Alright. Item number four was that I tried to do a lot of the easy work myself, and what ended up happening is it ended up taking so much longer than when I looked at my hard money loan. It actually cost me more money to do the work myself, and it sucked because I didn't know what I was doing than if I just paid someone to do it. And so when you get a hard money loan, it's not uncommon for you to be paying 70, 100, even $200 a day depending on how big your loan is. And what'll happen is people will say like, oh, I can paint. I can do the flooring. I can all sort of stuff. I don't wanna pay someone $5,000 to paint. I'm just gonna do it myself. But then they are doing it in the evenings. They're doing it on the weekends. It's taking them instead of being two or three days, it's not something that's taking them weeks. And then if you look at the actual net cost of that with how long it's taking them and what their actual holding costs are with their hard money loan, they're actually paying more money than if they had just paid the professionals to do it correctly in the first place. And to make matters worse, you gotta do the misery of doing the hard labor, which isn't for most people.

Mike DeHaan: [7:48] You are probably gonna do a worse job than the professionals are going to do, and so you're gonna have to do rework anyway. And ultimately, it's gonna really kinda drag down your project. It's also gonna affect your opportunity cost of being out there to network and find better connections and find more deals and find cheaper money and find everything else that will make your future deals better. And so I really highly suggest that people, they resist doing any work on their houses as for as long as they can. The couple things that I typically say are probably, like, maybe a slight difference from that is, like, some landscaping stuff. Sometimes landscaping work can be incredibly expensive, and you can go and you can block out the work in, like, a day or two with a couple friends. But if it's like internal stuff, you don't know what you're doing, stick with the experts and don't try to save a couple bucks doing it yourself because it'll probably end up costing you more just how long it's gonna take. Alright. And then item number five was that when I bought the property, I did not pick comps that were actually truly like the property that I bought. And for me, it was something that was kind of obvious, that was right in front of my face, I didn't even notice.

Mike DeHaan: [8:48] And that was the fact that mine was the only house in the neighborhood that did not have a garage. And so when I looked at all the houses that were around there, these, like, seventies split level houses, almost every single one that I had used to estimate the value of my property, it had a detached garage. It was kinda down an alleyway. Mine was the only one that didn't have this for some reason, and I didn't even notice when I bought the house. So then when I go to list the house, the realtor that I was working with, they started making suggestions on price that was about $10,000 less than I was seeing everywhere else. First, First, I was really confused, then I asked what the situation was. And she explained, well, you don't have a garage. It's also on a hill. And, you know, here we have winter, and it's gonna be a much less desirable place for people to live during the wintertime. And so that rounded it out. At the very end, all of a sudden, there was this lower valuation that I was expecting on this house, and there wasn't really anything I can do about it. It's not like I can just build a garage. It's a permitting process. It's very expensive to do that. And so it could have been easily avoided, and honestly, I probably could have bought the house a little bit cheaper if I had pointed that out at the get go, but I didn't know any better.

Mike DeHaan: [9:51] And so it's really important when you're going and you're looking at houses that are comparable to the one that you're buying, make sure that they have the same exterior Make sure they have the same exterior characteristics. K? Like, they have garages. They are similar lot sizes. The way that the street access and stuff is also more of the ones that you're looking at because that will affect your value. Make sure they're similar age houses, and then focus more on the square footage than the bed bath count because it's not uncommon for there to be houses that are similar in bed and bath count, but are very, very different in square footage. And square footage is ultimately what matters a little bit more in value. And And so just going through and making sure that all the house that you're looking at to analyze the one that you're trying to buy are really like yours will help you save a ton of money. And so all of this, I wasted a ton of money and a ton of time on this deal. I did come out ahead because I was fortunate enough to have bought a deal. And so after six months of work on my first slip, I made $4,000. So not a great payday at all, but the value of the education that I got is honestly just unbelievable. And so when you are doing these things, don't be afraid to jump in and take risks. Right? And to try things and to, like, you know, go through and learn the hard lessons because honestly, that's how we get better.

Mike DeHaan: [11:03] Yeah. It can suck if you lose a ton of money, but honestly, there are a ton of really, really, really bad decisions and a ton of negligence that has to go on for you to get into a situation where you lose incredibly horribly. Really, flipping houses and buying real estate is all about math. And if you think about things from a holistic view and you are conservative on your first ones, you can typically come out with a lot more upside than you're expecting. So anyways, guys, I hope that was helpful for you. Please subscribe to this show. We really appreciate all support that we get. And also share with any friends who are looking at getting into the business and aware of taking that first step. Hopefully, they'll learn something from this, and they can avoid making the same mistakes I did. Thanks, guys. I'll see you next time.