First Flip Failures - 9 Lessons That Created the Nightmare on Newell


Have you ever noticed that in the header of my website it says that I'll share my painful lessons with you? (Probably not, that's fine though!) Well, this is absolutely one of those times.


For the sake of transparency and not beating around the bush, I'll start by saying that this flip has been an absolutely horrible $#!+show. I'm roughly 3 months into the flip, hoping to be done by the end of November, and I'm desperately hoping to not lose money by the time we get out from under this thing.


So where did I go wrong you ask? Let me tell you!

  1. CONTRACTORS - I failed to properly set clear expectations and standards with my contractors

  2. DUE DILIGENCE - I failed to do the right level of due diligence in a number of ways

There are numerous things that went wrong in both of these areas, so I'll break down some of the more specific lessons learned within the big mistakes.


CONTRACTORS


What's the one thing you hear over and over when people talk about working with contractors?


LESSON 1: HAVE A CLEARLY DEFINED SCOPE OF WORK!!!!!


Seriously. I'm not kidding. When you feel like you're being annoying for continually asking for more detail, keep asking. What does "remodel kitchen" mean? I can assure you that when the project isn't done to your expectations at the end, you're going to wish you specified how you wanted the cabinets laid out, if you wanted that custom island bar, and where you expected to see the appliances.


Some contractors may be reluctant to get on board with it. Is that a red flag? Not necessarily, but it doesn't change the fact that you need to get there before you start the project. It helps keep everyone accountable, including giving them very clear guidelines on what you expect so that at the end when you come back asking for something they can point to the scope and say it wasn't in there.


LESSON 2: DON'T START THE WORK UNTIL THE CONTRACT IS AGREED UPON AND SIGNED


This is technically something that we'd all call a no-brainer, but guess who didn't listen? This guy. I was excited and in a rush to get the job started. I knew the contractor doing the work and trusted that we were on the same page after our very detailed discussions, so we were both itching to get started. Bad idea!


LESSON 3: UTILIZE CHANGE ORDERS FOR ANY DEVIATIONS FROM THE ORIGINAL CONTRACT


Again, this keeps everyone accountable. As things popped up we just handled them, but never amended the contract or did anything to reconcile what all was going on. Any deviation from the original contract should have a change order very clearly detailing the work that is getting added along with the price. No, I didn't do this...that's why I'm telling you!


LESSON 4: HAVE A CLEAR AND DETAILED PLAN FOR MATERIALS


Materials can be tricky. As an investor, I know what big items I'm looking for but don't know the little construction materials required for a particular job to be done. He had materials included in his estimate, but we never created a material list to specify what was going to be used and how much was to be spent on each item. Additionally, we never specified who was buying what and didn't properly set up a draw schedule. So I bought some things that were different than what he expected and vice versa.


As a result, WE WENT $18,000 OVER ON MATERIALS!!!!!! Seriously. That's not a joke. It was an absolute disaster.


LESSON 5: HAVE A CLEARLY ARTICULATED AND AGREED UPON PAYMENT SCHEDULE

LESSON 5a: NEVER EVER PAY LABOR AT AN HOURLY RATE


This was another ENORMOUS mistake on my part. Because we didn't have a clear and detailed scope of work and material list, we certainly didn't have a draw schedule. As a result, I was paying for materials as they were required and paying for payroll weekly. He wasn't keeping track of the budget whatsoever, was mismanaging the labor (i.e. having skilled laborers do unskilled labor for 3x the hourly rate), and essentially ran out of labor funds halfway through the project.


From now on, I'll do what normal people do and pay a deposit plus draws in arrears. This gives everyone someone to work towards, and prevents the pay-as-you-go that serves as a blank check for cost overruns.


DUE DILIGENCE


You may be surprised to hear...I made even more mistakes!!! Lucky for you, more to learn from.


LESSON 6: PEST INSPECTIONS ARE IMPORTANT!!

You know what really sucks? Termites. You know what's even worse? Having to rip up 500 square feet of subfloor and destroy 4 walls in order to find the termites.


I had a structural inspection, but I didn't have a pest inspection. And while it's questionable whether the structural inspector should've caught it, I'm going to give him the benefit of the doubt because the space where we had termites was in an unpermitted addition that he couldn't hardly access.


Either way, I should've caught it because the problem was MASSIVE! A week delay + $7,500 in overages = a bad day/week/month.


LESSON 7: ELECTRICAL INSPECTIONS ARE ALSO IMPORTANT!!


As we were finally wrapping up the termite problem, the next realization was that the electrical system was a rats nest and the entire electrical box needed to be moved. Oh, and the house needed to be rewired because the previous owner did it himself and everything was wrong. There's another $8,500 lesson for you!


To add to the fun, we ran into nightmare after nightmare with the county inspector. The work only took about 2 days, but the inspections took 2 months (!!!!!!!) due to ridiculous reinspections and noshows.


LESSON 8: SEPTIC INSPECTIONS ARE IMPORTANT TOO!!

You may be noticing a theme...the unpermitted addition was done by the previous owner, the disastrous electrical system was done by the owner, and guess what else was? The septic system!!!


I can't even tell you what this cost yet because it's still in progress. The county Environmental Health department is shorthanded and were 8 weeks out on inspections, not to mention any work that needs to be done. There's a very real possibility that I have to replace the septic system too. Cool!


LESSON 9: CHECK YOUR LICENSES!!!


This one is embarrassing. And also costly. And infuriating. I trusted but didn't verify, and it bit me in the ass. My "general contractor" wasn't actually a licensed GC, which meant that as soon as the project budget blew up and was upwards of $50,000, he couldn't pull the proper permit to get the master suite added legally.


If he had pulled the permit from the start this would've been no problem, but alas he did not. So now 8 weeks into the project we had to bring in a licensed GC to do the work, which cost another $7,500.


This could have been mitigated in one of two ways: either make sure I had someone licensed from the very start that could handle the permits no matter the budget, or make damn sure they pull the permits up front before the budget explodes.

If we're being honest, this has been completely disastrous. At the onset of the project I was looking at a potential profit of $35,000. Now that profit is wiped out and I am hoping and praying that I can break even.


BUT!


Mistakes, while painful in the moment (and maybe for a few lingering moments as well), are only truly bad if you fail to learn from them. I can assure you that I have not made that mistake.


In the time that it's taken us to get through the inspections on this project, I've closed on my second flip (#belfastflip), completed the rehab, and am under contract to sell. The lessons I learned from these mistakes have already been implemented on that project and made it far more successful than it would have been otherwise.


I'm sure there may be one or two more before all is said and done, but hopefully these 9 lessons are the big ones!

  • LESSON 1: HAVE A CLEARLY DEFINED SCOPE OF WORK!!!!!

  • LESSON 2: DON'T START THE WORK UNTIL THE CONTRACT IS AGREED UPON AND SIGNED

  • LESSON 3: UTILIZE CHANGE ORDERS FOR ANY DEVIATIONS FROM THE ORIGINAL CONTRACT

  • LESSON 4: HAVE A CLEAR AND DETAILED PLAN FOR MATERIALS

  • LESSON 5: HAVE A CLEARLY ARTICULATED AND AGREED UPON PAYMENT SCHEDULE

  • LESSON 5a: NEVER EVER PAY LABOR AT AN HOURLY RATE

  • LESSON 6: PEST INSPECTIONS ARE IMPORTANT!!

  • LESSON 7: ELECTRICAL INSPECTIONS ARE ALSO IMPORTANT!!

  • LESSON 8: SEPTIC INSPECTIONS ARE IMPORTANT TOO!!

  • LESSON 9: CHECK YOUR LICENSES!!!

Which ones are the ones that you learned painfully? Let me know your experience, and PLEASE let me know if hearing these mistakes helps you in any way!!!!

© 2019 by Invest DGP. Proudly created with Wix.com

  • Facebook Black Round
  • Instagram - Black Circle

(612)708-5360   |   patrick@investdgp.com   |   Charlotte, North Carolina, United States