Major Lessons from Mike's First House Flip

Mike DeHaan: [0:01] Welcome to the collecting keys Friday focus. What is going on, guys? In this episode of the collecting keys Friday focus, you have me, Mike DeHaan, and I'm going to do a deep dive on a topic that I got a lot of questions on Instagram about after I made a post. But I I made a post on Instagram. I'm at mike underscore invest, if you wanna give me a follow, talking about the lessons that I learned from doing my first house flip. And it does a little reel and kind of outline the main challenges that I faced from doing my first flip and the things that I learned. And I had a lot of people DM me and wanna know more details about some of the things that I talked about. So I just wanted to do a Friday folks episode to do a deep dive into kind of all the ups and downs of the first flip that I did way back now in 2018. So the first house that I flipped, if you haven't heard the story in other episodes or material that I've done, very basically, I had started buying rental properties. I was interested into doing flips to get some more capital to be able to buy more rentals. I had never done any sort of renovation before or bought any fixer upper really at that point. So I went and found a partner that had some money, so that we could partner on stuff together, because I didn't have the money to be able to do it. They had a tiny bit of expertise, I had zero expertise, and we basically just decided that we were cool with mutually assured destruction. So we agreed to partner up and start flipping houses together. This is not Dan, who is my cohost.

Mike DeHaan: [1:34] This was a different partner that I worked with for a short span. And we flipped three houses together over the coming year. And the most part, they went pretty well. But the very first one was an interesting sort of situation. So the agreement that we had was that I would manage a lot of the work and the contractors and all that sort of stuff, that they would bring the money, and that we would essentially split the deal fifty fifty at the end of it. Spoiler alert, what ended up happening at the very end after all the ups and downs after four months of work, my take ended up being about $4,000. And if you look at the dollar per hour spent on it, it was about as poor as it could possibly get from a dollar per hour perspective. And a lot of it was because there was some major lessons that we learned that we just didn't know that we didn't know. So first off, I guess I'll say to you, we bought this property as an REO from a realtor. So it was a bank owned property, and the bank realtor representative was the one that brought us the deal. And we bought it that way. We had no competition, and it was pretty straightforward purchase. We used hard money to close, and, you know, also used hard money to fund a lot of the renovation. So first thing, when we were analyzing this deal, we thought it was a pretty screaming deal because we were getting it. I think we bought it for like $1.50.

Mike DeHaan: [2:48] Comps that we were seeing were in the $2.80 to $2.90 range, and we estimated that needed about $50,000 worth of work. A lot of the issues that ended up coming up were due to poor analysis of the deal, and also two things we didn't about the renovation. So first off, we were looking at like the high 2 hundreds for an ARV. We failed to realize that this was the only property in the neighborhood without a garage. And that was a pretty large deduction when went to sell the property. So even when we went to sell it, you know, we talked to our realtor that was listing it, we were saying that we wanted to list it for $2.80 to $2.90. She was like, well, no way it's gonna sell for that. It's the only one without a garage. I can tell you right now that it won't go. And it was we kind of ignored her. We lined up listing it for $2.70, sort of barter on it, I guess. And then we ended up, I think, selling it for closer to $2.56. We ended up taking an offer for below ask after a price drop in a bunch of time on the market, so that cost some additional things. So lesson there being that when you are running your comps on your flips, make sure that you are really looking for like kind properties and not just looking for properties that are in the same neighborhood, but that they have the same features as well when you're running your comp. So that was a big thing that we learned there.

Mike DeHaan: [4:03] Next, as we got into the renovation, there was a whole bunch of things that went wrong that we did not realize were going to happen. So first off, and this is just our own ignorance, when we did our initial walk on the property, we did not realize that there was no heat source in the house at all. Basically, there was no furnace, there was no HVAC, there were some baseboard heating areas, I guess, where baseboard heating, electric heating was at one point. But those had all been ripped out as well as all of the electrical. And the challenge with it was that, basically, with how the house was damaged, how it was laid out, it didn't really make sense to install more electrical heating. So we ended up having to install a full HVAC system, including all the vents, you know, the furnace, everything. And that was a $14,000 cost that we did not account for we were running our initial numbers. We just didn't even think to look for a heat system. We didn't know. We didn't know. And we were just like, oh, I thought all houses had heat systems. I didn't know that that was even an option. So that was a large cost that we, you know, had to weather. So lesson there, make sure that all of the general services that you would expect exist in a property that you are going to buy, and that goes furnace, AC, if that's something that's necessary where you live, which it is in most places now, thanks to cobble forming, hot water heater. Right?

Mike DeHaan: [5:25] What other stuff like electrical panel. I've seen houses that don't have full electrical systems because things have been tampered with. Make sure all that sort of stuff is covered when you're walking the house, that it exists, or budget for having it installed. Second thing was when we went to turn the water on in the house. So we bought the house in like March. It was still cold out. The house had been abandoned for two years at that point. It had never been fully winterized. And, you know, we started working on it. We're like, oh, we need some water. We just went and turned on the water at the main. And immediately, all the pipes burst in the house because they had all expanded due to pipes freezing and that sort of stuff. And the entire house flooded. Like, I'm talking water shooting from the walls, cascading down the stairs, everything like that we had put in at that point became damaged and we had to do again. And I learned afterwards that if we had done that process correctly, we had gone and made sure that the water had thawed, that we can we had drained the house. Right? We'd gotten the water out of the pipes first. We could prevented all the damage that came with that because we ended up having to replace a ton of the piping, redo a bunch of the walls, redo a bunch of flooring, bunch of everything else that we were not expecting to have to do. And that was another major expense. And on top of that, we had to replumb a large portion of the house just because we didn't know that there was an appropriate way to do that.

Mike DeHaan: [6:48] We were kinda planning to have no plumbing work involved in the house, and then we ended up having to do an incredible amount of plumbing work as a result of that incident, in that moment of just ignorance. On the same line of doing the renovations, I learned the hard way that you should not pay contractors before they do the work. We had a contractor that we met actually at the meetup where me and the partner met. He was a smooth talker, had a great plan about all the houses and stuff they wanna do. At one point, we actually talked about even bringing him on as a third partner, which might have been better. But anyways, we decided that it would make more sense and that we would make more money if we just paid him to do this renovation, because, you know, we had all the numbers screwed up at this point. And, you know, we could bring him in and just have him do the work. We pay him as a contractor and it worked out great, and it'd be pretty easy. That was kind of the initial plan. Anyway, this contractor came in, gave us the bid, everything looked good, we were ready to roll. We cut him a check for the first half, which is what he recommended, and we never saw him again. So he stole our money and ran. To this day, I don't know what happened to this guy, if he went to jail, if he died, if he, you know, just moved to Canada. Who knows? Either way, we never saw him again, and he stole a good chunk of our money.

Mike DeHaan: [8:03] I think it was like $18,000, something like that. And then the crazy thing is too is we tried to call the police and all this sort of stuff, and they're like, well, did you have like a written agreement? And of course, our dumbasses did not because we didn't know any better. And so that was a huge expense as well that we had to deal with there that, you know, I I was definitely learning the hard way. The funny thing is too about that whole situation is I've tried to talk to I remember at the time, I was very upset about it, understandably. And I tried to talk to you about it, and everyone was just like, woah, yeah, you're stupid. Why would you ever think that that was an okay thing to do? But again, I didn't know what I didn't know. And that was a hard hard lesson there. And then moving forward, you know, we got everything fixed up. We got it ready to list. Everything had taken longer than we had expected at that point. You know, we were way over budget on our renovation and everything else, and then we went to list it. And ultimately, as I said before, we ended up selling it for less than we were expecting. Then the real gut punch came when we went to sell it. We kind of had our numbers worked out on what it was going to look like. And I got the payoff from our lender, as well as reviewed the HUD from the from the escrow officer from the closing. And I realized that we had greatly underestimated our lending costs, as well as our sales costs. So the lending cost, what got us, was that our loan had the points paid at the end and wrapped into the loan, which we ignorantly did not realize. We were under the assumption that for the loan we got, we were paying points on the front, and that we were good there.

Mike DeHaan: [9:42] But no, actually, the three points that we had on the loan were paid at the end, So it ended up being about an extra $5,000 that we did not know we're going to have to be taking out of our sales proceeds. Right? So we did not calculate our costs correctly. On top of that, you know, just the fact that things had gone on for so much longer, had we already given them so much more money than we were expecting, so that affected our bottom line. And then the last thing on the statement that got us was the fact that Washington State, where I'm at, has this thing called excise tax, which means a percentage of every property sale goes is taxed and goes to the city. And it's very high. It's like, I think on this particular property, it was 1.8%. So, you know, that was like an extra 4,005 thousand dollars that we had to pay on tax that I didn't know existed just because I was ignorant. So it's important to know that these sort of things exist in your market. And if you're unsure, you'll definitely do an inquiry. Because between that and the additional points on the loan that we didn't know were there, that was like $10,000 all said and done that we were not expecting to have to pay. So like, initially, was like, oh, okay. Cool. I'm gonna make $10. It at least like feels good.

Mike DeHaan: [10:54] No. Instead, I ended up making like 4.5, and it felt like a giant waste of time because, you know, if I calculate it out, it was like less than $1,000 a month that I had made for doing an incredible amount of work. So basically, everything that kind of could have gone wrong on the deal, kinda did. Like, there's nothing too crazy. I have to deal with squatters. You know, I didn't have any fires or like any crazy foundation issues or major disasters, things like that. But just the all the rookie mistakes, I absolutely had to deal with on this deal. And tell you what, if I could do it again, I would probably have it be exactly the same way because it was an absolute great lesson in the school of hard knocks. But after this deal, going forward, I wasn't scared of nearly as many things as a lot of new investors are scared of anymore because I had already dealt with a lot of them. I had already had the disappointment of not making as much money as I expected. I had a lot of ups and downs on my first renovation. I'd had a contractor steal money. I'd had flooding. Right? Tons of stuff went wrong. And it really allowed me to go into further deals with a lot more confidence and to be able to, you know, make better decisions as well. So that's my breakdown of the first flip that I ever did. Main lesson of the story is to, you know, make sure you do your due diligence. Hopefully, you can learn some of the things from the challenge that I faced. But also, don't be afraid to make mistakes, and don't go into your first deal expecting to make a ton of money.

Mike DeHaan: [12:18] Because things will go wrong, there will be unexpected things you don't realize. And you know, view your first one or two deals as paying for an education. You know, even if you make very, very little from it, the education from it will be completely invaluable, and will allow you to make incredible amounts of money going forward. So I guess if you look at it on this, I've, you know, spent four months and made $4,000 to develop the skills to go on and make millions over the following years, versus, you know, you could also spend four years and $200,000 and go to school, and it'll teach you how to make millions over maybe your life, if you're lucky. But the total ROI on this is incredibly high when you look at what I've been able to do with the confidence that this first deal gave me. Anyways, guys, if you have crazy stories about your first flips, I would love to hear them. You should DM me at mike underscore invest. Give me a follow there too. I'm trying to produce as much real estate content as I can over there. I do admittedly sometimes run out of ideas and have some gaps in my content, but I'm working to be consistent on it. But either way, go ahead and shoot me a DM, and give me your crazy real estate story. I would love to hear more about it. And if you got a good one, you already got some good real estate stories in general, you should come on the show. I'd love to bring you on, and you can share them with the world as well. But, anyways, go go follow me, Mike underscore Invest there.

Mike DeHaan: [13:33] You should also please subscribe to the show. Share it with your friends. Leave us a five star review. All those things really help us to continue growing. And as always, thanks for listening, guys. I really appreciate you all, and I'll talk to you all next week. Thanks for listening to this collecting keys Friday focus. Be sure to subscribe wherever you listen to your podcasts.