The Honeymoon Phase
Back in August, I took my realtor, Jesse McDaniel out for dinner. I was only in town for eight days or so and I wanted to be sure to spend some time with him and express my gratitude for the past year helping me find deals and solve problems. At some point during dinner, he said, ‘I found a great deal today and if you don’t buy it, I’m gonna’. A week later, I had the property under contract.
The listing price for the property was 56,000. In my eyes, the 3/2 1350 foot house looked great! Sure, there were boxes piled high, hideous kitchen cabinets and holes in the wall. When I brought my wife to see it, she wanted to get out as quickly as possible due to the pet dander and mounds of personal effects all around. Nevertheless I saw the house as a steal, and her reaction actually gave me confidence that it would take the right eye to see the value in this property. We offered 51,000 and although there were 4 or 5 other offers, we ended up with the winning bid.
Once the purchase was complete, we wasted no time in getting in and getting to work. There was a lot to be done but it was relatively easy work to accomplish. We gutted the kitchen and primary bathroom. We removed all flooring, replaced most doors, painted interior and exterior. Next we installed new flooring, cabinets and granite counter tops. In just 6 weeks, we were ready to list the property! That’s where it got interesting.
Trouble In Paradise
The house looked amazing, we were right at budget, and I was sure it would sell in the first 24 hours like my last two flips had. While it didn’t sell in a day, it did go under contract in less than two weeks. Closing was set for December 28th and it was a full price offer. December 28th rolled around and I hadn’t heard from the title company in a while. Assuming there was a delay due to the holiday season, I phoned to get an an update only to be informed that the buyer had walked from the deal! Annoyed, I mentioned to her that I wanted to receive the earnest money deposit for wasting our time only to be informed that it was never collected! To add insult to injury, we had paid around 300 dollars to repair the buyer’s objections and it took a couple of weeks to get her to sign the termination agreement, meaning we couldn’t even relist it right away!
Finally, we got the house relisted and this time it was put under contract in around two days. Figuring the last experience was an anomaly, I celebrated and looked forward to a quick closing. Two weeks later, my realtor called and basically informed me that we’d received the inspection from hell! Even with my personal knowledge that this was a well built and well renovated house, I completely understood how this inspection would make the buyer weary. Although his realtor assured him that it was a great purchase, he demanded we pay for professional foundation, roof, plumbing and electrical inspections, as well as fix a number of small objections. Wanting to simply get this thing across the finish line, we complied. After spending around 500 dollars on inspections and a couple of repairs, we were informed (again!) that the buyer decided to walk from the deal. This time, he hadn’t paid for his own home inspection, so after the earnest money was applied to that, there was so little left that it wasn’t worth quarreling over. Again, we had lost 5-6 weeks and were back where we started.
At that point, I was frustrated and tempted to just refinancing the place and put it up for rent. Still we decided to list it one last time. Again, I went under contract in just a couple of days – this time for a higher price than the previous two (which surprised me a bit as I was worried buyers would be skeptical if they had seen it listed for the third time. Fortunately, there was another offer coming which must have helped us get a strong offer). The week after it went under contract, we discovered that the buyer received that same brutal inspection report as the previous potential buyer! Fortunately to my surprise, their objections were reasonable (though still costly) and although it hurt, we went ahead and made the repairs. After 1200 more dollars of repairs, we crossed our fingers and hoped that we could get the sale done! And thankfully, it did!
Things will go wrong. My last few sales were so damn quick that I became overly confident. This was a good reminder that I need to account for delays and the unexpected. Fortunately we still made 21,000 dollars on this deal, but if I’d bought wrong, or had more urgency to sell quickly, this could have been a problem.
Secondly I was reminded of the importance of building in a buffer. Most of the flips I’ve done have maxed me out financially. Frequently we’ve been forced to charge credit cards almost up to max and feel cash poor right before we sell our flips. I’m at a point now in my life where I’m not willing to do that anymore. For future investments, I’m going to keep much more reserves on hand.
Overall this was a great deal and has helped me focus more on what type of investments we want moving forward. On to the next one!