“…do NOT give up control of your project, its design, its finishes, its colors, etc. Our decision to do so, and I’m sure Tyler would agree, was absolutely, positively……..”

That sentence trailed off, and is meant to read, “absolutely, postively… the single most expensive mistake we made during the entire project!”

It’s true. The reason being that by the time we’d finished the flip and saw first-hand how AWESOME it had come out, we realized with shocking clarity that we’d undersold it to our buyers. Probably to the tune of about $15,000.

Here we were in the midst of the project going out of our way to save $50 here and $25 there by crossing town to find a widget in a bargain bin, and yet we’d left a year’s worth of college tuition on the table by too hastily negotiating a sale.

BIG mistake.

Mistakes, though, are par for the course for newbie investors, and we knew that going in. Losing our assess or ruining our friendship or chopping off a hand… those were mistakes we weren’t signed up for. Sacrificing a fraction — albeit a big one – of our profit, but staying on a course to walk away with most of it… we may not like it, but we’d eat it and move ahead.

We (OK,  ”I”) made some other doozies, too. In my excitement to sell the house to these kids:

•  I threw in a storage shed that we’d have to build from scratch.
• I threw in the rebuild of some built in storage cabinets lining the carport, that probably wasn’t necessary.
• I threw in a 4′ tall fence along the backyard where it meets the alley. (Come on… you gotta have a fence along the alley!)
• I threw in an arbor in the front yard, that I still have to go build sometime. For free.
• I threw in probably a few other things I’ve long since fogotten, but cursed as I built them.

Standing in the midst of that broken down, stinky, worn out rat hole of a house before we’d bought it, I, ever the optimist, could see nothing but easy fixes, a gracefully smooth journey through a quick remodel, and why not add a few extra cherries on top? Heck, we’d be SWIMMING in profit and laughing all the way to the bank.

Even with mistakes factored in, flipping a house is like taking candy from a baby.

Isn’t it?

To be continued…

1) We could relax, knowing that we needn’t spend any time, money, or energy marketing the property. We had the buyer under contract, the price agreed, the closing date set. Boom, Done!

2) But… at the same time, we had the home’s owner-to-be now [heavily] involved in the project. With the stroke of a pen on the contract, our “flip for maximum profit” had just morphed into a “custom remodel.”

When we still thought we were flipping the house, Tyler’s and my plan was to shop the budget-bin at the local flooring outlet, pick a funky-but-not-beat-up front door from the ReStore, and keep tabs on the clearance rack at Home Depot for plumbing fixtures and bathroom vanities.

Not only is that the boot-strappers/budget-minded approach to maximizing profit on a flip, it’s also kind of fun! It’s like treasure hunting: you never know what you’ll find, and you might stumble across some real treasures!

On top of that, the value we were proposing to infuse into this house was not the most luxurious finishes, fixtures and design elements. The ‘value’ we knew would make it sell lickety-split was that is would be 100% clean and 100% done!

Clean and done. Those are hot items in the Columbia-neighborhood starter-home market.

But with each passing day on the jobsite, our notions of what “might’ve been” were swept away with the sawdust, and we got deeper and deeper into accomodating the deeply-contemplated material and design choices of the buyers.

Logistically it worked like this: On an Excel spreadsheet, Tyler and I had listed every element of the remodel we planned on doing, and we assigned each job and/or material choice a dollar-value. With that in hand, the buyers could choose to upgrade any item as long as they paid the difference.

Simple, right?

Not hardly, so we learned. It’s not like we had a building-materials equivalent of the Taco Truck pulling up to the front curb every day. With each new change we had to go out and chase down those materials, negotiate prices, comparison shop and so on. That all took time, and took us away from the jobsite OR the RE/MAX office, where we were trying to keep our businesses running.

And the extra bookkeeping took time. The communication with the buyers took time. Finding specialty subs to install specialty materials took time.

Time is money. Loss of time is loss of money. Loss of money is loss of profit. You get the picture.

Let me pause to make special mention here that the buyers for our flip could NOT have been better to work with. They sensed our maybe-not-too-subtle regret at choosing to pre-sell the house, and they did a world-class job at staying patient with us. I credited them then, and I credit them now.

But take my advice: If you’re itching to try a flip, think very, VERY carefully about pre-selling when you know — objectively — that you’re working with a hot property in a hot market, as we were. In fact, I’ll just come right out and say it: “Don’t do it.” I for one would try to avoid pre-selling ever again.

Tell your buyers, if you really like them, that you’ll give them first right of refusal when the project is DONE. But do NOT give up control of your project, its design, its finishes, its colors, etc. Our decision to do so, and I’m sure Tyler would agree, was absolutely, positively……..

To be continued…

I’m not one of those people, neither is Tyler. We pretty much both agree that there’s everything right about finding a great deal on a dumpy house, using someone else’s money to buy it and rehab it, then selling it for every possible penny of fairly-and-squarely-earned profit.

This sort of action has all sorts of benefits:

• It cleans up the neighborhood the house sits in, and raises the value of the neighbors’ places;
• It creates jobs for all sorts of contractors, suppliers, trades-people, and the like;
• It diminishes the vacant- or abandoned-house inventory, strengthening the market;
• It generates profit for us, which we then spend, infusing more money into our local economy;
• It’s an exercise in the American Dream of free enterprise, and it inspires more of the same;
• It creates a beautiful, sound home for the end-user, in our flip’s case an owner-occupant who happened to be a first time home buyer.

That last bullet-point above, the buyer, that’s the key. Buyer’s make the market. Not just with flips, but in all of real estate. Sellers gather data and hire appraisers and look for case studies and algorithms and fancy websites that claim to know a home’s exact price to the dollar, but that’s all mere speculation until a buyer comes forth and says, “I’ll pay this much.”

Only then do you know what a home is truly worth.

And in Tyler’s and my case, we had a unique opportunity to know our flip’s true worth way, WAY before it might’ve been sensible to know. Read on….

Remember in an earlier post when I mentioned the young family I was working with to find a home, and I’d called them about this one when I first saw it? They’d turned it down because of the new baby and a desire for a turn-key home. Well once we had this house under contract, I called them back and said, “It’s not turn-key now, but it sure will be!”

They drove out and looked again, but still said, “Not interested.” We looked at a few other places on the market, but found nothing that excited them.

Then they looked at our flip one last time. We hadn’t even closed on our purchase of it yet, nor had we cut one blade of over-grown grass or pulled one fiber of worn-out, green-shag carpet.

But through the wreckage, they had come to see it. They were buying into our vision.

We talked for maybe 15 minutes about our plan and what we were going to be addressing, sprucing up, fixing and upgrading. We talked about some of the material or color choices they could make as the job progressed. We talked about timelines, most importantly whether we’d be ready to close by the June 30th deadline to qualify for the $8K tax credit. Then it happened:

“We’ll take it!” they said.

“Hell Yeah!” we said.

And at that moment, all of us were genuinely stoked. Win/win, Baby! They’d get a freshly remodeled house in a supreme location, and we could go through the whole project knowing we already had the thing sold.

I smiled big. Through the stench of rat-piss and rotten wood, I could smell the sweet scent of pure profit!

I mean, what could possibly be wrong with that?

To be continued…

The Ninja-demo warriors lasted one more day

The final straw was when we tried pulling them off all demo and gave them the task of prepping and texturing the one bedroom that didn’t need anything but texture and paint. (We wanted to create a single “clean room” in the house that Tyler and I could use as an office if we needed to log on to a laptop or make a couple calls in relative peace.)

To this day I have no idea what had gotten into my head, to make me think the Ninjas were capable of completing a “finish-related” task.

Oh… they applied the texture alright. Over the top of all the door and window casing, baseboard trim, switch cover plates, light fixtures… and in some places rather than use a texture gun it appeared they’d used a bucket… maybe a shovel.

I still shake my head.

Nevertheless, Tyler and I had an agreed-upon hiring strategy and, despite the Ninja experience, we weren’t about to be shaken from it. The basic philosophy was this:

We’d post job ads on Craigslist and stack up the applicants. (If you’ve tried it lately, you’ll know that it takes about an hour or two to get upwards of 20 responses for even a menial job.)

We’d then single out the most sincere 20% of the responses and phone them for “interrogation”:

• Did they have a builder’s vocabulary?
• Did they have tools?
• Did they have a set of wheels?
• Did they have a felony record?

If they passed that phase of filtering, we’d explain our terms: “There’s no profit in this work. It’s a wage, period. We’re happy to look at a bid for a certain project, but we want to be perfectly clear: We’re NOT paying profit.”  

We never had a single word of debate or resistance to our terms. Guys were generally stoked to have a crack at some work, and that’s what we were counting on.

But the want of work did NOT, somewhat to our surprise, result in any sort of universal, heightened work ethic. If we hired 12 to 16 different guys for anything from general labor to painting to basic carpentry, we ultimately fired more than half of them for:

• failing to show up even remotely on time (or at all) after the 1st day;
• stopping work multiple times per hour to smoke and “rest”;
• doing an unacceptably low quality of work;
• calling in “sick” more than once in a 3-day period.

I might sound like I’m exagerating, and I don’t think this has anything to do with Craigslist as a temp agency. You can — and we did —  also score total winners off Craigs’.

The riff-raff is just a reality of the trades. I came to real estate from the trades (via home inspection), and I’ve watched countless guys over the years stagger away nearly in shock at how hard a full — a FULL — day on a jobsite can be.

That said, we did get some great guys — and we almost always had good luck hiring full-blown contractors after competing 3 bids against each other.

NOTE: I can’t overstate how critical it is to get bids from different contractors. Here are some examples of real numbers we got:

• 1 roof bid for $7500… another for $4300.
• 1 sheetrock bid for $5500… another for $1100.
• 1 painting bid for $3000… another for $1000.
• 1 furnace bid for $2200… another for $1280.
• And it went on and on like that.

But on our flip, we were driving HARD bargains with our hired help and our suppliers… there were no two ways about it.

So yes, we’d end up with some riff-raff that we’d have to fire and perhaps un-do and re-do their work now and again. We accepted that, as frustrating as it was at times.

All the riff-raff labor in Bellingham, though, wouldn’t cost us as much money as a key decision we were about to make. And the most painful part is that, blinded by the flurry of bigshot fast flips for fat profit, neither of us saw it coming. At all…

To be continued…

Since Tyler and I both work full-time already,

I mean, the economy is in the tank, right? New construction and even old construction are practically non-existent, meaning there are literally thousands of skilled carpenters, electricians, plumbers, roofers, sheetrockers, painters, and general laborers ready to rock and roll on our project.

And that’s what we found. Kind of…

Every good, heavy-duty fixer-upper job starts with a demo phase. Just get in there and tear apart, tear out, tear down and haul away all the known junk that’s getting replaced or rebuilt.

And if you know what you’re doing, you know that the BEST PRACTICE for demolition is to demo EVERYTHING that needs to go, right off the bat, one shot. And our little house needed A LOT of demo.

So we called our friend Bob the Builder, who referred us to a crew of elite, special forces, Ninja-warrior demo guys who’d be all over our house like ants on spilt sugar. We spent 10 minutes walking the house with the crew leader, then hired them at once before racing back to work at the office, and feeling proud!

The next day I came to check out the progress. There’d been some demo. The living room ceiling was torn down and piled up in the middle of the floor, as planned.  

There was a guy working away at demoing the kitchen floor, which all had to go. But man, he was slow. He was using a cat’s paw to pull nails from the top of 3 half-century-old layers — all of which were rotten and needed replacement — at a rate that would get it done by Christmas, maybe. It was, in my mind, like using a jacknife to fell a tree.

Another guy had just finished pressure washing the exterior to prep for re-painting, but he’d created big zipper-lines in the cedar fascia where he’d sprayed too close. That was gonna cost us.

Another guy was… to my utter confusion… on a step ladder, troweling joint compound onto a bedroom ceiling all around where a rot repair was needed. What the…?

Hold on… these guys weren’t the Navy SEALS of deconstruction. They didn’t know what the *$%& they were doing!

I grabbed a Sawzall and stepped onto the deteriorated kitchen floor. In less than 3 minutes I’d cut loose a 5-foot square of the underlayment/mystery-layer/subfloor sandwich, peeled if off the joists, and slung it into the front yard. The not-so-Ninja laborer looked like he’d just witnessed a murder.

“Do more of that,” I told him, “until that whole floor is in the front yard.”

I made similar demonstrations for the other guys on site at each of their work areas, then left to show a property to a buyer client. But my mind never left the flip. My “perfect world” vision had been shattered. This was going to take actual “involvement” and even some “management.”

We could handle that. We could handle getting what only existed inside our heads, out through our mouths, in clear detail, to another sentient being, to achieve a mutually understood end result. Couldn’t we?

To be continued…

This part of the deal almost de-railed it for us before we ever got started, and it had nothing to do with the overall state of disrepair the house was in. It had to do with lending guidelines.

See, Tyler and I had a signed offer on the house with both our names on it as “Buyer.” To a lender, they see “us” collectively as just ONE buyer. And there are limits to how many properties ONE buyer can own before the powers that be feel it’s too risky to loan more money for more properties.

Tyler has 4 total. I have 3. That’s too many. We went from bank to bank, lender to lender, collecting rejections. The seller took pity and gave us an extension on the contract. But still we had nothing.

Nevermind that our debt-to-income ratios were in check, our credit scores were in check, our self-employed work history was in check, and every other quality a lender wants in a borrower — or so we thought — was in check.

Nevermind that the entire GLOBAL economy had come to a screeching halt and HIGHLY QUALIFIED BORROWERS should’ve — in my humble opinion – had access to the entire Federal Reserve if they wanted, just to get some money moving around again.

We were flat-out told, again and again and again, “NO!”

So we did what anyone would’ve done when the conventional means aren’t getting you where you want to go. We starting calling private lenders.

Hard money, Baby! No federal guidelines, no appraisers, no hundred-page applications or two-hundred page documents to sign at closing. Just regular old Joe’s who use money to make money, and rely on guys like Tyler and I to borrow it from them — at a cost.

We called a local renowned private lender, and found that he already knew the house.

“I had a crack at that one already,” he said, explaining that he was called several weeks earlier to ask if he’d like to buy it. He had walked through it, and flat turned it down.

“You paid HOW MUCH for it???” he asked me in shock.

When I told him, he echoed the sentiment of the experienced investor/agent in my office, “You’ll lose your ass!”

This hard-money guru then explained that over the years he’d flipped or built over 100 houses in Bellingham. That he once had control of  a multi-investor kitty exceeding $70 million.

So this “Warren Buffet of Bellingham House Flips” basically called me a fool for being about to buy the house for what we were about to pay. He wouldn’t lend us the money.  

We next called a contact of Tyler’s whose family has made a fortune lending hard money — and continues to do so regularly. Tyler explained the numbers, the house, the whole enchilada.

“Not interested” was his guy’s reply.

Daunted? Heck no… these guys were just missing the boat, but sooner or later we’d find someone with a clue.

The third call was a charm. We laid down the project one… more… time. And waited for an answer…

“25% down, 2 points, 6.5% interest, 30-year am, 1-year balloon,” came the reply.

Hot damn… we were in!!!

Basically, for our $157,500 purchase:

• we’d have to put down $39,375 of our own money;
• so we’d be borrowing $118,125;
• The “two points” means we’ll pay 2% of that loan amount as a fee, or $2362.50
• on the balance we’d pay 6.5% interest amortized for 30 years;
• and the remaining balance would be due in full one year from closing on the purchase, or when we sold it, whichever came first;

Slam Dunk!!! We accepted immediately. I mean, this was a better deal than we’d get from a bank even if we could’ve gotten one to work with us, with all their origination fees and credit check fees and flood cert fees and appraisals and yadda yadda.

We closed less than a week later. The house was ours! (And the signing at escrow took about 2 minutes 15 seconds.)

Now… the profit clock was ticking, the house needed EVERYTHING, and the REAL fun was about to begin!!!

To be continued…

Tyler and I share an office at RE/MAX. We’re both full-time agents, and we’re both “investors” in that we own rental properties. Tyler’s been in this business for 11 years, and has a nice little portfolio of single- and multi-family properties that throw off some cashflow each month.

I’ve been a Realtor since ’06, but you may know I was a home inspector before that, and a carpenter before that. That skill- and knowledge-set is a blessing and a curse, but more on that later.

I’d been shopping Bellingham’s core neighborhoods (west of I-5) for some first time homebuyer clients of mine. We’d seen everything out there and just weren’t finding anything right for them. So one day I was driving the streets of the Columbia neighborhood, when I saw a FSBO (for sale by owner) sign.

I whipped in the driveway, and there sat a neglected, vacant, 1950′s house. By itself, it was nothing to write home about. But in the Columbia neighborhood — especially with me being totally updated and calibrated to the entire west-of-I-5 market at the time — I knew that if the price was right I was staring at a real find!

I called the number on the sign and asked:

• Is it still for sale?
• How much?
• Will you carry paper? (aka: Will the seller finance the purchase for a buyer?)

In less than two minutes I learned:

• It was still available.
• It was a little overpriced but not much — and I wouldn’t know the true value until I’d been through it to see how much work awaited us — and…
• No, the seller wouldn’t carry paper. They wanted to cash out.

My next call was to my first-time homebuyer clients. I described it to them, and since they have a new baby they weren’t at all interested in a fixer-upper on this level of disrepair.

My next call was to Tyler. Within 60 seconds he knew the implications of what I’d found and what an opportunity it could be for us. We’d talked about partnering on a flip just for fun… and  maybe to get into doing more of it on the side of real estate sales.

At the time, though, I didn’t want to flip it. I wanted to fix it and hold it as a rental. Starter homes in Columbia are MONEY — I mean, they sell quickly, and we could liquidate it anytime. I wanted to let a tenant first enjoy it while we built some equity.

Whether we flipped it or held it was something we could decide on a bit later. The first thing to do was to tie it up.

Less than a week later, we had gone against two other buyers and came out on top, so we had the house under contract with the sellers. It was a 3 Bedroom, 1 full bath, 1173 square feet with a carport, and in need of a FULL remodel.

We’d bought it for $157,500.

In the next post, I’ll explain how we almost didn’t — then creatively did — get financing for such a total fixer-upper.

To be continued…

We did it. Well… we’re not quite ALLLLL the way done

But my buddy Tyler and I’s recent project to flip a Bellingham home is 99.9% complete. We’re closed and recorded, the new owners are in, all the bills are paid…

And the only BIG thing left to do is write a freaking book about everything we learned along the way. (Maybe a series of books. There was a LOT of learning.)

Over the next while, I’m going to blog about the more meaningful and relevant-to-other-investors experiences we had and lessons we learned.

In the midst of sharing plenty of battle stories, I’ll answer the questions:

• Did we make a profit, or, as an experienced investor in our office at RE/MAX predicted, did we “lose our asses?”
• How did we get financing for a run-down, uninhabitable fixer-upper?
• Was it easy, in this economy, to find good help at reasonable prices?
• How long did we plan on holding the property, and how long did we REALLY hold the property?
• How did we find a buyer?
• What was the single most costly mistake we made?
• What did we do right?
• What not-so-ninja techniques did we use to save money?
• In this relatively slow market, how were we so sure we could sell this house and not end up holding it forever?
• What was our back-up plan if we couldn’t find a buyer?
• Will we ever do it again?
• Should YOU do it?
• And more…

Flipping houses is NOT for faint of heart, that’s for sure. At the end of the day, there’s only one guarantee: Anyone who does it is going to be overwhelmed with new learning.

Tune in over the next few weeks as I tell the tale here on NWWayofLife.com!

Meanwhile, if you’re in the midst of flipping your own investment house, by Golly… “Flip it good!”

To be continued…

Tonight, we hosted the first of three Stand-Up Paddleboard races in the Pre-Paddle Grand Prix point series. We didn’t know what kind of turn-out to expect, having just starting spreading word about the race and helping to host SUP demo nights at Padden a little over a month ago.

We were STOKED to have 17 racers out on the water!!! We all met at Cornwall Beach, and from there paddled up to Taylor Street Dock, under the catwalk, and back to Cornwall.

Despite the headwind and a hard go on the first leg, every paddler stroked it out and we had some great finishes on the Cornwall Beach.

This informal race was the first of three races in a point series, all leading up to the main event on September 5th, the Paddle Grand Prix. If you’re interested in trying Stand Up Paddling — undeniably the fastest growing watersport in the world — and think you might want to race, head to Lake Padden on any Tuesday this summer for free demos.

We also do a race at the start of the demo night, one lap around the lake (just under 2 miles) and it’s a great, warm, friendly place to see how you like it.

See you there!!!
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I learned something new last Friday

This took place at a property I have listed for sale, and with me were the Buyer, a builder, and an engineer. We were there to discuss the feasibility of what could or could not be done with the structure, as affected by the topography, height restrictions, existing layout of the home, and of course, how much it might cost.

The builder, Rick Dubrow of A1 Builders and Adaptations Design here in Bellingham, is one of the best and most experienced building consultants I’ve ever worked with. A1′s work is top notch, but long before they ever place the first ounce of concrete or pound the first nail, Rick’s style of talking — and listening — to a client and educating them about possibilities and processes of building… that’s why I refer him again and again. He’s a professional communicator, hands down.

Anyway, there we were, a half hour into the consult, standing below an un-maintained, 50-year-old house, when Rick spoke the words that were completely new and profound to me:

“I’m all about conservation, and I’d love nothing more than to see this house preserved and re-used in every way possible,” he started.

“But in the energy life-cycle of a house,” he said, “including all associated energy consumption of materials production, transport, construction, and then what is consumed during actual use of the house over its life-cycle, six sevenths of the energy is consumed after construction is complete.”

I stood there, trying to wrap my head around exactly what he had just said, when he continued…

“So it’s almost certain,” he said, “that the most efficient thing to do with this near 2900-square-foot house, in the context of what you [the buyer] intend to create here, is to tear it down.”

This was, to me, some serious outside-the-box thinking. In this day in age, as we’re peppered with constant messages of “Reduce, Re-use, Recycle!” the default philosophy is to conserve and build to what’s there. That’s the most “responsible” thing, or so I unquestioningly had thought.

But what I picked up during this meeting from Rick, is that the most responible thing is to continually keep learning, keep asking questions, keep studying, and adapt when new understandings come to light.

There are many hours of design and contemplation ahead before the final call is made to remodel or tear down, but Rick’s insight added a valuable twist to the decision making process on this project.