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FlipBlog 4

Welcome to the Blood Bath!

It wouldn’t be a blog on flips if it was just all sunshine and roses all the time…This isn’t HGTV folks…

I have to be honest about my first major setback. I recently added a project manager to my team, in efforts to assist with the day to day management of supplies, vendors and flip timeline. We shall call him Paul. Paul had been working for me for several months in another avenue before he moved over to this new role. Paul came to me with some construction experience, a strong background in real estate inspections/rentals, and he seemed to understand our local market as well as any realtor I’ve ever met.

He presented me with a project in Plymouth, which I thought was too much of an undertaking. However, he hit me with something like “if I can get this one done, I can do any of them” and pleaded that he understood the market, the property and had a plan. I was inspired by his confidence and gumption to take a risk and a hard crack at this property. I have always been a sucker for someone with a strong belief in themselves.

With that little preface, here how this one panned out…

The property is situated on a beautiful wooded lot in a mature part of the city of Plymouth, MN. Plymouth is an affluent suburb, that is known for its great schools and public works. The subject property was not in that specific school district, but it was in an above-average neighboring Maple Grove district.

The property had been owned by the next-door neighbors, and at some point, their son had been living there. I don’t know the exact circumstances, but the son passed away, the parents got the house back, and they sold it to a realtor (and would be flipper) who didn’t do much to the property in the few years that he owned it.

The front “wooded” lot was effectively a dense jungle of plants, trees, and weeds…an absolute shit show. The front steps were nonexistent so the only way that you had to access the house was around the back of the garage. All in all, it was a very poor design on the outside and had years of deferred maintenance.

Moving onto first impressions of the interior. As soon as you walked in through the backdoor of the house you’re spit out into this small landing area that can lead either downstairs to the basement or to the kitchen. When I turned to the kitchen I started to see some of the appeal and vision that Paul saw in this place. The wall that had originally divided the kitchen and living room had already been removed and an LVL (giant wood beam) had been put in to support it. Out of the gate, it already had the highly coveted open kitchen/dining/living room concept.

I toured the rest of the house and it was pretty mundane. The rooms were smaller and more awkwardly shaped. I didn’t really see huge potential here at first aside from the main floor living area.

There was a ton of exterior work to do (remove the old deck, multiple retaining walls, install a new deck to name just a few). Typically I feel that exterior work is not the wisest area to be spending money on flips. I was concerned that the house required new plumbing, electrical and HVAC. There would be a constant parade of licensed professionals through it and that means some considerable dollars in project costs.

I asked Paul to create a scope of work for the project. This is where we list out all of the items that the property needs in order to attract that end buyer. It applies only to the construction and does not include things like taxes, insurance, interest and other carrying costs. The grand total he came up with was roughly 80k.

This is important because I take that figure and the description of the scope and provide it to the bank. The bank then puts funds for that repair into an escrow that we draw from throughout the project timeline as we go.

Without belaboring all of the little details, this project did not go as planned. There were multiple issues with the permit process. The city inspectors came to look at and sign off on the HVAC work (which we properly applied for) however while conveniently there they turned their attention to the LVL board. Next thing you know they require us to seek out a structural engineer to sign off on the open concept floorplan. There went another permit and a few thousand bucks.

The next time the inspector showed up, they tell us “you have to take down those walls so we can inspect what’s behind them” after we just put them up. Only to have them inspected and be told “OK, you can put them back now” there goes another 10k!

Issues with the shipments for materials were causing delays and a lack of productivity. Issues with changing the material choices mid flip. Even really stupid stuff like getting hardware for the doors that didn’t match the pre-fabricated holes it came with.

It seemed like nothing was going our way. Then we get to the end where we plan to put in this gas fireplace that the seller left for us, only to hear that all HVAC companies we called won’t install a fireplace they are not providing. We were in yet another pickle. Luckily we finally found a vendor who was willing to do the work. That is set for tomorrow and then we just need to tile around the fireplace.

The project took over 4 times the labor that we expected, and we went well over budget on time and materials. We planned for about 80k for the rehab, but when the calculations return from NASA I expect to be closer to 200k with all of the carrying costs included.

This one has really set us back. It humbled us to know that we are not as good as we think we are. We still have a lot to learn. It highlighted the lack of systematic processes. It showed me that I didn’t do enough to train Paul. Most importantly … It taught me to follow my first instincts, and if it doesn’t seem right don’t let greed compel you to make a bad decision.

I will do another one to recap the actual financials of this transaction when it’s complete. It is too early yet to see if we actually made or lost any money, but we certainly lost out on profit potential.

Thanks for reading!

Ryan