Life's Too Short for Thin Deals

The thin margin deal, prior to renovation.

The purpose of this blog is to share the lessons I’ve learned in the trenches—fixing and flipping houses, building houses and land-lording.

My hope is to provide an additional form of value to our hard money borrowers–small business owners that do these kinds of real estate deals.

A lesson I’ve learned, re-learned and learned again: Life's Too Short for Thin Deals.

Here’s how it happens.  You’re having trouble finding deals.  Your offers aren’t sticking.  You’re getting outbid.  Your regular crew is about to take on a couple of jobs with somebody else.  You’ve GOT to keep them busy right?

Wrong. Don’t do it.  I’m here to talk you down from the ledge.  If you raise your offers a few percentage points above your preferred margin, things might go okay. They might.   You might get a decent payday coming out the other side.  But it doesn’t take much to totally derail your deal.

Some bad subfloors, termites, a broken mainline.  Suddenly, the things that you know you have to fix because it’s the right thing to do–don’t quite pencil.  By the way, these are the very things that won’t get you a higher sale price or more monthly rent.  It’s an ethical and maybe legal dilemma because, if you repair a property the right way you’re doing the long-term smart, the right, the ethical, and in some cases the legally required thing to do.

Here’s an example.  I bought a house in mid-2015 for ~$312K. This was among the last of the REO properties coming out of the GFC.  It was auctioned.  Going into the online auction, my max bid was $301K. Why $301K? I figured if there was another bidder maybe their max bid was $300K and I could make $300K pencil no problem.

Mistake One: I wasn’t as disciplined as I needed to be on the buy.  As the auction wound down, I made the classic mistake of saying to myself, what’s a few thousand dollars more?  Ok, I made this mistake a few times.

Lesson One: If you lack the discipline to compete in auctions either don’t compete in them or get a second person involved in the auction.  They can act like your designated driver if you try to go back to the bidding punch bowl one more time.

The kitchen prior to renovation

Mistake Two: I had a go-to GC at the time but used this project to test out a new GC.  My big picture goal was to have a backup.

Lesson Two: If you want to test a new GC, do it on a smaller job.

The kitchen following renovation

Mistake Three: It hurts to even write this because I’m the guy that never falls for this.  I let him change order me to death.  Call it death by a thousand small change orders.

Here’s an example of the kind of change order he gave me. His demo bid was too low because the walls were lathed and had chicken wire in them as opposed to drywall.  I wanted to accommodate him because I knew that it legitimately would cost more money for him, but this is the kind of thing any GC should have been aware of when they walked the property and assembled his bid.

He was either incompetent or intentionally misleading me.

Lesson Three: This first change order was a harbinger of what was to come.  I should have seen it for what it was and fired him then and there. If that meant having the house sit vacant for a few weeks while I found a new GC, so be it.

The exterior following renovation

In the end I bought this house for $312K, my $75K budget grew to $105K.  We sold the house for $523K in Jan 2016.