How A Good Real Estate Deal Turns Into A Bad One

5 Dec, 2007 Real Estate Brian Armstrong

Loyal Readers,

A few weeks ago I told you about a real estate deal I did that gave a 113% return in one month. Well, I am quite human and make mistakes just like anyone, so today I’m going to tell you about a real estate deal I did that DIDN’T go quite so well, and the lessons I’ve learned from it.

This was another foreclosure that I worked on rehabbing. As more and more money was sunk into it, it no longer made sense as a rental, so I will have to sell this property now to probably break even. At least I live to fight another day.

Here are a few before and after pics:

Some mistakes…and lessons learned (which seem obvious, but somehow weren’t):

Put More Detail In The Contract
Perhaps the biggest mistake I made on this property had to do with the contractor who I hired to fix it. I correctly got a signed contract with him, but didn’t make it detailed enough. It was not specific and I let him convince me that a number of items would be included that were not specifically written. Bottom line, what someone says doesn’t mean anything, only whats written counts.
Withhold Final Payment Until You Are 100% Happy With The Work
I knew that I should always withhold the final payment until I was 100% satisfied with the rehab job. I knew this, yet I didn’t follow it. When I inspected the work, I was in a hurry, it was getting dark, and I wasn’t thorough. Upon closer inspection it wasn’t done. And of course, being already paid, the contractor had zero incentive to come back. Never pay a contractor until you are 100% happy.

I realized that I need to build my confidence in dealing with and negotiating with these contractors. For an great book on this subject, check out When I Say No I Feel Guilty.
Bring As Little Money To Closing As Possible
I brought too much money to closing. When I didn’t like the lenders numbers, I was afraid to back out (risking losing the earnest money and the deal entirely) so I convinced myself to go ahead with a deal I didn’t quite like.
Lock In Financing Before Entering The Deal
The lender rules changed mid deal. I thought I’d be able to do an 80% cash of refinance. I was told part way through construction that the rules had changed and I could only go up to 75%. Locking in the financing before starting he deal would have prevented this.

Of course the irony, looking back on this, is that I KNEW all of these things before I did this deal. At least I knew them intellectually, but somehow I got myself in a situation where I didn’t do what I knew was right.

This brings me to another interesting point. I was very upset at this particular contractor for a while, and considered even suing him, but I realized that I have no one to blame but myself.

Sure, he might have taken advantage of the situation, but I gave him the chance to do so. I realized that I have to take responsibility for it, and not put my problems on to someone else. In a way, I am actually grateful to him for teaching me this lesson. It was an invaluable lesson that was worth far more than it cost me.

Finally, it has occasionally been a struggle to stay motivated during a deal like this. I had to keep reminding myself that it is actually great this happened; I’m learning so much. When a deal works out perfectly, you learn nothing. When things go wrong is when you really start to grow as a person.

One of my favorite quotes is by the American industrialist Thomas Watson, who is famous for building IBM. One time a reporter asked him how other companies can match the incredible success of IBM. He replied:

It’s quite simple, really. Double your rate of failure. You’re thinking of failure as the enemy of success. But it isn’t at all.

You can be discouraged by failure or you can learn from it. So go ahead and make mistakes. Make all you can. Because, remember that’s where you’ll find success.

Going out and trying something new, and failing, is probably the best learning tool ever developed. I was talking with a gentleman who owns over 400 houses to get his advice on this deal, and he told me that of the 400 houses he has bought, he has only lost money on 13 of them. But he remembered each one of those 13, and he said he learned more on those than the others combined. They were earlier in his career, and really it was the 13 that allowed him to have the 400.

Ultimately, I’m glad I went out and did it. Even if I make zero dollars, the experience will make the next deal that much better. In fact, the next deal is already looking quite good….like it’s going to have very little money down (nearly zero) and an outrageous rate of return. I’ll keep you posted!

This post is part of a series on Bad Real Estate Deal

6 Comments so far »

Candy said,

Wrote on December 5, 2007 @ 2:52 am

I’ve been following your blog for a while, just wanted to say that this was a really great post. I handle bookkeeping for real estate agents and investors. I’ll let in on the secret - every single mistake is one that I’ve seen even the most seasoned investor make. And nearly every single one learned from that mistake. Good for you! Can you teach the rest of ‘em to do that? *laugh*

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JJ said,

Wrote on December 5, 2007 @ 1:08 pm

Good post. I like what I heard somewhere -assumption is the lowest level of communication. Still, I’ve found it is difficult to spell out everything in a contract because it is so difficult to recognize all of our assumptions. To further complicate matters, most of the contractors I’ve used aren’t good at communicating. If they ARE good at communicating, they may also be good at deliberately missleading.

The main thing to remember is to keep following our rules and do our best to cover the bases.

[Reply]
Brian Armstrong said,

Wrote on December 6, 2007 @ 2:19 am

Thanks for your support folks!

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wil said,

Wrote on December 8, 2007 @ 5:22 pm

I saw your 5 mistakes on business from the Gratisites web page. You are off base on 2. You better spend some money getting a decent logo and business cards as they DO reflect heavily on the perception of your business. You show up with cards printed at home and designed with MS Paint you have just shot yourself ion the foot. Even more importantly, if you are selling a product for retail, spend whatever it takes to make your shlef presence strong and legitize yourself. Buyers know the package sells whats inside. You should read a bit more and/or open a business that becomes successful, then you’ll see why edits are required to 2.

Point 4 on a business plan. Wrong and right. You may think its useless but at the beginning it is critical to do an actual business plan from a lender template as each step in creating a plan opens your eyes to what it takes to start and run a business as there is so much more to it then anyones knows if they are new. A business plan presents hurdles before they become surprises after you have spent money. If you are serious, the business plan will challenge you, if you are not, it will thankfully weed you out before you spend money.

You are right that once you start your business, you(I) rarely ever refer back to it as its all hands on deck once you start making sales and each day is a business plan all in its own.

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Scott McDonald said,

Wrote on March 3, 2008 @ 10:26 pm

Brian,

Thanks for all of the info. I attended a Lifestyles Unlimited workshop this past Saturday and have been debating whether or not to join. What advice can you offer regarding this particular group.

Thanks,

Scott

[Reply]
Brian Armstrong said,

Wrote on March 5, 2008 @ 6:36 pm

I’ve been happy with them. It got me around a lot of really good people and got me to finally start buying real estate.

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