Most Common Mistakes and problems to avoid with Fix and Flips/ Rehabs
Real estate investors can make a lot of money with fix-and-flip rehab investing, but they also can lose a lot of money. Jack and Marcy talk about their experience of doing thousands of these deals and want you to learn through the mistakes they have seen.
“Marcy: Good morning or good afternoon.
Jack: Good evening too.
Marcy: Good evening.
Jack: On YouTube, nobody knows.
Marcy: Well, because you can be seen not sleeping and say, “Oh, let me watch Marcy and Jack.”
Jack: On YouTube.
Marcy: On YouTube, and here we are.
Jack: So I want to make this video on rehab loans or rehabbing and fixing and flipping because you can make a lot of money at it, but a lot of people fail, and I think it’s good to go over some of the problems with it in the hopes that the people who want to get into it can avoid the problem because if you know the problems, you can deal with them.
Marcy: Right, if you know them ahead of time, what could happen?
Jack: Yes, so the first thing is, what is a rehab and Fix and Flip. So, I think it is, tell me if you agree, someone buys a property in maybe poor condition, or it needs work and they put money into it and fix it up. So, handyman, back in the day, we used to call them handyman specialist. You buy a property for—I’m going to use a hundred thousand—you put in thirty thousand, maybe you sell for a hundred and seventy thousand.
Marcy: These are just examples because the minimum property value is two hundred and fifty thousand to start, we don’t want to confuse people.
Jack: So that’s what a fix and flip and a rehab is. Now there are a lot of people giving online courses and all kinds of stuff, some paid, some free, but you know, take it with a grain of salt. There’s nothing like doing deals. So, we come to this from a perspective of doing well over five thousand of these deals. So over five thousand, you’ll learn something, at least I hope you did. So, I want to talk about the common mistakes and what we see and how to prevent them in no order of importance and actually—
Marcy: He has notes today.
Jack: I never—
Marcy: Never have had his paper.
Jack: It’s because it’s important. It’s important because—
Marcy: We just want to make sure we hit every point.
Jack: So, with the rehab, you can make a lot of money, a boatload of money, but you can also crash and burn. And we see a lot of people crash and burn. And the reality is, to do it right, it really is a challenge, and you see, you don’t see too many people doing it right for a long period of time. A lot of them—
Marcy: Well, I think the reason is, Jack, just if I can interject, like the reason that people don’t necessarily do it right is because they’re not really reaching out to someone that has a license or someone that really does this—
Jack: Contractor.
Marcy: —that like does this on a daily basis. So, you know, if you’re going into this and you’re buying a property and you’re eyeballing yourself, you think, “Oh, this, A, B, C, D, this, all that needs to be done,” and the reality is that’s not true, and that’s where the biggest problem starts.
Jack: I agree with you. So first, I want to talk about, I believe, you, there’s three—I consider buying real estate, whether it be a rehab or a stabilized deal. There’s really three parts of the deal, and what I find is a lot of people are good at one of the parts or two of the parts, but to be good at three is a challenge, and a lot of people aren’t. So, let’s talk about the three parts and then if you’re not good at them, what you do. So, the first part is buying the property. I know it sounds simple, but that’s really the key. What to pay for, what the projections, to make realistic projections, to negotiate, to find the deal, because this is the hardest part, buying the property by far. If you buy a good property, you’ll be fine. So, there’s a lot of people who are great at buying but aren’t good at the second part. The second part is I call, managing. Now, if it’s a rehab, it could be fixing it up. So, part one is acquiring, part two is managing, and managing could be putting a tenant in there, managing a construction crew, rehabbing it, and part three is selling it. So, there are three separate parts, and you need three separate skill sets for each of them. What I found over the years, to be blunt, that a lot of people are not good at all three. Some, I found that some people excel at one. There was a guy early on in my career, I’m not going to give his name, but he owned… He was one of the best buyers I’ve ever seen, and I’m going back twenty-five years ago. He owned and he bought unbelievable properties in the Philadelphia area. He bought them dirt cheap, and he had a portfolio, I think over 150 properties, all great locations. Today, they would have been worth ten times, fifteen times what they were then, who knows? But the problem with this guy, he was a lousy manager, and what happened was, he was had a partner with someone, and the partner dealt with the management, and they did fine. When there was a partner dispute, they split the properties, and he was left with like 150 or whatever the number was, and it was a big poo-poo storm. He didn’t know how to manage the properties, he didn’t know how to communicate with property managers, he was just lousy at communicating and lousy at things like that. So ultimately, he lost most of his properties.
Marcy: We see it all the time.
Jack: So, because he excelled at one skill, I told him, and he knew that he needed to bring someone in on the other suits. If you’re good at something, you run with that, but one of the keys is, if you’re weak at something, you have to acknowledge your weakness, and you have to find a solution for it. In this case, he didn’t find a solution, and I’ve seen that over and over again. People are good at one thing. So, the first thing is buying. Remember, the second thing is managing, which maybe I call managing, but it could be dealing with contractors. And the third thing is selling. Selling is a skill and an art unto itself. You could be good at A and B, buying and managing, but if you’re not a great seller, it could be problems again. But the key really is buying, then managing, then selling, in that order. Remember, you can find someone, partner with someone. If not, everyone’s good at everything. I suck at a lot of things, most things, but I find good people to deal with the things I suck at. So that’s what I’m advising to do. Think about your strengths and your weaknesses and go with your strength, focus on your strength, but what you’re weak in, deal with. So that comes down to my next thing. What Marcy said is a lot of people get in trouble because they… I think—
Marcy: Not contacting an expert, like someone that can advise you correctly. And even like when I, Jack, we always say this too, like when you’re buying a property, I know it’s an extra expense, but its really money spent well. It’s to have a property inspected, to see, like, a property inspection report. Not, you know, not anything that has to do with us. So that you can really see where the issues are, because a lot of times when people buy the properties, they think that it’s one issue and then that issue leads into 10 others, and that’s where the overflow, and it doesn’t move smoothly and you anticipate, you don’t anticipate all these problems.
Jack: It happens all the time. And that’s my number two, my thing on my list is projections. A lot of great smart people make bad projections. They’re too aggressive. They listen to too many people, and they don’t do their own research, and they’re too rosy-eyed. What I mean by that is most of the rehabs we do, I don’t know, you tell me the number, it takes a lot longer to sell and a lot more to fix up the property.
Marcy: Every single one.
Jack: That’s most every single one.
Marcy: Every single one always goes over their budget, and where’s that money come from? That’s the thing, and it’s like they have great vision. It’s a great vision, but then the reality is, well, the city permits take longer than they should, there’s a problem with your contractors, there’s a problem with supplies coming in, there’s all these issues that come in when you’re doing rehab, and you have to try to have vision of them ahead of time so that you don’t run into a situation where you cannot finish a property with the funds that are provided in the rehab money.
Jack: So, let’s break it down. So, the rehab, the cost of the rehab, and the time it’s going to take you, is part of what I call the projections. The projections are a rehabber should put the whole deal on an Excel and measure it out, see what the income, what the expenses are, see if you’re paying a good price, look at the comps, you know, there’s so many, see what the N value is…
Marcy: You’re right because, Jack, if you don’t get your property a cent below market…
Jack: Way below market.
Marcy: Way below, cause then you’re putting in another $100,150 in, so you have to take a sales price plus what you’re putting into it. Is the value really going to be there? Is it really worth it?
Jack: Yeah, so you have to really dig in and have good projections. Take the time to learn the process, be them, I always talk about learn your field, be a craftsman in your field, be a master of your field, learn every aspect of it, and put good projections together because we see the projections, and inevitably, people are too rosy on their projections. And the projections have to deal with: What you’re paying for the property, your carrying costs, how much it’s going to cost you to fix it up, how much you can sell the property for, and your sales cost to sell it. A couple of recent examples, and I’m just going to go recent, we’re making this on a Monday, things that I’ve worked on in the last two days since Friday, okay?
Marcy: And I haven’t seen him for two days. Let’s see what he has to say.
Jack: I’ll tell you, people presented us a deal, and it was—I don’t want to say a little shopping center, it was three stores, and the current rents were about $31 a foot, and they thought the rents were low to the market, and they could raise it to about $50. I’m sorry, $45 to $50. We did our own comps and we challenged them on their comps, and all of the comps that they sent over weren’t really comps. They were far and everything close…
Marcy: …was a lower amount.
Jack: So, they believed in this deal so much, and where did they get their information from? A realtor. No offense to realtors.
Marcy: Because they have their best interests at heart when they’re presenting information. And again, it’s just business.
Jack: Realtors make money at closings. They don’t care if you’re stuck with the deal. So, this is a case we dug into the comps, and we went back and we looked at the comps we found, and we looked at the comps they found. And at the end of the day, you know what they said? “You’re right. The comps we used are too aggressive. You’ve got to be realistic.” A lot of times, people make the mistake, they fall into the mess of believing so much in it. You want to believe it’s so beautiful. You want to believe you’re going to make money so beautiful that you believe anything. You latch on to something that’s not realistic. And what these guys were doing, they were taking one comp on one specialized property and extrapolating that to think they can get that on this property, which they can’t. So, you have to use realistic figures. You know, another case, and that’s one, and these guys supposedly know what they were doing. Another case, somebody called me over the weekend, and they found a thousand square foot home…
Marcy: A thousand square foot home. Which is quite small.
Jack: Quite small, one bathroom, needed a ton of work. Literally, I don’t say in the middle of nowhere, but close to nowhere. Close to nowhere. Like bees and flies as neighbors. And they told me that they can fix it up. I think they said they were buying it for a hundred thousand or something, and they said they can sell for $275. And I said, “Where did you get the $275 number?” And his line was, “Well, the realtor is a friend of a friend, and the realtor told me you can get $275.” So, this is a rev… And we see this all the time.
Marcy: But in a sense, Jack, because we do see this, and we do take the time to check it out, we actually give really good advice too. I mean to help the borrowers…
Jack: I hope so. We’ll let the viewers…
Marcy: Yeah
Jack: So, my point is with the comps, and Marcy started out by talking about the home inspection, yeah. This same person who called me on the weekend said it’s going to be $60,000 dollars to do the work, and I said, “How did you get $60,000?” And they said, “That’s what the realtor said.” You know…
Marcy: The realtor is not like the expert.
Jack: Yes, you know, here, here’s the reality, my friends, and I use the word friends. In business, you don’t have any friends. You have alliances, and you have self-interest. So, get that straight. Any realtor or a contractor or anyone, a seller who you’re depending on, you’re going to be in trouble.
Marcy: Just don’t depend on anyone, depend on yourself.
Jack: That’s right. Do your research yourself. If you don’t know, and if you don’t know enough about values or about estimating, I don’t mean to be rude, but you shouldn’t be doing it because you’re gonna get in trouble. When you sign your name, you’re making a commitment, and you’re going to get yourself in trouble. So, when I talk about, we started with projections, we got a little bit off. Don’t trust anyone. Do the research yourself, be a Master of It, and put together not aggressive projections, but conservative projections because a lot of people…
Marcy: Give yourself some cushion.
Jack: A lot of people, look, I’m thinking of another deal that we had in here. Someone told me how much they were going to make on the deal. I said, “How long is it going to take to do the deal?” Beginning the number and I said it too aggressive. I said, “What about your carrying cost?” And you could hear, there were silence. Yeah, and I said, “Well, if they told me it was going to take six or nine months to do it, I said, “Well, during the six or nine months…
Marcy: You’re still needing to make payments.
Jack: You’re making payments, you’re paying taxes, you’re paying insurance. So, again, get a good spreadsheet. You can download good spreadsheets for nothing. I think we have one on our website. I don’t know if it’s good or not, but you can use it. Get a good spreadsheet and be the Master of It. Learn Excel. Don’t make the mistake of being too rosy with your projections. Be conservative with your projections, and don’t assume you know. We’re making this layout, and in the past four or five years or seven years, real estate’s gone nothing but up, but don’t make that assumption. Don’t make that assumption. So be careful with your projections. Honestly, that’s most of it, but I’m going to go and have more stuff. The next thing, as Marcy talked about, contractors. You know, contractors are known, and again, I don’t mean to annoy a lot of contractors. I don’t mean to—there’s a lot of good ones out there, but also…
Marcy: Do your research and find the right one.
Jack: Yeah, and you have to figure out learning. Don’t depend on someone else. Don’t depend on someone else’s estimate because it’s easy to promise, it’s easy to talk, it’s hard to deliver. Contractors are known for underestimating in terms of dollar amounts and in terms of time frames. You have to know enough to know if they’re in the ballpark or not. Again, I’m not an expert on contracting. I’m not an expert on HVAC or roofs, but you have to learn something about it to get an estimate.
Marcy: And also, like we always tell our viewers…So, make sure that also you don’t give all the money to the contractor. Don’t give all your money to the contractor. Like we’ve also had people that have done that too, and the contractor ran away with their money.
Jack: All the time.
Marcy: So, it’s like we supervise our rehab loans by giving money to start on a draw schedule, and then as the work is done and we document it, sometimes we inspect it, we make sure it’s done, and then we’ll get more money, draw schedule. We don’t give, if you come to us for rehab, we don’t give you the $50,000 right off the bat because we want to make sure the work is done and put back into the property. But as a rule of thumb, do not give your contractors your whole faith.
Jack: With whoever you’re paying, first of all, know what the costs really are, because one contractor or one guy, a gal can come in and say, “Oh, it’s going to cost X.” Someone else says X and Y, and someone else will give you something else. But you know what they’re going to leave you? You’re gonna—they’re gonna be long out of your life and you’re gonna have to deal with it. So really learn what the costs are going to be, and Marcy brings up a very, very valid point. We see this happen all the time. When you give the contractor too much money up front, you’re the one who’s losing sleep and they’re up, and they’re sleeping like a baby. If you give the contractor the bare minimum, they’re going to be up at night worrying about completing a job. We see it all the time. Contractors, things go wrong with contractors. The more you give them, the more dangerous it is. So, we always urge caution, pay them when the job is complete, not beforehand. If not, I hate to say you’re going to be in trouble. So be very, very careful on who you’re getting. And remember, some contractors are good at different things. Some contractors, chances are most of the rehabs that we do, and most of the rehabs are smaller jobs, so you’re not going to get one GC to do everything. You’re going to get a handyman, and the handyman may paint but can’t do electrical, or can’t do this, or he doesn’t know.
Marcy: We use several different subcontractors.
Jack: Also, yeah. Make sure that the promises are in order and make sure you have an understanding of what you can do. As I think you said in the beginning, I think I know which one it is. We have a case now that’s dragging on. I think more than…
Marcy: I think it’s literally almost two years. It’s crazy.
Jack: Two years. Is this the one in Chicago? Daycare center?
Marcy: Yeah
Jack: I’m not—I’m not giving names, but it’s a daycare center in Chicago, but a magnificent building, and he’s a real good guy. He originally thought it would be done in six months. He couldn’t get permits. Everything is a disaster. And he’s a good guy. So, we…
Marcy: And it was a great property.
Jack: And it’s still a great property. It’s choking the guy. It’s taking longer. So, make sure. You have to get permits. Don’t you have to get permits? Make sure you do it right. You know, a lot of people talk, and they say, “Oh, you have to get permits.” “But I know someone—I’m not going to get the permits.” It’s going to come up and bite you. Make sure you’re doing it right, and make sure you allow enough time. Really be methodical about this because between the projections and the contractors, that’s where we see a lot of problems happening.
Marcy: There’s so many. It’s a puzzle. There’s so many parts to it. You have to look at everything on an individual basis.
Jack: You can make big money doing this. I’ve, not only as a lender, I’ve made big money doing it as a rehabber and a fix and flipper, but you just really have to know what you’re doing. So, a couple of other things, and we can come back. It doesn’t have to be strict order. You know, there’s always something that goes wrong. Basically, a lack of capital is a problem in these deals because if you have capital, you can solve a lot of these issues. If you have cost overruns, if it’s another 10%, 20%, or if it takes another three or six months, if you have the capital to do it, you’ll be fine. But when you don’t have the capital, a lot of great deals are lost for small amounts of capital. So, I would make sure when you’re setting up the capital stack and you’re setting up the deal, you’re not going in using all of your capital. You’re keeping a good amount of reserves because if you have those reserves, that’ll save you. And it doesn’t mean you’re losing the money; you’re outweighing the money.
Marcy: But you’re outweighing the money. But Jack, still, in a sense, saving you. But you have to, in your mind, always put the extra costs in unless you might not be making the money that you thought you were going to make.
Jack: But a lot of people buy into, “Oh, you know, they see these courses: ‘How to buy real estate with no money down.'” And sometimes you can do it. We do some of that from time to time. But the more capital you have, the safer you are. Now, if you don’t have the capital, find a partner who has the capital. We made videos, and I’m a big believer that if you have a great deal, you could find a partner to fully fund it where you don’t need any of your own money if it’s a great deal and if you know what you’re talking about. So, but make sure again what I talked about in the beginning. Make sure you have the capital. Make sure if you’re not good at one thing, like the capital stack or the money, the other person has it. If not, you’re in trouble. So, if you have a lot of capital, you’ll take care of a lot of things. Another problem, we’re up to five, so we’re making progress here. I think the first time we dragged all the way…
Marcy: This might be a little long, but we’ll see.
Jack: I just so bad I can’t even see.
Marcy: It’s like 20 mins.
Jack: So, another thing, Marcy, how many times do we see a borrower come to us who got a rehab loan somewhere else?
There are cost overruns or they’re immature….
Marcy: and they’re coming to us to take us out…
Jack: …a year later…
Marcy: …a year later, for us to take out the original note, and they need more money now.
Jack: All the time, right?
Marcy: All the time, and those are really tough loans. They’re really tough.
Jack: So, a lot of people, I think, get in trouble. Again, goes back to the beginning. They’re overly optimistic in terms of their debt and in terms of how long it’ll take and the cost overruns. They’re not building a cushioning, or if the cushion is so small. I remember speaking to someone a couple of months ago, and it was like a forty-thousand-dollar rehab, and he goes, “Oh, I built in a five percent cushion.” And honestly, I wanted to say, “Two thousand dollars on a forty-thousand-dollar rehab is nothing. You’re a four.” So, the debt, make sure that you’re using the correct projections. Again, it comes down to the projection, and make sure that your lender is suited for what you’re doing. You know, a lot of people, and this is what we do at Gelt, a lot of people go with the lowest-cost lender, and that’s a mistake sometimes. Sometimes it works, but if something goes wrong and something, a lot of times, goes wrong, sometimes that lowest-cost lender is going to get you in trouble because they’re not going to be flexible, and they’re not going to give you the leeway in terms of lending you more money or in terms of giving you a modification or an extension. So, this is another thing that we see constantly.
Marcy: Which, for us, we are able to do that because we’re a direct lender.
Jack: We’re not selling our loans. That’s, that’s a whole other issue you should go to. We should make a video on that. So, the other thing, I want to talk about is options, we sort of going a little out of order, but we talked about capital and debt. So, you know, one option is to go to a lender, and I don’t know in today’s market, maybe you’ll pay 12% to 14% for Fix and Flip with three points. Maybe, I don’t know what the market is. They’ll be lower, it could be higher, who knows? You know but let me give you another scenario. It’s something for our listener or viewer, whatever you guys are, to think about here. You’re at dinner, and let’s say you’re a, you know, could be a fireman or a plumber or, you know, you’re a guy who knows the streets and knows how to find deals and knows how to fix up the properties and you could do the deal, and you have the time and you’re hungry and aggressive. Your brother-in-law is a doctor or a lawyer, an accountant, someone who doesn’t have the time but has money. So, picture a Thanksgiving dinner. You’re telling your brother-in-law over dinner, “I just found this great property. It’s a deal. You’re paying a hundred. I’m making up numbers. You’re paying a hundred. It needs forty thousand dollar’s worth of work. You could buy it. It’s an off-market deal. No one else knows about it, and you could sell it for a hundred and 250 or whatever. You make a nice profit.” The brother-in-law is thinking, “What am I going to do? I have all this cash. I—I hate the stock market. I don’t know what to do with the cash.” And the brother-in-law says to you, “I’ll tell you what, Bill. Let’s make a partnership. Okay? You do the work. You do all the work. I’ll put up all the money, and we split the profit.” Okay? That happens all the time. So, you have to decide as an investor, do you want to go down that route or do you want to go to a lender? Something to consider. You tell me what you think, but something to consider. And you may sometimes want to do a little bit of each. Another thing I see people, and this is where the last two things are, or—or yeah, the last two things are. This thing is really for more of a sophisticated investor. I always say that more people die from indigestion than starvation, and I think that’s a fact in today’s world. Okay, no very few people in the world, thank God, even third world countries are starving and dying because of starvation, but a lot of them are eating too much and starving from indigestion, and I see it in the business world, a lot of businesses and a lot of investment ventures, including fixing and flipping, not only including, especially fixing and flipping, die because they bite off more than they can chew. They do too much. They do one successful project, and let’s say they have the, they have the formula down, they make money, and it’s a lot of money. They do another one. They do another one, and they’re doing one at a time. Then they do two at a time. It somehow works, and they do that for a while. And then they do three, four, five, six, seven. Inevitably, when you bite off too much and you bite off more than you can chew, things go wrong. So, take it slow. And my last thing is sort of that don’t be in a rush to do deals. A lot of people say, “Oh, I want to do a deal. Let me go find the best deal I can get today and do it.” And that’s the wrong thinking. First of all, in order to do a deal, you need a lot of stuff aligned on your part. You need to be in the right financial position, the right mental position. You need to have the time, you need to have the focus, the economy needs to be correct. There’s a lot of things that have to go in your favor to do a deal, but a lot of people say, “I want to be in. I want to be a fixer and flipper. I want to be a real estate investor. I’m going to do a deal.” And that’s, my opinion is a mistake. I think you should be more of a sharpshooter than an elephant hunter or, I don’t know, maybe that’s something. Is that a bad anology?
Marcy: It goes back to the very big, very beginning what we said, learn what you want to do. You know, research it, decide it, look at all different variables, look at how this could go or that could go. It’s all from the very beginning.
Jack: Don’t be in a rush. Take your time. Don’t be afraid to walk on a deal. Make sure everything is aligned properly. And if you think, make sure everything is aligned properly, it’ll work out. But if you’re rushing and if you’re cutting the hairdresser’s—wise decisions, things can happen that can go wrong. Again, a lot can go right, and you could do fantastic. And I know it seems like this is a depressing, you know…
Marcy: No, no, we’re just going over different things that could happen, that’s all.
Jack: I want to encourage people to do this and to learn, and it is a skill, and it’s not something that someone just can do. Learn the skill and do it. Do we leave anything out?
Marcy: No, not on fix and flips, rehab loans. It’s really covered it.
Jack: Okay, I should have said at the beginning like the video.
Marcy: If you like, they made it to the end.
Jack: If they made it to the end, like the video. It’s a long video, like the video, like the YouTube channel, leave your comments. We’ll answer your comments, questions. Your answer, remember, when your bank says no, we say yes. Check us out at gelfinancial.com. Have a great day.
Marcy: Take care.”
Category: Education
Tag: fix-and-flip