How and Why I Lost Money on a Recent Fix and Flip

I have fix and flipped over 100 houses and I have a lot of experience and knowledge about flipping. However, even with that experience I can still lose money on a flip. In fact I just lost money on a flip I sold a couple of weeks ago (if you don’t count the commission I made as an agent). It doesn’t feel good to lose money on a flip and I would rather not talk about it, but I know telling this story will help others.

There were a number of factors that caused me to lose money on this flip. I probably paid a little too much for the house, I didn’t figure all the repairs as accurately as I should and I had multiple issues come up that I didn’t anticipate.

How much money did I lose on this flip?

To be perfectly honest I did not lose money overall on this flip, because I am a real estate agent. I did lose money on paper when you don’t factor in the commissions I earned when I bought the house and sold the house. I was paid a three percent commission when I bought the house and I paid myself a two percent commission when I sold the house. After all the expenses and surprises I ended up losing $762 not counting the commissions.

I bought the house for $140,403 and made a $4,212 commission with the purchase. I sold the home for $192,000 and paid myself a $3,840 commission on the sale. I actually made $7,310 on the property overall if you count my agent duties, but on the flip activities I lost money. I do account for the commissions I earn when I buy a flip, but I was planning on making at least $25,000 on this property, not $7,300!

How did I buy this fix and flip?

I bought this home as a short sale. It was on the market for $140,000 and I made an immediate offer for full price and waited to hear back. I knew the home would be worth close to $200,000 and did not need too much work (or so I thought). After I made my offer I was informed the seller received multiple offers and I needed to send in my highest and best.

I raised my offer to $140,403 and waited to hear back again. I like to make my offers odd numbers in highest and best, because I want to beat out someone who has the same idea as me, but may offer a round number like $140,000.  I was informed that the seller had accepted my offer and I had to wait to see if the bank would accept my offer since in a short sale situation the bank has to approve all offers.

Three months later (June 2014) the bank accepted my offer and we closed on the house!

I used a brand new contractor on this flip

At the time I made the offer on this house, I did not have very many flips. From the time I went under contract and I bought the home I ended up buying two more flips and getting a couple more under contract. I also had a fall out with a contractor I had used for years two months before I bought this home. I had to look for new contractors and after interviewing quite a few I decided to try out a new contractor I had found on Angie’s List.

The home needed paint, carpet, electrical work, windows, some kitchen work, a new bath, lots of yard cleanup and some work done in the basement. The contractor bid a little over $18,000 for everything and I thought that was a fair price. He also said it would take him about a month to complete the work. It always takes contractors longer to do the work then they say it will!

How long did it actually take to complete the work on this flip?

The contractor I used ended up doing a good job and staying mostly on budget. We made a few changes that added to the costs, but it took almost three months to complete the work. The final repair bill ended up being just over $20,000 and we had the home on the market in November. It took me five months to get the home on the market because I did not have my contractor start for a couple of months after I bought the home. I was so busy with my other flips trying to get them ready to sell that it took me way too long to get work started. I had ten flips going at once for much of 2014 and I did not have the contractors to complete that many in a timely manner.

What unexpected costs came up during the inspection?

I listed the home for $204,900 and I did not get an offer the first three weeks. I lowered the price to $199,900 and received an offer a few weeks later for $185,000. We ended up negotiating to $192,000 as a sales price. I usually sell my flips much quicker and do not have to lower the price on them, but this house had a few negatives.

• The one car garage was converted to another bedroom and I think many people wanted some type of garage.
• The home had a strange floor plan with the converted garage and although it had more square feet than many comps selling for more, the home felt chopped up and small.

Everything fell apart during the inspection, at least on my end. The buyers asked for the roof to be inspected, the furnace and found out the home is on a septic! I should have had the roof and furnace checked, but I was used to my other contractors looking at those items for me. I assumed they were okay since the contractor did not mention them and he said he had roofing and HVAC experience. The roof and a new furnace ended up costing another $7,500.

The house having a septic was a total shock to me. When I bought the house it was listed as being on sewer and the previous four listings in MLS showed a sewer system as well. The buyer had it scoped and saw the sewer line drained right into a septic tank. We had a septic company take a look at it and it turns out the line did drain into a septic and then the septic was hooked up to the city sewer! We had to have the yard dug up and a line put in that averted the septic and connect to the city sewer. Luckily the city was very cool about the situation and worked with us to get things connected right. That sewer line ended up costing us about $4,000.

What were the total costs on this flip?

Even though I bought the home for $140,403 and sold the home for $192,000 I made very little on the flip. I only made the money I did, because I am a real estate agent and made money on the commissions.

Estimated Repairs            $18,000  Actual Repairs:            $31,500

Estimated Selling              $10,600  Actual Selling               $10,600

Estimated interest             $3,000    Actual Interest             $3,500

Estimated Carrying Costs $3,000   Actual Carrying Costs $4,300

Buying Costs                        $2,800   Buying Costs                  $2,800

Total estimated            $36,600 Total Costs                $52,700

My carrying costs and interest costs all increased because I held the property longer than I thought. I had to pay more taxes, more insurance and more utilities while I owned the property. Not only did I have more costs than I anticipated, but I sold the home for less than I thought I would. This is why it is so important to leave yourself enough profit margins on flips to cover the unexpected.

Conclusion

Things rarely go as planned when you flip houses and this property had many problems. I still managed to make some money on it, because I am a Realtor, but if I was not I would have lost money on it.

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