We don’t claim to be experts at real estate, but after doing some deals, We’ve decided to share some things we’ve learned along the way. It has been said, “Fail early, fail often, and fail forward.” Our first deal, a long distance flip, was in a place we had never been and we knew no one there. We failed a lot, but we learned a ton. If you’re just getting started in real estate, feel free to learn from our many mistakes so you don’t have to learn the hard way. If you’re a veteran in the real estate game, feel free to get a chuckle at our expense.

Finding it:

In 2015 we were fired up and ready to get into the real estate investing world, and began taking steps to find our first deal. We started like any new investor should, by driving for dollars. We identified properties that were in rough shape and did the research at the county to find the sellers information and mailing address, and began mailing postcards. After about 300 postcards we got a call from a seller. He said he needed to sell his house fast. He didn’t have the money to pay the mortgage and he wanted to move to Florida (to be with family). The big issue for us was the house was in Albuquerque, NM and we lived in (and had targeted houses in) Oceanside, CA. The seller had just sold his Oceanside house and needed to sell his Albuquerque house now. We had never been to Albuquerque, we didn’t know anyone in Albuqurque, and we had never even looked into the Albuquerque market. But being overly excited to get our first deal, and wanting to capitalize any and all leads, we decided to try to wholesale the opportunity from afar.

Here’s the details of the house:

3 Bed, 2 Bath 1500sqft.
Seller owed $122,000.
ARV $200,000 (We thought based on comps pulled from Zillow)
Could rent for $1200/mo
Needed about $25,000-$30,000 in repairs and updates (We pulled this number out of thin air based on 6 pictures of the property)

Wholesaling it (or trying):

So we did what any newbie wholesaler would do and got the house under contract for $122,000, and offered it up for $130,000. We listed the property on a handful of websites and emailed tons of investors in the area. We called mortgage brokers, realtors and hard money lenders in the area to tell them about the opportunity so that they could tell me which of their clients might be interested. We were getting some great interest but the overwhelming consensus was that it wasn’t a deal unless we got it for a much cheaper price. One investor told us he would need to get it for $90,000 to make it worth it.

Our thought behind the numbers was this: $200,000 sale price - $130,000 purchase price - $30,000 repair cost= $40,000 profit! Why could we not find someone to jump at the opportunity?

So here is where we made our first huge mistake. We started to think that we could flip it from CA and then we could make the big bucks. But here’s the lesson: as a wholesaler, if you market a property really well, and get the deal in-front of a lot of investors who are actually doing it, and no one wants to buy it, you shouldn’t either. It is probably not a deal! But we learned that lesson the hard way, and decided to flip it ourselves.

“as a wholesaler, if you market a property really well, and get the deal in-front of a lot of investors who are actually doing it, and no one wants to buy it, you shouldn’t either. It is probably not a deal!”

Funding It:

Once we decided to buy it, we had to figure out how to buy it. We explored the option of hard money. Interestingly enough, the hard money guys that we talked to weren’t thrilled about the numbers either. That should have confirmed for us that it wasn’t a great deal. We did find one lender who would loan on the deal, and offered us these terms:

We had to bring 20% of the purchase price for a down payment, but then he would fund up to $20,000 of the repair costs. He would charge 5 points and 13% interest only payments. If we were able to flip it in 6 months, it would cost us $13,524 for the hard money loan. We would also still need to come up with the 20% down payment and the other $10,000 for the rest of the repairs, so we scrapped that idea.

We went back to the seller and negotiated some kind of a seller finance deal where we would essentially just pay his mortgage until the end of the flip. We would put our money into it for the repairs and when we sold it, we would pay out $122,000 so he would also end up getting the amount that we payed down on his loan. He agreed but also brought up the fact that he didn’t have any money to move to Florida so he would need some cash to move. Looking back now we realize that he probably would have taken much less “cash for keys” than what we initially offered but we were embarrassed to offer him a low amount. We now know that if you’re not embarrassed by your offer, you’re probably offering too much. We agreed to pay him an additional $5,000 cash for keys.

HUGE Mistake #2: We ended up structuring the “seller financing” as a lease option, where we were essentially leasing the house from the seller, but we had the option to buy it in the future. The big mistake we made was not consulting a real estate attorney to draw up the contract for us, because… well… attorneys are expensive right? Wrong. If you need an attorney for something, the fee they charge is almost always cheaper than the alternative consequences of bootstrapping it. Plus you are probably just going to have to end up paying the attorney later to fix it. Not understanding that then, we grabbed a lease option contract off the internet and began modifying it however we wanted and removed the parts we didn’t understand.

“well… attorneys are expensive right? Wrong. If you need an attorney for something, the fee they charge is almost always cheaper than the alternative consequences of bootstrapping it. Plus you are probably just going to have to end up paying the attorney later to fix it.”

The result from bootstrapping that contract is that when it came time to sell, we didn’t actually have equitable title and our realtor could not let us list it. So we had to go to the attorney and pay the fee (which only ended up being $200) to get the contract done correctly. He said what we were trying to do is called a land contract in New Mexico. Then we had to take that contract back to the seller and get him to sign it. Now all this unfolded after the rehab was finally done and we were ready to list it. We had already dumped tons of money into the repairs and the holding cost and the seller seriously dragged his feet in signing it. If he had just chose not to sign the new land contract, we didn’t know what rights if any we would have with our made up contract. To say we lost sleep over it would be an understatement. The other big issue with the original contract was we weren’t able to get home owners insurance during the rehab because we didn’t own the home.

To fund the repair costs we used a credit card that was offering 0% interest promotional rate on balance transfers for 18 months. So we did a “balance transfer” onto this credit card and we were able to deposit the funds directly into our checking account. Pairing this lease option strategy with a promotional credit card allowed us to get into this deal with no money out of pocket.

Fixing It:

We got 3 bids to do the rehab. One was kind of a handyman. He was the cheapest, but seemed very flakey and overwhelmed by the scope of work. One was a general contractor, who bid the job at $30,000 in repairs and said he could get it done in 1 month. The other was more of a project manager. He worked a lot for other flippers in the area, and bid the job at $40,000 in repairs, but said he couldn’t get to it until 6 weeks from then but assured us he could get it done in 3-4weeks. We went with the middle option.

Here is the contract with the scope of work and payment schedule we agreed to.

We decided to purchase the house sight unseen, with no inspections, based off 6 pictures and the general contractors bid. He determined the scope of work for us, and his wife chose the finishes.

His bid included a payment schedule where he was paid 1/6 to start, 1/6 when demo was complete, 1/6 when exterior paint was complete, 1/6 when kitchen and baths were done, 1/6 when interior paint was done, and the final 1/6 when the entire project was complete. So we wired him $5,000 and told him to get started. A few days later he sent us a couple of pictures of the kitchen which had been completely gutted, and told us the demo was complete, so we sent him another $5,000. Shortly after that he sent us a text picture of the outside of the house and told us the exterior was pressure washed and painted, so we sent him another $5,000. He was (supposedly) painting the interior and we thought we were about a day or 2 away from him starting to install the kitchens and baths when I (Megan) decided to use the few days off work I had to drive out to Albuquerque. I had never been, and I was excited to see our first flip come together, and I wanted to check out the area for our next possible deal.

This was right before I realized we were a bit screwed. I was still really excited at this point. From the look on my dad’s face it looks like he already realized.

What We Learned by Actually Being There:

Our contractor was actually not on schedule. He had demo’d most of the stuff but there was still a lot of junk left in the house, and the stuff he had demo’d was just piled up in the front and back yards. Instead of getting a rolloff dumpster and just being done with it he had 1 guy with a little tiny pick up truck making about 1000 runs to the dump, so most of the stuff was still in the yard when we showed up about 3 weeks into the project.
I had not let our contractor know that I was coming, and we arrived mid morning on a weekday and the only person working on the house was the guy who was loading up stuff to take to the dump.
We also realized that he had not completed the Exterior paint (but we had already paid him that draw). Instead he had pressure washed the whole house, painted only 1 side of the house and had sent us a picture of that side.
Essentially we had paid him $15,000 thus far and he had really only completed maybe $2,000 worth of work. We would have loved to fire him at this point but we didn’t want to lose that $13,000.
We also realized there were things that needed to get done that were not included in the scope of work. The yard and landscaping wasn’t addressed in the original bid so we had to have 2 big trees removed from the front of the house and tons of cacti and weeds removed from the back and side yards. We also wanted some gravel work done to add to the curb appeal. And approved some tweaks to the plan on the interior. So we had to increase the bid $4000 to add on those repairs.
While in town we went driving for dollars and explored the area around where we had bought. Before we started the project, some of the local people we spoke with had explained that the house was near “Nob Hill” which was a desirable area where young people wanted to live, Perfect! In reality, Nob Hill was a hip bar/nightlife area, so young people did want to live near it but they wanted walking distance. So block by block the values plummeted as you got farther from Nob Hill. So the “comps” we were basing our ARV on that were just 2 or 3 blocks away weren’t necessarily actual comps, and the area that our house was in was not as good as we were expecting or hoping. The realtor that we ended up hiring to list the property said that for the same house “1 mile north, your at $250k, half a mile south your at $125k.”

While in town we hired a listing agent who would list the property when it was finished. He also agreed to check up on the work for us throughout the project. He would also verify for us that certain things were actually completely done before we sent the next payment so we didn’t have to rely on trusting our contractor who had already proven untrustworthy.

Side Note: If we had some kind of a partner there from the beginning I’m sure that we would not have got ourselves into such a predicament. Someone with boots on the ground would have understood about the nuances of the area, and would have been able to alert me about the contractor much sooner.

After Pictures

The Result:

$4,000 over our initial rehab budget.
We finished the rehab in October instead of August like expected. And because of the snafu with having to restructure the land contract we weren’t able to list the house until January.
Being a college town and an area that gets snow and cold the market there comes to a crawl as soon as school starts in September.
We ended up having to drop the price repeatedly through the winter months and still got very little interest. We even tried offering 4% commission to the buyers agent in order to incentivize agents to show our house over any others.
We originally listed it at $199,900 and by May had dropped the list price to $174,900. As soon as school let out, we had a ton of activity and got an offer for $170,000 which we immediately accepted. By that point we just wanted the nightmare to be over.
Because we had to hold it over the winter, we had unexpected costs as well as increased holding costs. We had to pay to winterize the swamp cooler, remove weeds multiple times, fix a piece of fence that fell down in a windstorm and remove a huge tree branch that fell on the house.

Final Numbers:

That’s right. We LOST a whopping $20,000 on our first deal.

Should-a/Could-a Would-a:

There are a ton of things that we should have, or could have, done differently that would have saved us a lot of money, time, and mental anguish, but here are just a few:

Not do the deal! - This seems really obvious now but just because you are hungry for a deal does not mean you should try to pull off a really thin deal.
When you are just starting to rehab houses, you should plan to take twice as long to rehab it and sell it than you think you will take (so double your projected holding costs), and plan to spend 10% over your initial rehab budget.
Once we realized we missed the buying season in Albuquerque and we were going to have to carry it through the winter, we probably would have been better off removing the listing until school let out, and then listing it at $199,000 then. But hindsight is 20/20 and our Californian brains couldn’t understand the effect winter would have on a housing market.
Also we could have rented it out, made a small monthly cash flow, not had the holding costs to deal with and then potentially sell it a couple years down the line once it had appreciated some or during the summer months when the market had picked up. But with all the mistakes we made on this one I’m sure we would have found a way to thoroughly screw up renting it out so we decided against that option early on.

Now even though we lost $20,000 on our first deal, and even though it was absolutely soul crushing while it was happening, if we had the chance to go back and decide whether or not to do it again, we probably still would. You can pay someone $20,000 to tell you everything they know about flipping houses, and you might think you know all about it, but there is no education better than actually doing it. And even though we lost money, we gained confidence. We had worked through all the steps, from finding the deal, negotiating with the seller, managing the project and selling the house; after that we weren't scared anymore. We no longer had “analysis paralysis,” so we could take our lessons and courage apply them to our future opportunities.

First Deal: Long Distance Flip in Albuquerque - A.k.a What Not to Do!