Hey, thanks for being here. Yesterday's numbers fell off to around 270 of you stopping by. But if it were just two people, and not the 350+ we have on some days, we want to let you know that we appreciate every single one of you. Thanks again for taking the time for us.
We also want you to know that we won't be around for the next couple of weeks. We have some things that we need to take care of for the day gig -working for the man. We will try to post some pics and some updates, as well as finish our series of questions from a coworker, but no promises. If not or if we cannot due to areas of little internet, we will definitely have a rash of content for your consideration and consumption once we get back from the gig work.
Our Moreland project is finishing up. We are expecting the listing early next week. Our contractor has been unbelievable in pouring on the coals. The same can be said for our Realtor. Once again, we can not overstate how important the team is in this business. Forget about a solo endeavor. Unless one is a contractor, a lawyer and a realtor, as well as a marketer, it is a waste of time and money to try to do it all. Let go and let others -competent others. It was one of the best decisions that we ever made.
What if you can't sell a renovated house for enough money, and need to take a loss? This was the third question from one of our coworkers, and it is one of those things that makes the lower extremities pucker up in an involuntary cringe that is worthy of note. The dreaded loss. This is the part where we pause for a moment and sit back and reflect on the answer we are about to give because this isn't a simple "do this" or "do that." This is more about rules and systems than anything else. Let us explain.
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So, recall that we had a list of questions from a coworker. Last time we covered the first question: Why do this? And we covered part of the second question: Why not borrow money instead of working from a cash-only basis? We believe that this is such an important topic that we decided to work it into the first two answer posts.
We have a friend, an acquaintance that we like and like to be around. We'll call this person, Mr. X. Mr. X had a booming business on the coast. He had a business that was growing by leaps and bounds, tons of rental properties, and very nice toys. The only problem he really had was that he had borrowed a lot of money on his rental properties. His reasoning was that the coastal properties would always be in demand. Good times or bad, people would want to rent a place at the beach. He was partly right.
He was only stretched thin in a few places during the housing boom that preceded the recession. After all, wasn't it true that you had to spend money to make money, and wouldn't it be better if it was someone else's money? But as the clouds and thunderstorms grew just out of sight off his personal empire's shores, Mr. X started to see his main business wain. The thin cash flow that he had on his rentals allowed him to keep the doors of the business open, but little more. Then the storm grew into a tropical depression and a couple of his rentals started to suffer from lower occupancy rates. When people get scared, they tend to batten down the financial hatches.
Suddenly Mr. X was saying goodbye to some of his toys. He had to save his empire, after all, so he could always pick up those same toys later on -after the clouds passed. Goodbye, Cadillac Escalade, Goodbye, beautiful boat. He sold them at a price that was decent, but he ended up with a new problem; what should he do with the cash? Should he put it into his business? Keep the doors open and hope for the best? Should he pay down some of his debt? Should he sock it away under the mattress and hope for the best? Here's the deal: Hope is not a strategy. Mr. X was suddenly watching the sky very closely.
The tropical depression turned into a tropical storm and was on the cusp of becoming a full-blown hurricane. The water was rising and the waves were shooting over the breakers. He jettisoned one rental that had always been borderline. On paper, Mr. X was still profitable. But then the hurricane actually developed and assumed an identity. The public called it the "Housing Bubble," and suddenly many, many people, including Mr. X were sitting on property that was not only worth less than they had paid, but truly out of the bounds of affordability. This was a class five hurricane, and she was shaping up to be a real bitch.
Believe it or not, even with the upside down property values, Mr. X was still profitable on paper. However, the weak cash flow on his properties was now anorexic and soaking wet. The 220 pound bruisers had turned into a 90-pound weaklings under the pummeling they received from this hurricane. His business was in even worse shape. Located directly on the waterline, it suffered from an eroded foundation of confidence in the market. People were walking away from upside down properties. Unfortunately, in addition to rentals, Mr. X's main business was in real estate. Teetering on the edge of insolvency, he once again hoped that he would be able to weather the crisis at hand, and emerge solvent on the other side. He may have been partly on the right track. The worst of it seemed to be behind him.
Mr. X was right, there was a little, tiny, minuscule amount of sunshine peeking around the clouds on the far horizon. But where he was very wrong was in the assumption that profitability, no matter how meager, equates into solvency. In the end, the cumulative effect was a loss of his business, of his rentals, and his toys, and all of this because of cash flow issues. He was profitable until the end, but he could no longer make payments and keep up with payroll. On paper he was scraping by. But in reality he was losing ground quickly. And all it took was not a hurricane, but a few small inconsequential gusts of wind in the form of late rent on the heels of the housing bubble hurricane. More than a handful of units not paying on time, and he started to sink.
No debt for us, please. It is hard enough to hold it altogether without the burden of debt and the certainty of economic cycles coming to bear on our small holdings. We would rather stay on the high ground. Mr. X is a real person. And if you ask him what happened he will tell you first and foremost that a housing bubble sunk him. But in quieter moments of honesty, he will tell you that his over-leveraged position did him in. And once that debt-cash-payment-repeat-cycle begins, it is a mother to stop. Why, it's almost like trying to stop a hurricane.
Greetings, denizens of the real estate flipping and renovation world. Good news over the weekend: Although it is never over until the check has been cashed and is in the bank, State Street went under contract this weekend.
Two quick object lessons here for your consideration:
First, we screwed around too much in doing what we should have done all along... fixing the floors. And, if collective wisdom says that sloping floors are charming and that people expect them in older homes, and your little voice or voices say, "Um... well... how could...," that is the voice of reason trying to break through collective reasoning and your willingness to go along with such tripe because it is easier and cheaper to do so. Trust your gut. Or guts. Big or small, they probably know what is right even if everyone else is saying something different. Our messing around with this stuff ended up costings us thousands of dollars in carrying costs including, but not limited to, insurance, taxes, theft and maintenance.
Second, the end game objective here is to put out a great product in the shortest amount of time. If your contractor, realtor, lawn-care person, you name it, is not up to snuff, deep-six them and move on. Your endeavors are not for charity or for social speculation and folly. You are jumping into this because you want to make money. Never forget that Money and Time are married. One without the other is like visiting divorced parents. It is not an ideal situation. Your company is not here to pay for the education of others. Your company is here to pay your way through the world. It sucks being merciless, and we are not advocating 100% no-mercy. The n0-mercy stance will result in you or your company overpaying for everything because no one will want to work with you. However, we are advocating that you outline goals and objectives, nail down the time frame with all involved, and explain the consequences of not meeting those time and objective goals to all involved. That's fair.
A little side note here for one and all. We recently watched the first season and first episode of Flip or Flop on TV. One observation is that the young couple in the show was four houses into their flipping careers before they landed their show. Good for them and being able to pitch and land the show. But four houses? We bet that they know a whole lot more about house flipping now then they did then. Agreed? Same here. After renovating and flipping quite a few homes, we can say with out reservation that the schedule should rule the day, and that quality should be a close second.
Here's a couple of examples for your consideration:
If the contractor is way behind on the project, you need to stop and ask yourself three questions:
First, are there extenuating circumstances? Did the roof cave in? Was asbestos discovered? Something like that will set any schedule back.
Second, if no life changing events took place with the project, why is the contractor behind schedule? Did they lose a love one? Have to go to court? Are they incompetent? Do they know what they are doing? Did they lose a limb? Are they temporarily blind from some mysterious event involving a carpet cleaner and malfunctioning steam cleaner? Did their dog die? Unless they have a great reason for being behind, you may want to consider your acceptance of their excuses.
Third, if they can't hold the schedule now, will they be any better later on? If not, it may be time to fire them and get someone else.
If the house isn't selling, you need to stop and ask yourself two questions:
One, is there something wrong with the house, and if so what will you do about it? Are you going to fix it? Are you going to drop the price? Are you going to rent it?
Two, is there something wrong with the marketing or the way the realtor set it up? If so, how long is your contract?
In both cases, we suggest that you set up a schedule with the contractor, and limit the contract with the realtor. Don't sign long contracts. This way, you can reassess with them about what you want to do and how you are doing it. Make sure that there is a clause that gives you the right to fire anyone you work with if they aren't performing the way you think they should be, or if you are not hitting your end goals in a reasonable amount of time. Emphasis here on the word, reasonable. Extreme Home Makeover re-runs notwithstanding, it is pretty ridiculous to do a total renovation in a week or two.
Also, have a clear picture of average DOM (days on market) for your city and even the neighborhood that you are in. Your realtor is a professional and should be able to give you that information. If it is your first rodeo with that realtor, verify the information with another source. Either way, keep an eye on what is going on here until you build up a track record with anyone including the contractor, realtor, lawn person, graphic designer, service provider, etc. As you move from your first to your fourth, and from your fourth to your ___________ project, you will know who, how, when and where. But for now, limit your exposure to anyone by defining and communicating realistic expectations, and by giving yourself the escape clause you need to move out of those arenas that prove to be caustic to your wallet.
If your realtor, contractor, lawn person, service provider is professional at all, and you communicate clearly, they will respect your approach. However, and we cannot stress this point enough, you have to be able to communicate clearly. At the end of the day you will be accountable and responsible for turning a profit. No one else. Everyone else on the job will be taking care of themselves. You need to take care of you.
Finally, keep your worst case scenario in mind at the beginning. You should be able to answer that question that we will answer in another post:
What if you can't sell a house for enough money and need to take a loss?
In an earlier post, we talked about answering some questions that a coworker had asked us about our business. In this four part series, we will do our level best to answer these questions. Our hope with all of this is that our answers will move past mere information and into the realm of helping you accomplish whatever it is that you are after.
We recently had a discussion with a coworker that asked the following questions:
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