My latest Flop in Real Estate Investing
Hi Friends!
I wanted to write this post in honor of the upcoming release of “Profit Like The Pros”, a collection of stories from the Best Deal Ever Bigger Pockets Podcast with Ken Corsini, from Flip or Flop Atlanta. If you are not following me on Instagram, then you may have missed that they surprised me by putting my face on the cover! Ah-mazing!
I’ve started reading it and I have to say, I feel so inspired by the first few case studies, I highly recommend it if you are looking for your next inspiring Real Estate book.
As some of you might know, one of my biggest gripes with the Real Estate community, particularly at meetups and networking events, is how people love to brag about their successes. I think sharing our stories can be inspiring and helpful to those wanting to learn and yet it often crosses a line into braggadocious, “let me tell you why I’m so cool” territory and I want to walk away mid sentence. Yuck.
In an effort to be transparent, I feel it is important to share the wins, how we got there, including all the tips and tricks, but also to share the near misses and down right failures. It shows that we are trying and it usually teaches us a lot in the process. So without further ado, let me tell you about my latest FLOP. Yay!
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About a month ago, I was on the hunt! I was identifying properties for myself and Ben to buy. I had lined up 6 properties for myself (I’m in the midst of a 1031 exchange), 2 for Ben, but was looking for one that could work right away for him as the others were months out (not built yet). As I’ve mentioned on this blog previously, I have been exploring the opportunity of investing with Turn Key companies that provide new construction homes and a property management company to take it from there. To be clear, these are just plain old long term rentals. :)
What excites me about this is the opportunity to have a home with little to no maintenance for the first 5 years, a property manager (I am no longer the property manager!), a solid cash flowing return of over 8% cash on cash and a location with a good chance of appreciation. Upgrade!
After a short call with the broker at Housefoilios, in Georgia, I was off to the races, running the numbers on their website, until I found one that met my requirements. Once I did, I reached out to reserve it but found that it was already gone. Shucks. They didn’t have an email announcement of new properties, so I just returned to their site often to check out the inventory.
This next time around, I found an even better price and return, quickly ran it by Ben and emailed again to lock it in. My first disappointment with attempting to work with this company was that they did not allow us to hold a property without placing a non-refundable deposit. What I had been finding as the norm with some of the others is that you can reserve a property and you have a week to do your Due Diligence: check out the schools, crime rate, flood plain maps, interview the property management team, etc to make sure it was going to fit your portfolio before sending any money. Since we didn’t have that grace period and I saw how quickly the others went, I felt an unfortunate pressure to press on quickly. We zeroed in on a 4 bed, 2 bath for $126,900. Our contact/Broker at Housefolios sent us photos of a home with the same floor plan that they recently sold on that street. It looked great.
He suggested a phone call to walk us through the reservation protocol on the builders website. When we found the home’s address on the website, I stopped Ben in his tracks as I saw it advertised as a 3 bed, 2 bath with a different layout. Wait a minute?! The broker called the builders to confirm and found out it was actually a 3 bed, 2.5 bath! What is going on here? Neither the builder nor the seller had the correct information. *We should have walked away right there and then.* We went back to the property manager, received another estimated / rental report and when the numbers still worked we continued on.
We asked for an updated floor plan and actual photos, but in the flurry of insurance quotes, lender docs, property mgmt plans, ordering blinds, a fridge, walk throughs, and inspection scheduling, we let it slide into the background. Big mistake.
Unfortunately the mistakes, not so comically, piled on from there:
-The taxes quoted in the proforma were from the empty land value, the actual taxes would be $100 more per month.
-Ben was preapproved with another lender but they told us that the builder's lender would give a credit of $6000 so we switched. Right before we got our final closing statement, the lender realized that we didn’t qualify for as much since we are not going to be owner occupying, so it ended up being $2500
-We asked for photos of the home, not once, twice but 3 separate times during the weeks under contract, only finally receiving them the day of the inspection, which was only 10 days before closing. When we saw them our hearts sank. The layout was super awkward.
Even though it was a super cute home from the outside, we found out it was an awful floor plan which I remember seeing when I did the in person “Atlanta” tour, but in a different part of Georgia (must have been the same builder). On the tour, the group of investors outwardly expressed their confusion and displeasure with the floor plan. It has the stairs jutting out between the kitchen and dining room so you have to walk around the stairs to get to the dining room and if you open the patio door, you cannot get out of the kitchen as the door opens inward.
We immediately got in touch with the broker and builder to see if we could be moved to another property. They set up a call with us for the following day. In the meantime, I jumped on the Housefolios website to see if anything fit the bill. We found one for $105,000 in an area the property manager recommended, and started the whole process again. We had to squeeze in all the due diligence before the call to see if it was a viable lateral move. We even had our property manager drive out there to check out the neighborhood, and upon arrival he found that they had not even broken ground on it. Ugh.
Even though our original plan was to buy something ready now, we preferred to wait the 3 months instead of getting stuck with a dud of a home. When we got on the call with the broker and builder, we noticed the home we planned to move to was no longer advertised. When we asked about it, they said that the price online was wrong and it was actually $150,000, but it didn’t matter because it was already reserved anyway. They offered us one last house but after discussing it with the property manager we decided it was just too much and we had to pull out. Sure, we were out the $225 for the inspection, but surely we could get our earnest money back after all this madness?
As of the time of this writing it has been more than two weeks of them “trying” to get it back. What a mess. While I feel confident we will get it, I am still stunned that this all happened to me with my level of know-how and experience. I felt really upset on Ben’s behalf because he is so new to the process and I was so involved because I want to protect him from these exact scenarios.
Is a weird floor plan really a reason to pull out?
I imagine a few of you might be thinking this, so I thought I would explain my reasoning. The property manager agreed that it is awkward and some tenants have turned away from similar homes with that floor plan but that he could rent it. My issue is resale, I always buy with an exit strategy and feel that 5-10 years down the road when it has lost it's “new home sex appeal”, it will just be awkward and only sellable to investors (at a discount), not market rate owner occupants.
Why did you stick around through all the disappointments?
PMI Georgia, the property management team were absolutely fantastic throughout the process. What I have learned through years in rentals is that you live and die by the management. You could have the greatest home, in a wonderful area, but if you don’t get it rented or have it rented to bad tenants, you won’t make any money on it.
What did I learn?
I have learned a huge lesson about getting (demanding) actual info right away and I hope this will help me grow as an investor.
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So there it is. My latest FLOP for all the world to see and yet, in the end only time and a small amount of money was wasted. I feel relieved to be out and we are already moving forward into other projects.
Have you made some FLOPs recently? Share them below. We can all learn and grow from them.
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