Many people get excited about real estate and decide to try their hand at flipping a house. Flipping is where you buy a property (often at a discount), fix it up, and then quickly sell it again. I’m sure that we’ve all seen the HGTV shows where people flip houses. More often than not, they end up running into issues in the middle of the project, get frustrated, and continue on to make a massive profit for very little work.
It shouldn’t be a surprise to anyone, but those shows are manufactured and largely scripted. I always love watching these actors with perfect hair, makeup, and clothing “demo-ing” a house while wearing a $25,000 Rolex watch……give me a break!
But make no mistake, flipping properties can be extremely stressful. There are indeed problems that will creep up in the middle of the project. Dealing with unforeseen issues, managing contractors, wondering about the finished product and more can wreak emotional havoc on a person.
I can’t possibly provide solutions to every single potential problem that you can run across on a flip in one short article. But I want to explain the emotional roller coaster that I’ve been on lately and some ways that you can avoid these issues. Also, by going in with eyes wide open, you’ll know what to expect along the journey.
In this post, I’m highlighting a few issues and giving a broad overview of some problems that came up during the flip. I’m going to make another post which explains in more depth what these issues were, how they came about, and what I could have done to prevent a lot of the worry on my part.
The Beginning- Uncertainty and A Lack of Confidence
It takes a lot of mental preparation to get to the point where you’re ready to flip a house. For some, this comes quickly and for others, it takes longer. I was looking for a house to flip for almost a year before I pulled the trigger. It took quite a while for me because I was initially pursuing flipping property in Denver, CO. The houses here are very expensive at nearly $500,000 average in the metro area.
Given that I only had $25,000 to work with, I spent a lot of time getting business partners set up, looking for a property, networking, and reading. This amount of money was much more than I was comfortable with. And this prevented me from pushing through to take action.
I believed in the strategy in theory, but I wasn’t convinced that I could pull it off. I was confident enough to form a business partnership, convince others to put 25k in a piece to join me, find contractors and lenders, and start looking for deals. But when the going got tough and we couldn’t find any deals, I didn’t push through. In hindsight, if I had more self-belief I should have hustled harder to find that deal as I only needed one.
The Deal- Excitement and Irrational Exuberance
After trying for several months to make something happen here in Denver, I decided to switch my strategy buy and hold in a cheaper, cash-flowing market. I was deflated from doing all of the work myself to make this business work with little help from my partners and so I pivoted. I was focused on using the BRRRR strategy to acquire properties for next to nothing and make passive income.
This time I would run my own show solo, and by focusing on the much cheaper market of Kansas City, I could afford to do so. Within only a month or so of pivoting strategy, I had a property under contract from a wholesaler.
The feeling I had when purchasing this property was very similar to when I purchased my first property. I was finally making things happen! I’m sure there were moments of uncertainty, but I was glad to be making progress again. Because I was very eager to do a deal, I overlooked some due diligence when evaluating the property. This would come back to bite me!
Issue #1- Concern, but Ready to Push Forward
One of the due diligence things that I neglected was to vet the contractor who had bid on the project. The wholesaler had provided a bid for the rehab work from a contractor, and I had been planning to use them for the project. I didn’t double-check the work that was supposed to be done, or the property itself as much as I should have. And importantly, I didn’t develop a relationship with the contractor themselves.
I purchased the property, and all of a sudden I couldn’t get ahold of this contractor. I hadn’t given him any money, but I was losing money every day by having the house sit empty. It turns out this person had decided to shut down their business and didn’t tell me.
Now I had to scramble to find another contractor. I ended up getting bids from 3 different contractors. And each one was coming in at nearly 2x what the other contractor had bid to do the project. There were some very key items which the first contractor had neglected to consider such as all new windows on the house.
My lender advised me to consider throwing in the towel. His reasoning was that it was better to quickly lose a little money, rather than wait to lose a lot of money in the future. I was determined to make this deal work, and was convinced that I could at least break even if things didn’t work out.
Issue #2- Anxiety, Am I in Over My Head?
The lender was able to still lend the money that I had contracted with him. But I had to come up with the extra $25,000 needed to complete the rehab. So I took out a personal loan.
Luckily I have good credit and was able to secure this loan very easily from the big banks. But now my lending options were likely tapped out. This also represented a doubling of the money that I had to put into the project. I only had 25k to start with, and now this deal was a much larger percentage of my capital. If it didn’t work out, I would survive, but it would really hurt.
It is demotivating to realize that you may be working just to break even. I can handle that, but to do a deal just to end up in a lot of debt really put my anxiety on high alert! Instead of hoping to make 35k, now I was shooting to break even more or less. I started looking into the comps for the area and started doubting my numbers. I would forecast out worst-case scenarios in my head and worry about things much more than I should.
What I needed was to trust my ability to handle adverse situations. Unfortunately, I was emotionally overleveraged. Financially, I would be able to survive if things went south. Internally, however, I was at my subconscious limit. The only way to go was forward at this point however.
Issue #3- Contractor Woes and Uncertainty
So now I had the loan taken care of. My worries about funding the deal were greatly reduced. All I need to do at this point is to manage the contractor, execute on the plan, and hope that the market supports my initial projections. This would turn out to be the most difficult part of the process both emotionally and logistically.
Because I was managing this project out of state through a general contractor (GC), I had to put a lot of trust and money in this individual. Communication started off great in the beginning of the project, but after the first several payments it became harder and harder to get ahold of this individual.
I had now given this person a lot of money, and was unable to validate that they were performing the work to my standards or at all! This resulted in many sleepless nights, and many days of worrying excessively over whether I was being taken advantage of.
Again, I started doing what I call “catastrophizing”. This is where you imagine the worst possible outcome to an uncertain situation and then fixate on all of the potential problems that will arise from that situation. Clearly this is not healthy! I had made mistakes in my management of the deal, and now was letting my predilection for anxiety get the best of me.
Finale- Relief and Optimism Once Again
This flip is still in progress. Time will tell if this deal was a success or a failure. As they say though, “There is no failure, only learning lessons. You only fail when you quit.”
I have 2-3 weeks left on the renovation, and most of the big-ticket items have been completed. This has resulted in a large reduction in my stress and anxiety levels. I have restored communication with my contractor, resolved money management issues, and sought out the advice of more seasoned investors. In this post, I have highlighted the negative emotions that came about over the last 8 weeks. But I don’t want to leave out the good parts.
Sure, there were times, sometimes several days and nights in a row, where I felt completely overwhelmed and worried. But there were equally as many days where I was very excited about what I was doing. I’m moving forward on my goals, learning a ton along the way, and gaining invaluable experience that will serve me well in the future.
I will follow up once the project is completed on the success of the flip. But I wanted to make this post to let others know what to expect as you go through your first major rehab. I know that I’m not alone. Many podcast guests speak of how much they learned and grew on their first flip. And losing money on the first flip is extremely common. I have no plans to quit, and am in fact ramping up my marketing to acquire my next deal as soon as possible.
There were many things that I could have, and will do differently on flips. Doing flips out of state is also much more difficult than doing one right in your backyard. But realize that this journey is very common.
If you’re doing your first flip, be proud of the fact that you had the courage to even take on such a project. Many people dream and talk about it, but fewer people actually take that leap. If you’ve gotten this far, then you are certainly capable of handling any adversity that comes your way.
And if you are thinking about doing a major rehab, especially one out of state, realize that it is a difficult business. You may experience a strong emotional roller coaster throughout the process. But what one person has done, another can do as well! Stay tuned for future posts where I will be explaining what I did wrong so that you don’t make the same mistakes.
Until next time. To your success,
Tim
