I started in real estate as a landlord with the very modest goal of accumulating a few rental properties to supplement my income and to grow my net worth. Within a short time, however, I was studying all the different methods of real estate investing. I was particularly attracted to the idea of flipping homes. Not just flipping homes for a quick buck but the entire process of getting an ugly house and then selling a beautiful home to a family.
At the time, the local real estate market was in the early stages of the real estate boom. Rents were not rising as fast as sales prices. I could not buy a home and rent it for enough to cover the mortgage. The rental income on the properties I held did not justify the headaches created by tenants and property upkeep. One of my properties that generated a great deal of headaches had also significantly appreciated in value. I sold that home and put $50,000 in my account.
I now had the seed money to start my new endeavor and I had a plan. I was also familiar with the real estate market out west that had not yet benefited from the real estate boom. I took my windfall of cash and went property searching in Utah. I knew a local realty agent and had a family member who was in the construction business.
I knew the basic premise of flipping. I needed to buy a home for about 50 percent to maybe 60 percent of the end value, slap on new carpet and paint, and sell the home for a nice profit. However, most of the real estate professionals whom I approached were very unreceptive. Many did not think such efforts were worth their time. After several rejected offers, I started to believe them myself. Such discounts must be a myth. Eager to put my strategy to work, I bought a home in a nice community in need of modest repairs and at very modest discount.
I knew the numbers were tight from the beginning but I still thought I could make about $5,000 on the deal if everything went right. Right away, I had made a couple major miscalculations. First, it’s extremely rare that everything goes right. Second, my geographic location demanded that I completely abdicate project oversight to other people. I thought my contractor would be honest with me because of our relationship and further motivated by the hopes of additional future work. I also figured that the real estate agent, whom I trusted, would provide additional oversight. This theory failed on every level. In my experience, it is rare to find someone who performs well when oversight is lacking and they have little or nothing invested or at risk.
As the project progressed I assumed the renovations were going well. I was surprised at how long it took. I had to confront the contractor at one point and cajole him into getting the project done, but I just figured he was trying to juggle his business. Within a few weeks, I was told the home was ready to list. We put the home up for sale and waited and waited.
It was a tough market out there, and my plan required the home sell within three months to be profitable. As the months ticked by, interest devoured my profit. I had planned to make my home perfect and irresistible in every way.
The agent got a commission when I purchase the home and she agreed to a discounted commission on the sale. However, I found that she had equally reduced the buyer’s agent’s commission. Unfortunately real estate agents, like all of us, look out for their own self-interests and they naturally push the homes that are most profitable to them. When I confronted her about this she got angry. I was shocked because this was our deal from the beginning. She was also 30 miles away from the project and made very few trips out to the home, held no open houses, and to my knowledge did nothing more than list the home and stick a sign up front. She was also supposed to be my second set of eyes on the project but apparently rarely went out and or was reluctant to report negatively on the contractor.
After months of waiting, I finally made a trip out to the project and was shocked at what I saw. The contractor had used a sprayer to paint, which is fine, but it was the sloppiest paint job I’d ever seen. He’d bought enough carpet to cover the home, with enough left over to finish his basement. I’d paid for a deck that should have taken him five days to finish and it was to have a built-in hot tub. All he did was throw 2x4s on the ground and slap decking on top. As the summer set in, no attempt was made to maintain the yard.
In the end, it took several weeks of my own time to fix the problems. I fired my real estate agent and hired a local agent. Within a week of completing my work and hiring a new agent, the home had a solid contract but the damage was done. My losses exceeded $10,000, but my lessons learned were priceless.
Justin Pierce is a real estate investor in Northern Virginia. In his occasional column, he will write about investing in real estate.