The Top 3 Ways To Lose 50k On a Flip

Speaker 1: [0:02] Welcome to the Collecting Keys Friday Focus.

Dan Austin: [0:05] Hey there. Welcome back to another episode of the Collecting Keys Friday Focus. If you're new here, these are the episodes where Mike or I take a few minutes to do a deep dive on a specific topic, something that's top of mind to us or something that's relevant to us in our business throughout the week. And today, I will be your host, Dan Austin, also known by some as investor man Dan. And today, I wanna talk about how we lost 50 k on a flip. That's $50,000, 50 macaroos that Mike and I lost on a flip that we just sold. We actually bought it back in January 2022, and there's some intricacies to this story that I'll go over. But I actually wanna use this as an example to go over what I believe are the top three biggest mistakes new flippers and experienced flippers alike make. The mistakes that they make that contribute to them losing money, to be honest, and they're not complicated, nothing's complicated here, but we do get caught up, we do tend to get caught up in the excitement of a deal. This this reminds me of a quote from Warren Buffett, where he where he was asked, you know, how do you provide such consistent returns over such a long period of time? And Warren Buffett's response was he follows two simple rules. Rule number one is don't lose money, of course. And rule number two is don't forget about rule number one, which honestly, that sounds kinda funny, and he was probably being facetious when he said it, but it does make sense, and it is a failure on our part sometimes, because as investors, we get caught up in the excitement of a deal, it's super easy to get caught up in that. Sometimes, fudge the numbers a little bit, or we let another wholesaler, or another investor sell us a deal, and we buy into their sales pitch, and it isn't quite as accurate as we had hoped. And so that speaks really to the first rule that I think one of the biggest mistakes, I should say rather that people make when flipping a property that contributed to them losing money is, they highly overestimate their after restored value.

Dan Austin: [2:10] And now this goes back to optimism, you can be really optimistic, and we tend to be if we're if we're really trying to grow our business, you have to be somewhat optimistic. But you also have to be realistic when it comes to the after restored value on a project. So when you're pulling comps, which is typically what you should be doing if you're buying a deal, you should not be just listening to whoever's selling the deal on the value of the property. But when you pull comps, I always teach people, and I say, first things you need to do is look for the natural barriers, which are typically like big roads, north of a freeway, south of a freeway, you know, Main Street, North of that or East Of Main Street, West Of Main Street might be totally different demographics, totally different properties and pricing. Even though it might be the exact same house from one side or the other, there could be several reasons for that. But look for those natural borders, and making sure that you are pulling comps in a good area that doesn't have some some weird reason, like a main road dividing it, that would that would make you lose your butt on a deal because you've looked at the comp on the wrong side of the street. So get into your buy box. The next thing you gotta do is don't just look at the awesome sales prices. Don't just go and pull three of the max top prices that you can. You need to look at the low prices.

Dan Austin: [3:26] You need to look at the in the in the middle prices. You need to look at the high prices, and you need to do a blend of those comps. And if you're using a per square foot method, that's certainly a great way to average out those square feet. But when you're doing that, look at those comps and why they're demanding more. Is it a floor plan? Is it a corner lot versus not a corner lot? Is it extra bathrooms? Is it they redid the kitchen, put quartz countertops, and it's super cute? Or is it a flipper special where they painted the walls, slapped down some carpet, and put new hardware on the nineteen fifties cabinets? All of that actually plays into a role of the sale of that property. So be very realistic and just take the extra time to make a really good comparative analysis of your property and what you plan or think you plan to do to that property, and make it match what are those comps as best as possible, and that's how you're gonna get your price. Do not overestimate that, take the time, and really get a good average blended cost for for what that after resort value is going to be. The next rule, which again, this is gonna be common sense, but the next rule, the next failure point that I see for people that contribute to them losing money is underestimating the repair costs. And this can happen in many different ways. One of the ways is that for newer flippers, think you need to over repair it and you have no idea what the costs are.

Dan Austin: [4:46] So as you get into a project, you think, well, if I was gonna live here, I would want these countertops and I would want tile floor, because it's just so cute. I would want these, I would want these, I would want these, and those things all add up. And in the beginning of the project, not a big deal. Right? You just spend you spend an extra $500 on the nicer tile for your your backsplash. Whatever, that's $500, not a big deal, it's not gonna blow the budget. But you keep doing that, and trust me, it's death by a thousand cuts as you go through an eight week rehab. All of a sudden, all the super cute stuff looks super cute, but your budget is not cute. It is completely destroyed, you spent too much over rehabbing it. The other part of underestimating rehab cost, is people don't, and I've been caught up in this before, thinking I knew what I was doing, you do not get a full inspection on the property. So for this this project where we lost $50,000 on it, I didn't even inspect the property. Typically, I'll do at least a walk through, and I can get a good visual, a good idea, a good understanding of what we're gonna run into, and have pretty good bookends on that. This one, we didn't. It was an interesting situation where the seller became a tenant and did a rent back for us for three months, which turned into six months, and we couldn't get them out. We had to evict them.

Dan Austin: [5:57] And so, I didn't know exactly what we're getting to into. I had photos of it, of course, and our sales guy went and walked, and so I kind of knew what I was gonna get into, and we definitely we knew, hey, it's a big property. It's a big, lot of square foot, a lot of carpet, LVP, a lot of paint, all that sort of stuff, so we knew it. But there were several things that we didn't know because I didn't walk it and just kinda even even look at the age of certain things. One of them, the air conditioning was bad in the home, and so we had to do that. That was another, you know, $4,000 that we had to spend, $5,000 we had to spend on air conditioning. The roof, I got some pictures of it, and I knew it wasn't like great, those old three tab shingles, but it didn't look terrible, like the shingles weren't curling up or anything like that. Well, we didn't get in the attic, and the roof was leaking actively, which contributed to a $25,000 fee. So you talk about 25,000 there, 5,000 with air conditioning, that's $30,000 between two things that could have easily been inspected by me. And when I say full inspected property, you can hire an inspector and pay, you know, $400 to do that. But really, you don't have to. You just need to go walk the property and itemize what you need to what you need to replace. And then, you know, with that as well, if you don't understand how to price repair costs or projects because you've never done it or you just don't have a lot of experience, there's really two major components. One is labor, and one is materials. Now if you're going to go and remodel a bathroom and you're gonna use standard like Home Depot products, go to Home Depot.

Dan Austin: [7:20] And I always tell people this, are you gonna replace the shower surround? Are you gonna replace the valves, the vanities, the toilets? Go and just go look at all those materials. You can literally go walk down the plumbing aisle and get all the fixtures and things you want, add those up on a piece of paper, and then any other major items like vanities and floorings, you can go literally walk Home Depot and get your materials cost. And you might find that about $2,000 will get you an entirely new bathroom and materials. So when somebody comes and quotes you $50 to redo your bathroom, you're gonna say, well, know the materials are $2. Should he really make 48,000? Probably not. But you gotta do that. You gotta go get those quotes and get multiple quotes on things when you're new, so you understand what a good quote is, and understand what you should be paying on the labor side of things, instead of getting into a project and getting change ordered to beat hell, because they keep saying, oh, we didn't know this was gonna happen, and we have to charge you more money now. Or having to hire new subs or other contractors that you didn't expect to hire, and they're coming in and they're saying, well, you know, I want $2,000 for that, and you're like, ugh. And it just, again, death by a thousand cuts. So not understanding the actual cost of materials and not understanding the actual cost of labor. Not doing a full inspection upfront, so you at least know the bookends of what could actually happen. Major problems for why people tend to go over budget on their projects.

Dan Austin: [8:40] Okay. So the last the last mistake I see people make, and it isn't necessarily one that I'm always like harping on, but it is a huge problem and it caught us off guard on this last slip, is underestimating the time it takes to complete a project. So you go in there, if you if you don't do number two very well, right, you don't go and get an inspection, and you don't know you're gonna have to do x y and z, you're probably not going to know to the extent of how long it's going to take you. So it's like, how do you how do you estimate a schedule if you don't actually even know what the repairs are going to look like? Anyhow, go going back to the scheduling thing, not knowing how long it's going to take contributes to the sum of the overall cost. If it's a tight project, the carry cost could be $3,050.60, up to a $100 a day in interest, depending on where you're at in your price point of your market, if whether it's a 150 or $300,000 purchase price. Say you're, you know, that's what your hard money loan is, you could, you know, you're just seeing that interest accrue, you're gonna have some utility costs, you're gonna have some carry costs associated with that insurance and all that sort of stuff. But, you know, for two month project that that once you buy and sell it, let's say it's four months, four months to six months is not a ton of money, but it does affect your bottom line, it does contribute to it as you saw with our $50,000 loss that contributed many many thousands of dollars to our carry that we did not expect to have. But what else it does, what what also what it also does is it opens the door to having o's and oh no's. On this project in particular, we had a lot of different things.

Dan Austin: [10:10] Things that failed, that didn't fail before. You know, we had some some water issues, some pipes that froze and failed, and all those sorts of things that we did not plan to deal with because we didn't plan to carry it through the winter, and that just that just happened because we're owning it. Just like when you own a home, things just fail and break. So the longer you own a property thing, the more opportunity for whoopsies. You know, I think on this one too, we had a squatter move in, we had neighbors calling us, and just it was just a heck of a time just holding on to this property with all the all the things that just kept popping up, and it seemed like every other week I was getting a call about that property. We weren't even working on it at some point, so it was just like such a headache, and gives you opportunity for crazy things to happen. The the other thing about carrying a property longer than you expect is the market can change, and that happened to us. So we bought in January 2022, and we just sold it February 2023. That was like a year plus hold time. A market can change a lot in a year, season to season for sure. Right? But a year, and then this year of all years for us to carry a property for a year, yeah, absolutely so. Back to the after restored value, we actually estimated the ARV pretty good on on this project. We're pretty good at that. But as the market shifted over twelve months, our ARV was totally out the window.

Dan Austin: [11:31] And now we just had to sell it for what we could get, to be honest. The ARV that we initially quoted did not matter. It was at $700,006.50 to 700, and we sold it for 500 with lots of concessions on there just to get it out the door. So that's how we got that loss. It could've been a big could've been a big win for us, but because we held it for so long, trying to get those, you know, owners that became tenants out of it, and a bunch of other things that happened in the process, it took us that long just to get this thing buttoned up and out the door. Now, you might say to yourself, well, why don't you just keep it? And we totally could've kept it instead of losing $50. Absolutely. And we would've probably cash flowed a $102,100 bucks. We could've sat on it for a year. Really, that wasn't ultimately what we decided to do. And we were actually going through the refinance process to do it. So it was like kind of like a a final hour decision for us to not keep it. But really, what what happened was we recognized we had several other opportunities where we could earn a bunch more money, and that we could keep certain machines and certain systems moving, and get a much higher ROI than holding on to that property, and also dealing with what could have been. And funny enough, after we sold it, the furnace went out on this place.

Dan Austin: [12:42] It was not our responsibility. Had we owned it still, that would've been our our our problem. That would've been an $89,000 issue for us. We had the furnace fully inspected after we did the air conditioning on, like, it was fine. But things just happened. Right? And so boom, we already recognized we saved ourselves from like $9,000 on that one. But also, were able to repurpose the money because, yes, we lost 50,000, but we pulled out over a $100,000 of our own cash that was actually profits from other flips that we're able to push out into other projects, and other investments that are going to earn us a much better ROI. And sometimes the velocity of money is just so much more important than today's loss. So anyhow, top three mistakes I see people making. The first mistake, overestimating their after restored value. The second mistake, underestimating their renovation cost. And we talked a lot about how you can do that, and why why people do that. And then lastly, underestimating the length of time it takes to get through a project, and we talked a lot about how that can happen, and what the repercussions of that are. If you like this episode, and you wanna know more about these types of, like flipping properties and renovations, all this stuff, hit me up.

Dan Austin: [13:50] Give me a send me a DM on Instagram. It's the best place, investor man dan. Also, if you wanna learn more about what Mike and I do, not not about losing money on flips, but actually about how we're finding these deals and how you can find your own off market deals, go ahead and go to go to collectingkeyspodcast.com, and click on the top. There's like the top right corner of it, there's a blue button that says instant investor. Click on there and learn about our instant investor program there where you can learn everything Mike and I do on the off market side of things. So other than that, catch you guys all next week.

Speaker 1: [14:23] See you. Thanks for listening to this collecting keys Friday focus. Be sure to subscribe wherever you listen to your podcasts.