Ashley:
This is Real Estate Rookie episode 298. You guys a $100,000?
Tony:
A hundred thousand… Oh, this is like a paper loss a hundred K? No, this is like Tony wiring a $100,000 dollars from a business bank account into our lender’s account to be able to cover this, it definitely hurts.
Ashley:
My name is Ashley Kehr and I am here with my co-host Tony Robinson.
Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’re switching it up on the Real Estate Rookie Podcast. Ashley is my therapist for today, and I’m laying down on the therapist’s couch and I’m opening up my heart and my soul and my vulnerabilities around a recent deal that went terribly, terribly wrong.
Ashley:
And he says he’s the one laying down on the couch, but it’s actually me cozy with a comfy pillow, my blanket and a chai tea for story time with Tony today. So we are going to all learn some important lessons today. First of all, why you should always get things in writing and what earnest money deposit can actually protect you from or provide some kind of security, I guess. And then talking about pre-approval. So have you gone and gotten a pre-approval for a loan? Have you sold a property where somebody came and brought their pre-approval? What does a pre-approval actually guarantee? Tony shares his experience with that. And then also the timeline of owning real estate from acquisition to disposition of the property and how important that is in today’s market.
So you guys, I’m sure you’ve seen the headlines, you’ve seen everything in the news you’ve seen on social media, everybody talking about what has happened in the market over the past year, the past six months, and what’s going to happen in the future. We’re talking about inflation, interest rates, all those things. Tony shares a story about how he was impacted by some of these variables that are out of his control. Tony, anything you want to share before you break down in our completely vulnerable to our rookie audience today.
Tony:
I just want to tell the rookies, don’t judge me for all the tears you’re about to hear as we’re going through this. I tried my best to keep my composure, but I was just overwhelmed by so much emotion I couldn’t handle myself, but also cool. I loved that we actually learned a lot as you were riding those things off. I was like, “Man, I guess we did learn all that kind of going through today’s story.” But I guess just, I do want to give a shout-out to someone that left to say five star review on Apple Podcast. And we’ve been getting some pretty funny reviews lately. This person’s review is normal, but their username is Hilarious with three exclamation marks L-O-L capitalized with two exclamation mark so…
Ashley:
So they must have been talking about me. They made their username at to talk about me as well.
Tony:
Maybe they made their username and talk about you.
Ashley:
Oh, I’m hilarious.
Tony:
Hilarious LOL says, “These two are great. The show is great for beginners. The hosts and guests provide great insight and actionable advice that really helps get the ball rolling in your investing career.” So Hilarious LOL, we appreciate you. And for all of our rookies that are listening, please take a few minutes, leave us a honest reading review on Apple Podcasts or Spotify, wherever it is you’re listening. The more views we get, the more folks we can reach and the more folks we can reach, the more folks we can impact and help, which is what we love doing here at the Rookie Podcast.
Ashley:
Yeah, Tony, I got some boring banter to share with you real quick before-
Tony:
Yeah, please do.
Ashley:
… our show sponsor comes on. So it was just Mother’s Day and my son made this whole worksheet for me with things about mom or whatever. And one of the things was, “My mom loves to cook and he put in my dad cooks.” But in three other places he put, “My mom is funny. I love how funny my mom is.” So that just made my day. I don’t care if he doesn’t have any recollection of me ever feeding him a meal and cooking for him as long as he thinks that I am funny time-
Tony:
You’re funny.
Ashley:
… that made by day.
Tony:
That’s all the best. I love that. And Sean and I, we actually did some arts and crafts for Sarah as well for Mother’s Day.
Ashley:
I saw the scrapbook. Yeah, it’s so nice, so sweet.
Tony:
She’s pregnant right now. We’re trying to think what’s a good gift for her as a soon a mom to be. I mean like, okay, what if we introduced the baby girl to mommy? So me and Sean went to Hobby Lobby, first time going to Hobby Lobby by myself by the way. And we found the scrap booking aisle and we were at a loss. We were like, “Where do we even start? What do we do?” So we had to ask the Hobby Lobby employees like, “What do people usually buy when they’re making a scrapbook?” So anyway, the nice people that Hobby Lobby helped get us set up and Sarah loved it. And we basically wrote, we created this scrapbook where every page was us introducing our daughter, our unborn daughter to a different aspect of who Sarah is as a mom. And she seemed to really appreciate it.
Ashley:
I saw that post and I thought it was so sweet. And it was so cute as she was showing some of the pages, but I so badly wanted to comment, but I didn’t want to ruin the moment, but I wanted to comment. So this is why Tony has 200 unread messages because he said at home scrapbook.
Tony:
Scrap booking, that’s what it is.
Ashley:
That’s how you return a text to see has 200 text messages that-
Tony:
I’ve got too busy scrap booking. That’s my new passion.
Ashley:
Today, we’re going to have a very different episode. So get cozy, grab yourself a blanket, sit back in your comfortable chair. I’ve got my chai tea. And we are going to take the agony, the grueling pain of someone else’s loss and turn it into our entertainment and life lessons learned today. So I’d like to welcome my special guest, Tony J Robinson, to share how he lost a $100,000 on a deal. Tony, welcome to my show.
Tony:
I think that was by far the best intro to a podcast we’ve ever done.
Ashley:
I wish I could just riff like that every time.
Tony:
If we don’t get an Emmy nomination for that cold open ash, I quit. If we don’t get it, then I quit.
Ashley:
You know what? Good. I did forget my notepad and my pencil. So anytime you say random things, I could look at you, nod, eyes wide open and write something down.
Tony:
That was good. I felt like I was on Oprah or something, or like a Dr. Phil episode. I’m here for it. But unfortunately what you said is true, right? What you said is true. We’re here to talk about my pain and agony today. So I’ll just give the quick backstory we’ll go into, but basically the long story short is that we had a rehab project that we’re going to end up losing a little over a $100,000 on.
Ashley:
You guys a $100,000.
Tony:
A $100,000. And my producers asked me like, “Oh, this is like a paper loss a $100,000.” “No, this is Tony wiring a $100,000 from a business bank account into our lender’s account to be able to cover this.” And it definitely hurts. But talking over with Ashley and our team, we figured it could be a cool instructional thing for all of our rookie listeners as well to know that it’s not always rainbows and butterflies when you’re investing. And sometimes you make the wrong decision and you got to lick your wounds and write some checks and learn some lessons and hopefully move on from it.
Ashley:
And it’s not even only about wrong decisions, it’s about other things that are out of your control too. And that’s why we want to do this episode so that you guys can learn and educate yourself and what are some things that you should be watching for. So we’ll go into Tony’s story, he’ll set the table as to what exactly happened and then we’ll go back through and what are the things he would’ve done differently? What should you be watching out for? There’s no reason to create the same mistakes that other investors have made.
So Tony and I both try to share as much as our wins, also our losses as to lessons learned. You’ll probably hear me rant a lot about property management over the next couple of months as I’m transitioning away from my property management company and the things that I learned that actually hurt me in the long run with my investment portfolio. But today, let’s start off with Tony’s story. Sit back, get your cozy blanket on and relax. And if you are listening to this on a podcast, you might want to pop it open on YouTube to see a tear. Slowly stroll down Tony’s face.
Tony:
The single tier. So let me give some backstory first, listen to how our business structure kind of works. So a big part of how we scaled our short-term rental portfolio was we found properties both turnkey somewhat, but a lot of them were properties that needs to be rehabbed. And what we would do is we have one entity, one business that we use to purchase and renovate homes. And then that entity would basically sell that property to a partner who then our long-term holding entity would partner with.
So basically I have LLC-1. LLC-1 one sells that property, or they find that property, we raise private money to rehab that property. Then once the rehab is complete, it’s a fully furnished, ready to go, turnkey, short term rental, everything down to the forks, the knives, the sheets, everything you need to run that property is inside of it.
By the time you finish the rehab, LLC-1 number one then sells that property to Ashley. Ashley enters into an agreement with my LLC-2 to say, “Hey, we’re going to buy this entity jointly together.” And then Tony’s entity will be the one that’s in charge of managing it long term. So it’s a really sweet deal for our partner because they get a turnkey property, they don’t have to worry about managing it. And it’s a sweet deal for us because we’re able to sell that property as a flip. So we get some cash up front, but then we also get the benefit of manage. You get long term.
Ashley:
Tony, how many of those deals have you done so far? I just want to set the table for experience. Was this the first one you ever did this? Have you done several?
Tony:
In total I want to say we’ve done I think seven or eight of those.
Ashley:
Sp quite a few, yeah.
Tony:
Yeah, we’ve done quite a few and most of them worked out pretty well for us. We had one that we barely broke even on. It was four grand that we made instead of what we were initially projected. And that one was same around the same time as this one. So that’s our business model. We know how to do it. We’ve done it successfully multiple times and we’ve made multiple six figures with that process as we’ve done it successfully. But there were a few things that went wrong with this one that I’ll detail. So I’ll give you guys the timeline and Ash, feel free to jump in as I’m going through this with any questions that you have. We closed on this property at the tail end of February, 2022. So a little over a year ago is when we closed on this property on the front end.
So our rehabbing entity bought this in February of 2022. The rehab itself went pretty smoothly. We finished it in, I don’t know, maybe four or five months, which is our typical timeline for a turnkey short term rental. So say we started it in February, we were probably done with this property by, I don’t know, June or July of 2022. Once we finished the property, we started shopping it around to some of our potential partners, which is again what we normally do. And we had some interest, but people weren’t super stoked about it for whatever reason. And while we were shopping it around, we turned it into a short term rental itself just so we could generate revenue while we were waiting on the partner to potentially flip it to. And when we took that listing live, it got off to a rough start for one reason or another.
So we took the listing down as a short-term rental. We invested another $12,000 into the property just to really take it over the top and we re-list it as a short-term rental. As we’re doing that, we’re still shopping ground, we ended up finding a potential partner to buy it from us. She was someone that we had a relationship with before she had looked at working with us on a previous deal.
So we had a relationship with her. But she was in the process I think, of selling her primary residence or there was something going on in her personal life where she said, “Look guys, I’m super interested, but I need about three to four months to be able to be in a position to actually buy it from you guys.” And we’re like, “You know what? It’s fine. We’re already renting it as short term rentals. So we’re generating revenue there. We can wait 90 to 120 days.” But as we get closer to that timeframe, she starts to go, the responsiveness starts to decrease, and the amount of communication we’re getting starts to slow down as well.
Ashley:
Did you have her put a deposit down? Were you still keeping this property open to other people to invest in it? What happened during that timeframe that she’s asking to hold it?
Tony:
That’s a great question, Ashley. And probably one of our first mistakes was that there was no EMD. We didn’t even have her sign the purchase agreement. It was just like a handshake deal where she said, Hey guys, yeah, I’m super interested and I’m here. But again, just to give some context, this person had participated in our big bear deal that we tried to take down as well. So she had actually wired a six figure check-in for big bear. So we knew that this person was legit. It wasn’t just some person that we didn’t know. So we knew that she was legit. But yeah, probably having them sign the purchase agreement upfront would’ve made more sense. Just so you know, there was a little bit more accountability on both sides. But we didn’t do that. And for one reason or another, after those three, four months had expired, that person came back and said that they weren’t in a position to move forward anymore, didn’t have the desire to move forward anymore.
So now we’re in the back half of the year at this point. It’s like, I don’t know, fall of 2022. So now we have to shuffle to try and find another partner to sell this property to. Luckily, there’s still a ton of interest. The property had been performing really well as a short term rental up until that point. So we had revenue that we could show, we could show how well it’s performing, especially after we invested that additional 12K to really take the property over the top. So we ended up finding a partner pretty quickly at that point. We get the property appraised and it ends up appraising for $580, I think $9,000, which is cool because we had it under contract at 5 85. So we had appraised for more than what we had under contract for. And our numbers going into this, we had initially bought the property for $355,000. That’s what we bought it for.
We put about another, I’d say after we invested that last 12K, maybe like $125 into it. So let me just do that math really quickly. So we’re all in it for $480 and that includes our holding cost, utilities and all that stuff, all in it for $480. But we still have these interest payments from our private moneylenders that are racking up every single month. So every month we’re accruing about 4,000 bucks in interest.
So up until that point, when we got that second appraisal, which came back in December, we had already accrued about $40,000 in interest. So we had our four, whatever. So we were about 4 89 totals what we had at that point. Now the second partner that we had lined up, they were happy, ready to move forward, they end up not being able to get approved for the mortgage. So now this is the second person that steps in to try and buy this property and they’re just not able to do it. So at this point it’s like, “I don’t know, I think that was January, mid-January when we got the news.” So that person wasn’t going to be able to get approved and now we’re resetting and starting this whole process over again.
Ashley:
And Tony, is there really a way to… When you’re flipping a house or even just selling a house in general, I mean a preapproval letter, maybe asking for something like that, what would you have done different in that situation, I guess? And how long did they hold up the deal then when they couldn’t get the financing?
Tony:
That one, honestly, I don’t know if I would’ve done anything differently because whenever we flip our homes, we have a lender that we always use. That’s part of the requirements of buying one of our properties is that you have to use our lender if you’re doing it as part of our partnership. So this is something that we’ve done a ton of business with. This person that was our buyer was pre-approved, but as the underwriters did a little bit more due diligence, there were some things that came up that just the underwriters didn’t feel comfortable with. And there was weeks and weeks of back and forth of trying to get the underwriters to give us a thumbs up, but we couldn’t get there. And then the buyer ended up having to back out. So sometimes you don’t know until you get to that point that a person won’t get approved.
Ashley:
That is so important to talk about is just because somebody has that pre-approval doesn’t mean they’re actually going to get the loan on the property too.
Tony:
And just generally speaking, everyone should be careful. Don’t take pre-approvals at face value. I can go, there are private moneylenders who have websites right now where I can go in and within two minutes of me just plugging in some basic information, I can have a pre-approval letter from a hard moneylender. So just definitely take those with a grain of salt.
Ashley:
The same too goes with cash offers. Like, “Oh, if you need proof of funds, like hey, we’ll give you proof of funds.” You see a lot of hard moneylenders doing that too.
Tony:
So there’s a little bit of both of that. So the second buyer ends up pushing us back, I’d say another, I don’t know, two months or so. We went back and forth with that buyer. So now we’re in early 2023. And for folks that have been paying attention between mid 2022 to early 2023, we saw interest rates go up dramatically during that timeframe. And when we went to go shop this property for a third time, the interest had diminished pretty significantly because hey there were some policy changes in the city of Joshua Tree that took place that spooked some buyers. People didn’t really understand what these new policy changes meant, and they thought that there was a ban on short term rentals.
So we had to do a lot of educating the folks to say that that’s not what’s happening here. And the interest rate increase made it more difficult for us to structure this as a partnership where we were still able to give healthy returns to our investors because when we first had this property in their contract, we were looking at a 5% interest rate. Maybe now we’re looking at a 7%. And that difference between a 5% and 7% can really squeeze returns, especially when there’s multiple parties involved.
Ashley:
And during that time too, were there some changes on vacation home loans too?
Tony:
Yes.
Ashley:
Going from 10% to 15% because I feel like that would greatly impact it.
Tony:
That also hurt.
Ashley:
You’re buying $500,000 houses. That 5% does make a difference in the capital someone has to bring.
Tony:
So the 10% second down home loans are still an option, but they now come with more points attached to them. So even though technically it’s still a 10% down payment, if there’s two or three or four points being added to that, it almost feels like a 15% down payment at that point. So there were all these things that were happening, interest rates going up, loan products becoming less desirable, uncertainty around the policy landscape in that market. So it took us even longer to find that next partner for all of those reasons.
Ashley:
And all things that were not in your control. Yeah, I think is very important to point out, yeah.
Tony:
Yeah, those were things that we just had to roll with the punches on. Now luckily we did end up finding another buyer and we’re hopefully going to be closing here shortly with that person and they’ve been done. But now the final hangup is the appraisal. So remember we had this property appraised in the fall of last year, in the fall of 2022 and appraised for $589,000. That was about six months ago. Now, we just got an appraisal back and appraised for $440,000 is what it appraised for. And if we were to close this month, we’d owe our private moneylenders $510,000. So just between what we are, private moneylenders and the other, that’s a pretty big difference right now. But when you tack on our closing fees and all the other things kind of come to closing, it’s going to be close to about a hundred thousand dollars check that we’re going to have to write to pay this whole thing off.
So it’s definitely been, I think a frustrating experience for us and seeing that, I think our lack of urgency early on has really come back to bite us in the butt. We just saw this situation where the markets that we were investing in had been doing so well, we didn’t anticipate how quickly things would shift, but to lose, we’re talking $589 to 140,000, that’s %140,000 almost $150,000 in equity that we lost over the span of just a few months. And I don’t think any of us saw that shift coming in that market and now we just have to deal with those consequences.
Ashley:
I saw something similar kind of happen. I had done my first flip in Seattle about the same time period, bought it last February, and then we went to sell it in, it was about May, I think, April, May. And it sat on the market for a long time and we ended up breaking even on it. And at one point, it was during the rehab process, we’re like, “Oh my gosh, the comms, I could make a 100% return on my money.” I invested into this like, “Oh my gosh.” And then boom, it drastically changed. So Tony looking, actually the first question I wanted to ask is, did you end up still partnering on this deal? So do you have equity in this deal as a short-term rental? And what will be your return on that? So have you actually figured out your cash on cash return of basically, say you invested a $100,000 of capital into this deal.
Tony:
It’s going to be pretty nominal, right? Because we had to give up a pretty healthy chunk of equity to still make it palatable for that partner. Typically, on our deals we’re going to own like 50%. That’s where most of our partnerships when we do this, we still retain 50% ownership, but because the appraisal came back so low and where interest rates are in order for the deal still to make sense for that partner, we still have to give a pretty healthy chunk of equity. So the returns, it’s going to be terrible, right? We’re almost going to be managing this thing for pennies on the dollar, so our partner’s getting a solid deal because he’s got a really experienced management team that’s going to take care of everything and make it profitable for him. But for us, it’s just one of those things where we got to look our wounds and deal with it.
But I think we still have some optimism because we know that that real estate valuations are cyclical. And we saw Joshua Tree as a market, it was super affordable for a really long time. And then between early 2021 through mid 2022, you saw prices just go on this astronomical tear and now they’ve come back down to a more reasonable rate, not quite where they were before 2021. I wouldn’t say it’s as low as it was in 2020, but definitely not as high as it was in peak 2022. So we’re seeing it start to stabilize, and our hope is that as that market stabilizes over time, we’ll recoup some of that value. And when it makes sense, whether it’s five years, 10 years from now, that portfolio that we have out there are properties where maybe we would’ve liked to have sold them, but we had to hold onto them. We can revisit at that point of getting them sold.
Ashley:
So what are the things that looking back maybe you would’ve done different and then maybe we can go into here’s the things you should be watching out for that maybe you can’t control. But what are the first of all the things you would’ve done different?
Tony:
So there’s a few things. Honestly, I think the first thing is one of the things that I’m most concerned with now as we continue to flip in this market is our… I don’t know what you want to call it. Basically our stop clock from close to close, how much time are we spending? And when that window gets too wide, you open yourself up to more fluctuations in the market. Had we closed in this property, the resale 60 to 90 days after we finished the rehab, we wouldn’t have been as exposed to the fluctuations in that market. If we closed in it in February and we were selling it in July, even in that timeframe, it’s five months, but the market’s going to shift, but is it going to shift as heavily as it did on us this go-round? So I think trying to really decrease that timeframe.
For example, we just finished another turnkey flip and JT and we bought that property nine weeks ago and we already have it under contract to sell right now. We just got it into escrow yesterday. So that’s us learning from that mistake of, “Hey, we want to make sure that we’re protecting ourselves.” And even in that one, I underwrote that at what I felt was a conservative number and prices even dipped bit since then. So I think being able to go quickly from your initial opening escrow where you purchased the property to your closing escrow, where you dispositioned that property, keeping that as tight as you possibly can, that’s one of the big things I’d say we learned.
Ashley:
To close that gap are you taking on properties that don’t need as much rehab?
Tony:
So we’re just not taking on as many so one of the challenges that we had in that market was that we really only had one crew that we trusted to take on our rehab projects. We had tried out a few different crews, but every time we did that, it happened to us twice where we basically had to stop these other crews and in the middle of their jobs and say, “Hey, you’re fired. And then bring back in our main crew to finish it off.”
So what we realize is that it’s probably in our best interest to work at the capacity of our crew and however many jobs they can effectively take on at one time without necessarily slowing down is what we really want to focus on. So this flip that we just had, that was our only project. We just had that one project going and that allowed our team to just burn through that job super quick, whereas before we might’ve had four or five rehabs going on at one time, but they had to spread their resources out across. So really just getting back to the basics of, “Hey, we’re going to do one project at a time, we’re going to knock it out, then we’ll roll into the next one.”
Ashley:
So what’s next for you guys? You’ve taken this loss, very painful loss. Tony’s been sobbing uncontrollably this whole episode if you guys haven’t noticed, but what’s kind of the future? You’ve said you just recently did another flip, but what are some other things that you’re going to be maybe pivoting or changing with your business model, if any?
Tony:
Before I answer that, I just want to talk really quickly, Ashley, about the private bunny, because that was another, not a mistake, but just like it was a rough part of this. I think that was the hardest part for me was our private moneylenders because most of these folks, this was their, actually all the folks in this deal, this was their second time lending to us and that first flip in and out, we knocked it out, they got the return, they were so happy to say, “Hey, let’s roll into the next one.” And usually we’re able to give them their money back in six months, and now we’re going on month 14, I think, with this deal.
Ashley:
So how did you structure it with them and did you have to go and ask for an extension?
Tony:
So our original promissory note stated that it was a 12-month term, but that we had the option to extend beyond that. But if we did extend that, they got an increase in their interest rate. So it went from whatever it was. I think they got an additional point on their interest rate if we had to extend beyond 12 months. But honestly, when I was talking to folks in the up at the beginning, I said, “We haven’t had any deal get close to 12 months, so I don’t even think we need to worry about that, but we put it in there.”
Luckily my real estate attorney was the one that said, “You should probably just have it in there just in case.” And it really came back to save us. But I still had to, we had to communicate to those folks and say, “Hey, look, things aren’t going as planned, kind of here’s where we stand, here’s what we’re looking to do.” And obviously not all of them were happy because sometimes they have other plans for these funds and it’s not something that’s super liquid. It’s not like a stock they can just go out and swap out with someone else. But I think having those tough conversations sooner rather than later is a route I would encourage people to go.
Ashley:
And I think as investors too, if you are listening and you’re planning on being a private moneylender, that it is very important to know that this can happen and your money can be tied up. And Tony has stayed within the realm of his contract, but there may be times where an investor says, “You know what? My loan is like due now, but I cannot pay it.” And then have to go and ask for an extension that wasn’t even in the contract either. And it’s like, “Okay, as the private moneylender, do I go and start the foreclosure process on this or do I wait three more months now for it to sell?” So definitely, I’m glad that you brought this up, it’s talking about the private moneylenders.
Tony:
And most private moneylenders don’t want to deal with the hassle of going through a foreclosure. They didn’t get into this business to be active if their private money lending is typically because they want a passive return. So I think most are probably going to be understanding, but I think how you communicate that situation makes all the difference because my hope is that even though this deal, the timeline took longer than we anticipated, that we’ve still handled it well enough to keep that relationship open for future opportunities. But it definitely does require, I think having some tough conversations. And it reminds me of our guest, JP Desmond, and he lost a quarter of a million bucks across a few flips, and he talked about how he had to go back and have some tough conversations with his private moneylenders around, “Hey, how can we make this still a win-win situation? How can I get you paid back without crushing myself financially and trying to pay all you guys back all this money at one time?”
Ashley:
I wanted to share a story of my own as far as the appraisal and the impact of appraisals have had lately. So there was a property I was rehabbing, I had a hard money loan on it, and I needed to do an extension on the hard money. And it was written in that that was fine. The only thing I needed to do to extend the hard money loan was to have a broker appraisal done where they don’t actually send a licensed appraiser. It is a broker that is somehow trained and certified to do appraisal. So a real estate broker. And I don’t think banks really use them since they’re not an actual appraiser that does them. And this is the first time I’ve ever had that done. And this was back in December of 2022, and the property came back at $327,000 between December and March put there was two houses on the property and in the one house we put in a brand new kitchen, a bathroom, there wasn’t even a bathroom in it before.
And then flooring and then some other finishes and into the property, the actual appraisal in March came back at $320,000, so $7,000 less. And we added a kitchen, a bathroom, and flooring throughout the house. So it was a huge shock to us. So we talked to a couple of people that had disputed appraisals before and we actually went and disputed it and we showed we had that broker appraisal and they ended up matching it. So they did match it and say that it would now appraise for $327,000, and they lend to us on that. I think we had wanted it to appraise at $380,000, the $327,000 and appraised that our hard money on it was only $171,000. So that was more than enough to pay that back. So it was still fine, but it was just crazy, the difference in value from December to March as to how that could change. And it just, as soon as you had said your experience, it’s almost like a very similar timeline and the same thing to happen.
Tony:
Yeah. So I think the big lesson there is to never let Ashley renovate your kitchen because you end up with negative equity as opposed to positive equity. No, I’m kidding. No that was-
Ashley:
No, it’s okay. I think this is the best jam you’ve ever told Debbie, the only jab you’ve ever given me.
Tony:
Yeah, I can’t even take credit for that because Eric, our producer, put in it in the chat, so I’m just reading what he wrote.
Ashley:
Do you know what? The kitchen didn’t have backslash, and actually I’m sitting in that unit right now while we’re recording and it still does not have the backslash. So maybe that’s the big mistake there is you need backslash.
Tony:
Yeah, but I just want to talk a little bit about it, the appraisals as well, because the appraisal process is a very, very subjective process. Appraisals are an opinion of value by the appraiser that’s going out there. And two appraisers could walk the same exact property and come back with different opinions of value. And we had a property that we were trying to purchase last year and we ended up having to challenge the appraisal two times. We had three total appraisals done, and each appraiser came back with a different value of what they thought that appraisal or what that property was worth. So I think to Ashley’s point, being able to challenge an appraisal was really good thing. But just to give some insight, and this is something that my lender shared with me when we got back that $440,000 appraisal on a property that had recently appraised for $589,000.
What he said was that during the 2008 financial crisis, a lot of that was driven by these outrageous appraisals that were being done. And appraisers were in cahoots with lenders to just come up with these property values that would allow people who shouldn’t be getting qualified for mortgages to get approved for it because there was so much equity in the deals and a lot of appraisers were held accountable for their recklessness quote and how they appraised properties. So what you’re seeing now is that as markets start to pull back and sales slow down and things of that nature start to happen, appraisers are starting to become more conservative because they don’t want any blow back on them if there’s an inflated value on specific properties. So the fact that the velocity of sales has slowed down so much in this market, I think hurt us.
But then also there’s this combination of appraisers, thinking back to 2008, understand that there’s risk involved to them personally, professionally, if they overstate the value of some of these properties, that they’re being even more conservative than what they probably need to be. So there’s just a lot of things that come on and I think that that can kind of impact what we’ve got here.
So you asked Ashley kind of like, “What’s next for us?” So I mentioned one piece, right? We are still going to continue to flip. I think that there’s still a need for it. I still think that it’s specifically for the kind of product that we have where it’s a turnkey short term rental where people can take it and day one, they’re 99% ready to go. I still think there’s a need for that, but now it’s just, “Okay, how do we make sure that we’re protecting ourselves?”
So one of the things I said is the time that we’re taking to do projects, we want to make sure that we’re keeping that timeline super short from closing to closing. The second thing that we’re doing is we’re just being a little bit more patient with the volume of deals that we’re doing. So there’s properties that are listed right now that our agents, wholesalers, whoever has sent to us that we think would make good flips. But I told the team like, “Look, we’re not going to buy anything else until we disposition this flip that we currently have.”
So we really have proof of concept on what we think we can get because if we end up getting another property in our contract and we’re tying up more private money and then turns out that the property values go from four $440,000 to $375,000 or $350,000, now we’re back in the same position all over again. So I’m trying to talk internally to make sure that we’re approaching these things with the ultimate amount of conservative or conservatism, conservativeness, I don’t know what the correct word is, but that we’re being conservative and that we don’t move forward until we’ve got our own kind of numbers in house to prove what we think that these values should be worth.
Ashley:
And if you end up doing multiple and then that does happen where it decreases anymore, that’s the couple checks you have to write out instead of just one.
Tony:
Instead of one, instead of one, right. But overall, I still think the business model makes sense. And I think what we’re also trying to do now though is expand to different markets. I think not necessarily a mistake that we made, but we definitely have gone really narrow and deep into one market and now we’re thinking, “Okay, does it make sense to spread that risk out across different markets and can we potentially rebuild the team that we’ve built in this market and take it elsewhere? Can we take it somewhere else?” Because honestly, as a short term rental, that market is still doing really well. It’s just the resale values where we’re seeing this market get hit. So from a revenue perspective, most all of properties are still net positive, but it’s like how can we balance out that equity loss potentially by going into other markets as well?
Ashley:
Well, Tony, thank you so much for being raw and honest and sharing this struggle because you see all of these people on Instagram that only share the wins and never share the bad that actually happens. And there are so many challenges in real estate investing that it is so important to learn from other investors that are willing to share those experiences. And one thing that I have found too is that it can actually be somewhat inspiring and motivating to hear about something that really sucked for someone else as to, here’s Tony, he lost a $100,000, but he’s still going a real estate investor. He didn’t quit. He’s making it work. He obviously had reserves and capital in place to be able to write that check, to pay that. And so these learning experiences are amazing. But also the mindset too as to why have you not got your first deal or why have you not got your next deal? Is it because you are scared of that exact situation happening?
Well, maybe not take on such a big deal at first, start smaller on a smaller scale so that if you do lose, it’s maybe not such a big loss. So maybe you need to look at different markets to be able to find something that’s on a smaller scale or whatever that may be. But as you listen to more and more of these horror stories from investors, there are very few that give up. And one thing too, Tony, is you have different, they’re real estate, but different kind of income streams from your real estate. So you have the flip business. Are you wholesaling some houses too?
Tony:
Yeah, we did-
Ashley:
We do that for a little while, but yeah. Okay. And then you are managing short-term rentals, you are also designing short-term rentals partners-
Tony:
Yeah, we have a cleaning company.
Ashley:
… designer. You’re cleaning, and then you’re also partnering with people to own the short-term rentals too. So I think having these different multiple streams, but the building that foundation first and Tony’s foundation was buying short-term rentals and building that and then branching off and going, Tony didn’t start out with, I’m going to flip, I’m going to buy short-term rentals. I’m going to start a cleaning company, I’m going to start a management company. All from day one. He started out with the one thing short-term rentals that strong solids of foundation. And Tony would like to ask you as our closing question here today on my therapeutic show as to do you think that if you would’ve started all these income streams at once, would you have been able to be as successful as you are today? And would that loss of hurt you a lot more? And do you think that building, that strong foundation had a great impact in you being able to weather the storm of a $100,000 loss?
Tony:
Yeah, I think one of the best decisions that I’ve made as an entrepreneur was narrowing down on one specific niche. And when I made the decision, I literally told myself like, “Okay, if I’m going to do this, I want to commit five years of my life to just this one thing, and I only want to do this one thing for the next five years.” And it wasn’t until I really started to go down this rabbit hole that I started to identify other places where I needed support of that main goal of building my short-term rental business. So design was a critical part of building out our short-term rentals. And then we recognized, “Okay, if we’re doing this really well internally, can we offer this to other people.” Cleaning, we literally just couldn’t find good cleaners in Joshua Tree so we built our own team. And once we had that team built and stabilized, then we said, “Well, hey, if we have these processes internally, can we give them out to other people?”
Property management. We had to build out and become really good at managing short-term rentals at scale. Okay, now we’ve got these systems, can we pass that off to other people? So all of these kind of secondary tertiary subsidiary businesses only came because we were so laser focused on building our own thing first and getting really good at it. So for all of the rookies that are listening, don’t try and do a thousand things at once to start with focus on getting really, really good at one thing, and then naturally you’ll start to figure out where the other opportunities are. So guys, I know this is supposed to be Ashley’s talk show moment where she’s the host here, but I just want to give a few takeaways before I let you guys go. So first thing I’d say, is to make sure that you get all of your agreements in writing.
Again, I think one of the mistakes we made was not getting a signed purchase agreement, was not collecting an EMD when we found that first potential partner. And I think doing that upfront could have alleviated some of these challenges that we ran into down the road. Second, a pre-approval from a buyer doesn’t always mean they’ll actually end up closing. The reason it’s called a pre-approval and not a final approval is because there’s steps in between that pre-approval and when they actually get funded from their lender. And things could definitely change in between the pre-approval and that final process. So just know that there’s always some risk there, and obviously you want to try and do your best to vet that person, but sometimes things come up that are out of your control and that buyer’s control. Second, and this is a big one for us, is to not hold flips for too long, especially in a time where the economy is shifting and moving as fast as it is right now.
The quicker you can be at getting in and out of a rehab property, the better. And this isn’t not just for flips, but even for your BRRRRs. If you’re doing a BRRRR property and you underwrite with a certain ARV and the market shifts on you where you lose $150,000 and your ARV, your BRRRR could be in trouble as well. So whether you’re flipping, whether you’re reducing the amount of time you spend in one single property is going to help you tremendously. And then as a kind of add on to that one is working at the capacity of your crew. I think part of the reason why this one took so long is because we had our team working above their capacity, so they were jumping from project to project as opposed to being able to focus just on one. And again, I think that there’s value sometimes in working in smaller batches, but just more frequently than in bigger batches to take a long time.
So be focused on your crew and what they’re actually able to do. And then two more points here. Appraisals are subjective and you don’t always have control over what that opinion of value is. So as much as you want to research the market and look for comps and do things like that, there’s always still the opportunity or the possibility that the appraiser walks in there and they want to be conservative to cover their own butts. Because remember the appraisers, they get paid regardless of what happens after the appraisal’s done. So they have no incentive to make sure that your appraised value is close to what it is under contract for. They just want to make sure that they’re protecting themselves and giving what they feel is the safest value of opinion. And actually, you can always try and go back and challenge, but just know that appraisers are working subjectively and with the primary focus of protecting themselves from a liability standpoint.
And then last, just to be patient. There were some scary moments I think going through this, especially when we realized how much money we were going to potentially lose here. But losing is part of growing, and I think every successful real estate investor I know has had some failures along the way and it made them better investors because of that. And my hope is that I can take this failure, this loss and turn it into a $100,000 lesson on how to be a better rehabber. So just a few takeaways. I hope you guys get some value from hearing my sorrow and seeing these tears fall down my cheeks and when the next bad flip happens, you guys will be the first one to know.
Ashley:
Thank you guys so much for listening to this week’s rookie reply. I’m Ashley at Wealth From Rentals, and he’s Tony @tonyjrobinson, and we will be back on Wednesday with a guest.
