Planning To Succeed (or How To Recover If All Goes Wrong)

Nothing better on a cool October morning than huddling on the couch with a big mug of freshly brewed coffee and watching house flipping shows on TLC, HGTV, or A&E.  I know they’re unrealistic.  But even so, I always learn something.

This Saturday morning’s offerings were no exception.  One in particular got me all riled up.

What most disturbed me was the “investor’s” insistence on her rightness.  She spurned everyone’s advice and thumbed her nose at the law.   I watched in awe as she made one uninformed decision after another.

“You’re so ignorant,” I screamed at the TV, my husband wincing at my barrage of insults.

The more I watched, the more frustrated I became.  Why wouldn’t she wake up?  Why did she refuse to see the light?

Not that I’m in a position to judge or advise, but even to the most novice rehabber, her errors were glaringly obvious.  You don’t eschew sound counsel.  You don’t hire an ex-boyfriend to be your general contractor.  You don’t live in the house while you’re rehabbing it.  And you don’t pick a number out of a hat to serve as your budget.  Oh, and you don’t plan to spend only $200 on a kitchen with bright yellow accent tiles and baby blue cupboards, of which the host exclaimed, “You kind of have an Easter parade motif going on in here.”  (I had to throw that in.   It made my jaw drop.)

As happens most often on these kinds of shows, she came out smelling like a rose.  Made a tidy $123,000 profit.  Not bad for six months work, even in California.  One side note:  This was 2007.   Right before the bottom dropped out.

Most Of All – Have A Plan

Now I can’t fault this first-timer for not having a plan.  Her plan was just faulty:

1) She wanted to spend $20,000 for repairs and holding charges that ultimately cost her $80,000.

2) She didn’t plan on doing any of the work herself.

3) She put an ad on Craigslist to find a general contractor.

4) Her needs, wants, and desires came ahead of any remodeling (e.g.: she was sick one day and the ex-boyfriend carpenter made too much noise for her to sleep).

5) She didn’t price anything in advance to understand the cost.

6) Her partner (another ex-boyfriend) paid the bills, so she was unaware of the money flying out the window.

7) Her timeline of four weeks was unrealistic (it took just shy of six months).

Here’s our haphazard proposal:

1) Do a portion of the work ourselves (we ended up doing about 2/3s and still doled out a substantial portion of our budget to The Painter and The Handyman).

2) Use The Investor’s knowledge and contacts to find hired help (yes, that worked out well).

3) Get the punch list from The Investor to estimate costs (never happened).

4) Do it all for The Investor’s guesstimate of $7000 (hmmm).

5) Do it in four weeks (took us eight).

That’s it.  That was our plan.  To take a small percentage of Andy’s Jeopardy! winnings and parlay them into a nice payday.  Not exactly what happened.  Let’s just say, we didn’t come out smelling like roses.

How To Recoup If Things Go Wrong

Sure our first mistake was in trusting The Investor, but we had no contingency plan if things went south.  We discovered we weren’t as knowledgeable as we thought we were.  We ended up relying heavily on the insights of The Painter and The Handyman.  Many of those proved to be costly.

When we realized The Investor would not live up to his end of the bargain, we didn’t change course.  We just kept plugging away.  Fired the hired help.  We couldn’t afford to keep them on anymore.  So day after day, we drove the 35 miles to the house, worked to exhaustion, and prayed it would turn out okay.

At this point in the flip, about midway through, we should have sat down and taken a long hard look at our finances and what still needed to be done.   We may have been able to salvage our pocketbook and our dignity.

Instead, we took a bath in humility.   And learned, too often as we humans do, the hard way.

So what can you do if you find yourself in a similar situation?

1) Take a good hard look at the numbers.  Start at the beginning if necessary.  If you’re spending way beyond your budget and nowhere near finished, look at places you can cut costs.  Go back to the warehouse stores and consider lower priced options for items you have left to purchase.  Don’t skimp or sacrifice quality.  But you don’t have to have designer faucets or slate floors to make a house saleable.

2) Be aware of your surroundings. Some neighborhoods require granite countertops and ceramic tile.  In others, the investment would be foolish.  Be sure you’re putting your money in areas that will give you the most bang for your buck.

3) Don’t be afraid to change course or redirect your efforts. Assessment can be your best friend.  If you had a complete kitchen renovation on the table, maybe you can scale it back to re-facing the cabinets and replacing the countertops, provided you haven’t already done the demo.  Paint works wonders and can cover a multitude of imperfections.  If you find you need to cut back a bit, figure out ways to reuse rather than replace.

4) Get help if you need it. Here’s where we really went wrong.  We stubbornly held onto a false belief that The Investor would come through for us.  If we had been smart, we would have paid someone else to help us finish the project.  A realtor.  A different investor.  Someone who knew more about it than we did.  Yup, we would have had to fork over some serious cash, but in the end we would have come out ahead.

Even in these down times you can still make money flipping houses.  There are a lot of ignorant people out there trying to do it.  Arm yourself with knowledge and good counsel and you don’t have to be one of them … and neither do we.

Happy Transformation,

Shawn

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