Episode 8 | House Flipping Mistakes To Avoid

Welcome back to The New and Experienced Investor. I'm the new guy, Alex Barnett.

And my name is Joe Homs, and I have over 40 years of experience as a broker, mentor, and investor.

It's great because I can say combined we have over 40 years experience.

Yeah. Yeah, I like that.

It helps my resume. Today we're going to be talking about house flipping mistakes to avoid, especially during a recession. Are we in a recession?

Close. Yeah. If not, we're going to be here pretty soon if the Fed keeps raising interest rates the way they are. So, yeah, pretty close.

Can I get a bailout?

Oh, yeah. Yeah. Can we get a bailout? Well, it depends, you know, which political party you're with.

True. Yeah. And, um, if you missed our last week's guest, we might not be getting any bailouts.

True, true.

That's unfortunate. Yeah, gotta do it the old-fashioned way. Um, so yeah, I want to just kind of touch on some mistakes that, I mean, I've— we've definitely made. The last year we did, we did about 4 flips. That was our first year flipping. Thanks to you, we partnered up, kind of showed us the ropes.

And by we, you mean you and your wife?

That's right, yes.

OK.

Yeah. Lauren Barnett, because we just got married. So yep. And then she's going— she's taking the test coming up here. They're kind of backlogged. Yeah, they're backlogged.

Nice.

So she put in her application to take the test.

OK.

And just waiting to hear back on that.

Okay, sounds great. It'll be fun.

So yeah, let's go ahead and dive into it. Is it possible— let's start here. Is it possible to flip during a recession?

Yeah, absolutely. You can flip in any market. You know, flipping is a numbers game. So depending on what numbers you're looking at and what you end up or expect at the end of the day, honestly, you can flip in any, any market.

Good to know. Okay, let's start off with number 1, overestimating your flipping skills. This came— this mistake we made after the first one going into the second one. Because the first one, we flipped a property. It was a mobile home. Made somewhere around $100K profit. Thought I was a genius. Thought it was this— what is everyone talking about? Why is it so hard? There's no such thing as a flop in flip and flop.

Yeah.

Is what I thought.

Yeah.

And then we went into our second flip, which was right off the bat much harder. There were some things we didn't check— the plumbing, the old utilities with the water shut off, a bunch of stuff. So how do you avoid that?

So in my defense, when Alex brought me this deal, I told him right away I don't do mobile homes. The reason that we ended up doing this mobile home and we are still looking for more is because you actually own the land underneath the mobile home. So you're not buying into a mobile home park that has a park rent or anything like that. You're buying into a mobile home. Yes, there is an HOA, but you do own the land underneath. And the first mobile home we went into, we actually both learned a lot from that mobile home flip. I think the first thing I remember that we learned we were trying to get some financing for it. And there's an FHA Section 443, which says that the property has to be on permanent foundation before a bank will lend. What the lender didn't tell us, it has to be 1976 or above. And we were flipping a property in 1971. So we ended up spending about, I think it was like $30,000 $3,500, around there.

Mm-hmm.

$3,500 to do something that we did not need to do. Um, but obviously we didn't learn from that lesson because the second one we did the same thing. Um, the first one was purchased cash, so we figured, oh, okay, well, we did this for nothing, but, you know, we had to do it. And then the second one was purchased with financing. We did it, but it wasn't necessary at all because they used conventional financing instead of FHA financing. So after that, we learned that, you know, 1976 or below, you don't need to do the permanent foundation because this is— you can't use it, you know. So you learn a lot of things along the way. Alex and Lauren's job, not only bring the deal, but to bring the contractor. Which is another important thing when you're flipping properties is to bring the right contractor along.

Absolutely. Yep. And we— because it kind of went pretty smooth with that first contractor, when we got into a new area where we needed another contractor, I feel like I didn't vet that guy enough. And then that caused a whole host problems.

Yeah.

And that definitely goes into overestimating your flipping skills, thinking it's gonna go the same way every time.

Yeah. And I think, um, you know, like normal— I mean, we're all human, we all want to trust people. Um, you know, you may have ended up trusting this person way too much. Um, I, I mean, I'm kind of the opposite. I, I don't trust anybody. I'm kind of like, uh, Ronald Reagan, the The former president, trust but verify. And that's what you have to be with these contractors. You can trust them, but boy, you need to go by at least once a week. You need to check on what they're doing, make sure they're doing everything correctly. They're always going to be asking you for money. Uh, you know, you need to be there to make sure that they're doing what they're supposed to be doing.

Absolutely. Especially during a recession, I would say don't overestimate your skills. Find a mentor. Find somebody that's done it before that can see the patterns of possibly where the market's heading, so you make sure you make the right move when you purchase the property.

Correct. Yeah.

Gotcha.

Mm-hmm.

Good call. Mistake number two: not doing your research. I guess that could kind of come into that 433A.

Yeah. Yeah. But you know, again, I I'd never flipped a mobile home, and you found it through your wholesaling efforts and stuff. And so we both were. Kind of learning along the way.

Yeah.

And it's just like anything else. We're not afraid to go into the project, but we did actually sit down after the first project because it was so successful. I wanted to sit down and I wanted to go over all the numbers with you and Lauren, which we did. And everything was fine. Everything was hunky-dory. Why we didn't figure out the 443 part till the second mobile home, probably because we were, we were all excited. You know, we ended up making $100,000 on a mobile home flip, which wasn't the case with the other 2. We made, I think, $20,000 on the other 2 we flipped. So it wasn't $100,000. But that's, that's because the market was turning as well.

Yeah. And I guess that goes into doing your research. And I mean, was there a way to tell Back then, I can't even remember now if we knew the interest rates were going to be going up. You know, sometimes I guess sometimes you just get caught in that, that middle section.

Yeah. You know, this was a senior community we were investing in. And I would say a senior community is not that interest rate sensitive. Because like, you know, the first property, it was purchased in cash. We're talking about, I think we had it under contract for about $60,000. And then we ended up selling it for a little bit over $200,000. You know, we're talking about a low amount. And if it's a senior community, obviously older, more established, they have money in the bank. They're just looking for a place to, you know, purchase something that's not going to be, you know, $1 million, $2 million, because they don't need it. It's just, you know, maybe a husband and a wife. That's it. And they're, they're moving into an area that, you know, they, at the end of the day, they can pay cash. So I would say it was not as interest sensitive as, you know, purchasing a property that's in the $900,000 to $1 million range or anywhere in there that you need a loan. And when you get to those high numbers and you're paying 7% on interest, it's a lot of money every month. Absolutely. It's a lot of money.

What about doing your research regarding code enforcement or pulling permits? How do you walk that line of not letting them know maybe, but finding out if you need some sort of special exemption, or does it just depend on how much work you're going to be doing?

Yeah. I mean, a mobile home, you're not, you're not removing load-bearing walls like you would in a normal flip. Those, those kinds of things you need permits for. You know, mobile homes, I found it actually pretty easy to do. If you have the right contractor going in and, you know, really sprucing up the place, we actually didn't even remove any kitchen cabinets or all that stuff. We redid the countertops, we redid the showers, we glazed, reglazed the showers. So we weren't doing what I am normally used to as a full, you know, rehab where you pull everything out and start all over again. Uh, So permits, I wasn't really too concerned about permits and stuff. And then, you know, these, these structures are raised up.

Mm-hmm.

So it's easy to get to the plumbing underneath and the electrical. If any of that had any issues, which we had a couple of properties that did, and they just, you know, did the replumbing job. It's not like, you know, with a slab leak or, or you're going to have to, you know, drill into the walls to maybe move a wall plug or something. These, these places are very easy to rehab. Yeah, not hard at all.

Not hard at all. I think the only thing we needed to get approved was the paint by the HOA.

Oh yeah, okay, then that's normal because you do have an HOA. So yeah, knowing that when you're going in, anytime you're dealing with an HOA, you have to get everything approved on the outside, whether it's paint or landscaping, whatever it is has to be approved by the HOA. If not, you know, they, they will stop the work and You know, they can fine you and all that stuff. So we did know about that in the beginning, and I did tell you, and you guys went to the HOA office and, you know, told them that you were going to basically paint it the same color. And they said, yeah, go ahead. It was a little bit darker than it was before. I loved it.

Yeah.

One of the neighbors didn't like it, but I loved it.

Yeah.

You know, and so I, you know, It was fine and not a big deal. But yeah, do your due diligence and find out things like that.

Yeah, HOA will be all over you. Number 3, mistake number 3, not having a solid plan. I think, um, this, this kind of— we made this mistake when we went into, uh, from Mobiles into our first stick home out in Joshua Tree. I found that As we got further into it, we were changing some stuff around, and then all— and then working with that contractor who wasn't as reliable, it definitely caused a rift in the timeline. Um, so I would say, and Lauren and I have talked about this, the second we're going in and walking it, start getting your ideas and just have it all laid out to where it's— everybody knows what we're doing from day one.

Correct. Yeah, the more you change plans along the way, the more expensive it's going to be along the way. You know, it's like you're in a project and you go, okay, well, let's add an ADU on this place. You know, it's like, oh, well, hello, that's going to cost way more money. Was that in your plan? Was that in the original purchase price that you've decided you're going to purchase it, put an ADU, and at the end of the day, it's going to be worth a lot more? Well, that's great if it's in the, you know, the original plans and specifications to do that. But, you know, Deciding that halfway through, it's, it's not going to work at all.

Yeah. Even fixtures down to all that stuff, have that all picked out, ordered. Sometimes there, there's a delay in some of the materials that you think you, you want. And so, yeah, you want to make sure that those are all available and that your contractor's not waiting even one day for you to—

Right. No, there's, there's a plan to flip properties, you know, You try to work from the ceiling down and have everything ready to go for the next contractor that's coming in. You can have 2 contractors there if they're doing 2 different things. You know, like a person that's working on the tile in the bathrooms, they can be there by themselves alone doing that stuff while another contractor is doing something else. You've got the cabinet maker and installation crew coming in. Right after you've pretty much got everything buttoned up, tightened up, ready to go, put them in. Your, your painter is probably going to be the last person that comes in and, uh, and then paints around everything that's, you know, you've just put in brand new. So there is a step-by-step process that needs to be adhered to.

Yep. And I think once you get it down Then you can start duplicating it and really making it efficient.

Yeah. Yeah.

Love it. The last mistake to avoid flipping during a recession, not being realistic with their expectations. And I think this is especially important during a recession because you don't want to think, you know, you're going to be getting 2022 prices after you flip it, you want to make sure you're, you're pulling comps. I mean, how are you comping these days?

Most of the comps that I'm using are back 2021 comps. So, you know, a couple of years back, where it was a more normal market. It really, really got crazy in 2022. It just absolutely got crazy. So I try not to use any of those comps whatsoever. I'm going back. And even then, I'm kind of hedging my bets and properties that I'm buying are, you know, maybe I was buying at $0.70 on the dollar. I'm at $0.60 on the dollar now. So they've got to really, really be some fantastic deals. I'm not doing, you know, 80% on the dollar, 90% we were doing sometimes because we saw the market. You purchased something in January 2022. You were done by March 2022, back on the market and it's selling for, you know, $100,000, $150,000 more than you even thought because it was that crazy of a market. So you could pay for something a little bit more, a lot more than, than I would suggest that you do now.

That's, that's words of wisdom right there, folks. Just to reiterate, so we got, we got 4 mistakes to avoid. During a recession, we have overestimating your flipping skills, not doing your research, not having a solid plan, and then not being realistic with your expectations. But all of these can be avoided.

They all can be avoided if somebody listens to what I have to say.

Yeah, that's all it takes. Listen to Joe. Geez, he's trying to tell you, just take his words of wisdom to heart. I definitely had the problem with the expectations, for sure, just because at some point, it was always like a running joke because Ryan had like 22 flips. And I was like, yeah, I want to do 22 flips. I think we had 3 at one point. And it was tough. It was just staying on top of everything and all the moving parts.

Yeah, plus the distance was a factor as well. Yeah.

Yeah. So just listen to Joe. He knows what he's talking about. What if people want to get into flipping during the recession? What, what do they—

can they—

what's the best way? Get a mentor? Reach out to you?

You can reach out to me. Anybody can reach out to me anytime. I'm, you know, I'm available. You know, I got my YouTube channel and stuff, and there's a lot of good information on there. If you want to go there and subscribe, I'd really appreciate it. I would say start from the beginning and figure out what it is that you want to do. Putting your network together, you know, that involves real estate agents, title, escrow, you know, wholesalers like you, putting, putting all the pieces together before you actually pull the trigger and go out and buy something. And then making sure that, you know, you kind of vet your project with somebody that knows what they're doing.

Mm-hmm.

Kind of give you that second opinion so that you're able to sleep at night, let's say. You know, a lot of people go into this and they immediately get stressed out, especially if they had hard money on the property.

Yeah.

So they're paying, you know, 9%, 10%, 11% interest on a property they're flipping. And they're just, you know, lying in bed thinking, how much money is this costing me sitting here doing nothing? You know, so You have to figure out whether you're even that type of person that can flip a property. Because if you're like stressed out 24/7 while you're fixing a property, you're flipping it, this might not be a good business for you. You know, you need to, you need to be able to handle issues and work through those issues, you know, without having to lose sleep at night. You know, because honestly, your health is, is more important than anything else. And, you know, if you're getting stressed out and you have a heart attack over this, that's not good for anybody. So yeah, start from the beginning, put all your systems in place, and then once you have that, then, um, you know, pull the trigger.

I blame HGTV. They made it look so easy.

Yeah, they always do. You know, I hope you didn't think that was real, what was happening, because I can tell you it's not real.

Yeah.

You know?

Yeah, absolutely. And, um, you know, just with one swipe you can go from hoarder house to completely finished. It doesn't show you the 9 months that it possibly took.

Yeah, yeah. When it should have taken 3.

Right, exactly.

Yeah, yeah.

God, that's annoying.

Yeah.

So I'm thinking this next one we get, whatever it is, we're going to have, you know, all these mistakes kind of taken care of. And obviously other things may pop up, but at some point it's just—

Well, we do have another one. We have that subject-to deal. Yeah. That you end up getting. And, you know, we put under contract and now we're in the process of evicting, you know, the folks out of there. And I'm walking you— well, I don't know if walking is the right word. I'm pushing you through the deal and, you know, making sure that you're contacting the tenants in there and making sure that they know that we're serious about getting them out.

Yep.

And, you know, they've been playing back and forth with you on text for a while. And then finally, you know, I got a text from you. I think it was last Saturday. that they're willing to start negotiating. And that's because we served them with, you know, an eviction notice. And I told you that was going to happen. So that's another learning process that you have. And, and then we'll go through that and we'll, you know, we'll end up at the other side. But I can tell you that you'll learn a lot along the way.

Oh, yeah. You know, I've already learned a lot. The one thing that's really helping me, at least through that process, is The owner, the person that actually owned it, she still calls me to this day and says thank you, you know, for helping me out. And she'll check in and say, hey, how's it going with them? She's like, I don't really care what happens to them. I told them to get out. Yeah, yeah, because they have an RV so they can go live in the RV by the lake. Yeah, so she's like, she's got a place to go. She has options.

There's RV, RV, Corvette. Yeah. What else was there? What other toy was there?

There was a brand new Harley. There was, I think, a Mustang or something. And yeah, a bunch of stuff.

Not unusual. I mean, people spend lots of money on toys and not really making their mortgage payment, which is what the issue was.

Yeah, but that's definitely helping me through the process. Oh yeah, well, we did help. her out of, you know, and she's starting a whole, a whole new thing with her life, and it's, it's great to see. But that'll be kind of a cool one because there's the, the house is in decent shape, so I don't think we're gonna have to do too much to it.

Well, you know, don't count your chickens until the eggs hatch. So it's in good shape now. You did see it, you did take some pictures, uh, which is good in case we have to document that, uh, you know They didn't leave it in such a good shape. Oh, gosh. I hope that's not going to happen. And I hope they move out in a timely manner, 30 days or less. But we'll see what happens.

We'll keep you guys posted along the way. If you want to see or hear about the team, like we talked about the flipping team, that was, I think, 2 episodes ago called Building a Team for Flipping Real Estate. Go back and check that out. Um, please leave a comment. We're now live on wherever podcasts are available, so leave a comment, share with your friends. We're building this from the ground up to just reach more new and experienced investors. And if you guys have any topics that you want us to cover, please write to us or, you know, comment in any of the platforms, YouTube, what have you. And like we said, Go to Joe's YouTube. We've got hundreds and hundreds of videos there where he talks about pretty much everything real estate related.

Yes.

Anything else you want to add?

No.

Okay.

No, I'm good. Yeah. Okay.

Gotcha. Yeah. We also, if you're in the local Orange County area, Joe has a meetup that he's been doing for years. We're going to be getting into a new location next month.

We are. And now we're taking it on the road. The meetup is the last Monday of every month, and it's been at Round Table Pizza in Lake Forest for the last 7 years. And I was asking Alex if he thought it was a good idea if we started going to different locations. And so I think that's what I'm gonna do.

Nice.

Is go to different locations. So next month's meetup is in Irvine. You can go on meetup.com and find it there. And then I have another location that I've picked out I haven't told you about for the meeting after next month's.

Nice.

So I think we're just gonna travel around Orange County and have it at different spots and, you know, maybe get some different people coming to our meetup and then grow it. I've got 3,000 people that are members of that meetup group, which is awesome. And Anyways, it is this coming Monday. I don't, I don't know if this podcast will be out before then or not.

Yeah.

Yeah, it'll probably be after. But if you want to look it up, it's on Meetup and it's last Monday of every month, which we're going to keep the time and the monthly schedule the same, but the location is going to change every once in a while.

Excellent. And you can look it up by typing in Orange County Investor Meetup.

Yeah. Nice.

And then you'll see Joe there.

Yep.

Follow us on all socials. Reach out. Let's keep in touch and we'll see you guys next week.

Take care. If you want some more advice on real estate investing, reach out to us one-on-one.