My First Flip, Part Deux

Hi Future Flippers …….we’re back with the continuing saga of “WTF was I thinking”. It’s time to get your favorite beverage of choice (that would be Whisky if you’re my friend Joey, he has a really groovy Whisky Blog, although I seem to recall him being a wine spritzer kind of guy in college, but I digress), jump into your Barco Lounger and read on about our continuing tale of woe (spoiler alert: it turns out ok, well sort of).

If you’ll recall, I had purchased my first flip house on a street who’s name I couldn’t pronounce. What were my first two mistakes? Any one? Just raise your hand! I’ll wait……………………..Horseshack? Ok, I’ll answer: 1. I bought a house without really understanding the numbers, and letting my impatience to buy skew my decisions and 2. I didn’t check with the town building department about setbacks and COs. I mentioned this in my first blog, but it’s worth mentioning a few more times (take a pencil out and write this down): You make (or lose) your money on the purchase. If you buy for too much, if you buy without knowing all the facts, it is impossible to make the loss back up. Flipping is a lucrative and high risk business. Here is how bad the risk can get……

As a result of the non-conforming issue (remember my house was only seven feet from the street and it doesn’t like being called non-conforming), I was prevented from doing the type of renovation that I had planned for when I purchased WH. To refresh your memory, we were planning to build a full second floor with 2 baths and 4 bedrooms including a master with an ensuite bath. Instead, we were limited to simply renovating the house as it was, meaning our After Repair Value (what we would sell it for) would be considerably less then we had expected when we purchased it. The reasons the non-conforming setbacks prevented us from doing what we wanted is a bit complicated. If you’re curious about why, that’s something best discussed in my soon to be available (cheap plug coming) ‘One On One Mentoring Service’.

Next Problem

As mentioned earlier, this house had no basement. It wasn’t built on a slab ala a Levittown House. It was built on piers. You may be asking yourself (here it comes…) Self, what’s a pier? And why use piers? I don’t know why. Probably for some sadistic reason to screw around with a future renovation! Here are some pictures of a pier system under construction that I glommed off the internet.

In the drawing above, the piers are open to air circulation which is a good thing as long as the floor joists and subfloor are properly insulated and there are vapor barriers. In WH, there was an apron that enclosed the piers and constrained air circulation, plus no insulation or barriers. Overtime, due to moisture evaporation from the ground, the subfloors were moldy and severely rotted. We uncovered this issue during demolition.

But that wasn’t the only problem from the invading moisture. As we pulled sheet rock off the walls, much of it saturated and moldy, we observed that the wall framing was also rotted. Add to that the water intrusion from the roof and bad chimney flashing, I had a real problem child on my hands. What to do, what to do……….?

The only way to move forward was to gut the house to the exterior wall studs. Sister (a way of repairing, not a sibling) the floor joists as needed. Install all new sub floors, walls doors, kitchen, baths, electric, plumbing….essentially build a new house between the exterior walls. Plus repair the damaged exterior walls and roof. Yikes!

Result of this mistake

I should’ve been more aware of the ramifications of pier construction and not purchased this house. But in my defense, I am not a structural engineer so how could I know? Because it looked bad. I should’ve questioned what was going on. In hind site, I knew this probably was an issue, but my contractor didn’t seem to be terribly concerned so I wasn’t. WRONG! Of course he wasn’t concerned, he isn’t paying the bills and probably knew this was going to result in a large change order. And was it! Construction costs went from $90,000 to $120,000. Oops.

From this point forward, things went fairly smoothly until it was time to turn the gas on. Here is why as an investor, you really need to understand your utility. For instance, did you know that if gas service is turned off for a year or more NatGrid considers the house feed pipe abandoned? I didn’t, but I do now! Whats that mean? It means that the utility will require the installation new gas service pipe from the street to the house, at our cost. And it ain’t cheap.

We had essentially completed our brand new house, with our brand new and quite expensive totally new interior. Unfortualty, NatGrid was a little backed up and the next available date to trench and install the gas pipe was in February. Being that our application was submitted in November, and it was getting cold, we had to winterize the house and set up electric heaters throughout. Don’t ask what the PSEG bills were, I could run my 5,000 sf house for it. So, any guesses on what this little oversight cost? $4,500. And it delayed selling the house, so I got to spend three additional months of hard money interest. I’ll explain what Hard Money lending is when I cover financing.

(a note about gas service: due to a war between our idiot Governor and NatGrid, if service has been disconnected for two years or, new construction requires a gas hook-up, no connection will be performed. I understand the parties are trying to come to an agreement, and it may have been resolved, but again, know what’s going on with your utility).

We finished the full house renovation in January of 2016, after a six month renovation (I could’ve built a house from scratch). The end product was a quality renovation that we were proud to bring to market. I’ll post pictures on the next blog as I am limited on WordPress.

Time to sell, there were a few phuque ups (get it?) there too.

Location, location, location. Where your house is located trumps its design, assets, or condition. You can fix a house up or change it’s layout, but moving it to a better location is bit more difficult. Or, you can do what I did and go for the double play and have a little house in a less then desirable location. People generally don’t like to own a house on a street with a double yellow line (check that box). People generally don’t like to own a house across from a big box store (check that box). People generally don’t like to own a house across from a school (check that box). The take away here is that as an investor who is going resell (or flip) a house, you want it to appeal to the widest buying population. It should appeal to almost everyone. A small house, with very little storage on a double yellow lined street across from a Party City store on one side and an elementery school on the other side, just isn’t going to fly off the shelf. It did finally sell in July 2016, to a very nice couple without kids. I owned WH for 12 months; way too long. Today my average hold is 5.5 months because not only do I know what to do, I also know what not to do.

So we close the saga of WH. I will refer back to it as we review flipping here on the island. From setting up a company (LLC or S?), getting funding, finding inventory, to choosing an agent and marketing, we will cover it all.

I learned a lot from this experience and looking back, I believe it was a much better education then I would’ve received spending $60,000 on a flipping school. The negatives made me a very cautious investor; while positives (yes there were some) gave me confidence to make the subsequent investments and keep on going.

I would very much appreciate some feed back good or bad (nah just good). If you have questions please don’t hesitate to send them in to Bruce@LIREELLC.com.

How can you lose!