I always enjoy the real estate investor stories where the person put the time into learning about a particular investing tool (such as flipping), established an awesome network of mentors to help/guide, then decided to take massive action thus knocking the flip out of the park. From that time on, they were hooked.
My most recently sold flip didn’t quite fit that narrative – but I sure did learn a hell of a lot. At a recent real estate investing summit, Scott Lewis of Spartan Investment Group (http://spartan-investors.com/about/) shared that if you are going to get into real estate investing, you’d better “be prepared to get punched in the face.” I was right in the middle of a hellacious flip where a punch to the face would have been preferred. This flip was kicking me in the face and then punching me in the mouth when it wasn’t kicking me.
The series of events that unfolded over a 7-month period became rather comical as the saga continued to drag on. From losing 10% of the land amount to a title dispute, to wood termites, contractors not finishing but getting paid, sales contracts falling through as well as a last minute mechanics lien. I had to laugh to keep from crying. Some of the mistakes are so obvious now that it is painful to reflect on. I may one day write a book on the ordeal (it will be in the comical-horror genre). For now, the most effective thing I can do is get some of the high-level lessons learned listed out for others to learn from and make DAMN SURE I never make the same mistakes again.
1. Review HUD-1 or settlement statement
Before going to your closing, be sure to get the good faith estimate or settlement statement and HUD-1 at least 24 hours in advance so you can review each line item. As a borrower, you are entitled to view the HUD-1 form 24 hours before the actual settlement. That 24-hour period is critical to allow you to ask questions and verify accuracy. If you are using a real estate agent and/or a title company to close on your purchase, they should help ensure you get this. However, not all agents or title companies are created equally so you need to make sure you stay on them both to get the documents you need for adequate review prior to closing.
Some things that stuck out on my HUD-1 were an excessive “assignment fee” from a wholesaler and a pre-paid payoff “bonus” where the hard money lender actually charged me up front and held my money (over $2,000) for when the time came that I paid off the loan. Assignment fees may be a necessary part of the transaction as well as “bonus” payoffs from hard money lenders. The point is, you should know what each line item is and why it is there BEFORE you ever walk in to sign.
The simple lesson here is – GET OUR HUD-1 TO REVIEW 24 HOURS PRIOR TO CLOSING.
2. Contractor Draws and Inspections
During critical points in the project, I was traveling overseas for my W2 income job. The timing was less than convenient for both me and the contractor – with me traveling and the holiday’s fast approaching on a project delayed time and time again. Ideally, I would have had a contractor who honored his word or an inspector on my team who ensured my interest was 100% protected prior to releasing funds. I failed to do this though and I paid the price. In hindsight, I would have been better off telling the contractor to not work on my job during my travels. That way, I could inspect his work myself prior to paying him.
Contractors are amazing creatures. I have met some amazingly talented and honest ones. I have also met some who will put duct tape in place of an A/C vent on the ceiling.
The simple lesson here is - YOU must either inspect the work yourself or YOU must have a trusted business partner/associate/employee who has nothing but your best interest in mind. Once the check is cut, all leverage is lost and no one (contractor or friend that was helping you out) seems to care quite as much as you about the shitty work done or the money you lost having to re-work and repair.
The responsibility to control that situation starts and stops with YOU – so MAKE SURE YOU COVER YOUR OWN ASS AND INSPECT WORK YOURSELF.
3. Conduct Inspections
I saved about $50 on a termite inspection that I could have had performed by my quarterly home servicer. That $50 savings prior to purchase cost me over $4000 at the end of the flip when it was discovered that dry-wood termites had been actively inhabiting the house for months. Ultimately, the new buyer of this property allowed me to treat the termites while we were under contract. That was lucky though – many buyers will run like hell when termites show up. And I don’t blame them.
Now, before we buy, I do a little bit more than just kick the siding around the exterior walls. A few simple termite signs to look for are found in this link: https://www.angieslist.com/articles/5-signs-you-might-have-termites.htm
The simple lesson here is - PAY FOR A DAMN TERMITE INSPECTION BEFORE PURCHASING.
4. Title Company issues
There were two title companies used during this flip transaction – one at purchase and one at sale.
The title company that I chose and used to sell my property did their job and discovered a 5,000 square foot plot of land in the back of my 47,000 square foot property that had been previously sold to another buyer (two years earlier).
The title company I did not choose but did use to purchase my property failed to make that same discovery when I was buying.
The result of the purchase transaction title company not doing their job adequately was a loss of 9.9% total land area that I thought I owned and represented as I was selling. In dollars – it was in the 10’s of thousands.
Simple minded folks, like myself, would think that title insurance is paid for at purchase by the buyer to prevent the buyer from being out of pocket if it is found later that the land they purchased is in fact, not land they own. Depending on the title company and the title insurance group involved, that is not always the case. Just like lenders and agents, there are good ones and shitty ones. The good title / title insurance companies stand behind their work and protect buyers from purchasing property that they do not own. The shitty ones do not. The result of using a shitty title company and title insurance group seems to end up with them forcing you to sue them to do the right thing. Don’t worry – Title Insurance and ways to protect yourself before, during and after your purchase is an upcoming topic.
To eliminate the possibility of falling victim to a shitty title company or shitty title insurance group, YOU can have a new survey conducted (or negotiate the fee during purchase if you have a good agent or are working with an aligned wholesaler). A survey (typically) costs less than $500.
The simple lesson here is – if you are purchasing a property where land equates to a fair amount of the overall value of the asset you plan to sell, then it is in your best interest to get a new survey done. This can help mitigate the risk of relying on a title company or title insurance group to do their job. To protect yourselves as home buyers you should insist on an Owner’s Policy with a Survey Endorsement based on a professionally prepared current land survey.
The lessons learned on this flip may end up costing tens of thousands of dollars in potential profit when you add it all up.
In summary, make sure you:
Do you have any key items you would add to this list of simple lessons you've learned on past deals - perhaps the hard way?
Please share in the comments below.
Justin Grimes has been an active real estate investor since 2007 participating at various levels in asset classes from single-family rehab and mortgage note creation to multi-family, self storage and mobile home parks.
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SALES LEAD GEN.