\n<\/p>\n
Losing $100K<\/strong> on one real estate deal<\/strong>!? Is there any coming back from that kind of loss? Unfortunately, real estate investing<\/strong><\/a> is not always sunshine and rainbows. Every successful investor has had their fair share of failures. By learning from some of our mistakes, our hope is that new investors<\/strong><\/a> won\u2019t have to make them!<\/p>\n Welcome back to another episode of the Real Estate Rookie<\/em><\/strong> podcast. Today, Ashley interviews Tony about one of his most recent deals that went south. Ultimately, Tony ended up losing a whopping $100K<\/strong> on the deal. This kind of loss would cause many people to throw in the towel and quit their real estate journeys<\/strong>. Instead, Tony ate the loss, learned some important lessons<\/a>, and got back up on his horse.<\/p>\n If you\u2019re afraid of losing money<\/strong> on a real estate deal, allow Tony\u2019s mental fortitude to encourage and inspire you to keep going! In this episode, he shares a handful of invaluable lessons\u2014including why it\u2019s so important to manage the timeline<\/strong><\/a> of a deal, why you should always take a pre-approval<\/strong> with a grain of salt, and how diversifying investments<\/strong><\/a> across different markets can help lower your risk<\/strong>!<\/p>\n Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: Tony: Ashley: \u00a0<\/p>\n<\/div>\n
This is Real Estate Rookie episode 298. You guys a $100,000?<\/p>\n
A hundred thousand\u2026 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\u2019s account to be able to cover this, it definitely hurts.<\/p>\n
My name is Ashley Kehr and I am here with my co-host Tony Robinson.<\/p>\n
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\u2019re switching it up on the Real Estate Rookie Podcast. Ashley is my therapist for today, and I\u2019m laying down on the therapist\u2019s couch and I\u2019m opening up my heart and my soul and my vulnerabilities around a recent deal that went terribly, terribly wrong.<\/p>\n
And he says he\u2019s the one laying down on the couch, but it\u2019s 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\u2019s market.
So you guys, I\u2019m sure you\u2019ve seen the headlines, you\u2019ve seen everything in the news you\u2019ve seen on social media, everybody talking about what has happened in the market over the past year, the past six months, and what\u2019s going to happen in the future. We\u2019re 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.<\/p>\n
I just want to tell the rookies, don\u2019t judge me for all the tears you\u2019re about to hear as we\u2019re going through this. I tried my best to keep my composure, but I was just overwhelmed by so much emotion I couldn\u2019t handle myself, but also cool. I loved that we actually learned a lot as you were riding those things off. I was like, \u201cMan, I guess we did learn all that kind of going through today\u2019s story.\u201d 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\u2019ve been getting some pretty funny reviews lately. This person\u2019s review is normal, but their username is Hilarious with three exclamation marks L-O-L capitalized with two exclamation mark so\u2026<\/p>\n
So they must have been talking about me. They made their username at to talk about me as well.<\/p>\n
Maybe they made their username and talk about you.<\/p>\n
Oh, I\u2019m hilarious.<\/p>\n
Hilarious LOL says, \u201cThese 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.\u201d 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\u2019re 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.<\/p>\n
Yeah, Tony, I got some boring banter to share with you real quick before-<\/p>\n
Yeah, please do.<\/p>\n
\u2026 our show sponsor comes on. So it was just Mother\u2019s Day and my son made this whole worksheet for me with things about mom or whatever. And one of the things was, \u201cMy mom loves to cook and he put in my dad cooks.\u201d But in three other places he put, \u201cMy mom is funny. I love how funny my mom is.\u201d So that just made my day. I don\u2019t care if he doesn\u2019t have any recollection of me ever feeding him a meal and cooking for him as long as he thinks that I am funny time-<\/p>\n
You\u2019re funny.<\/p>\n
\u2026 that made by day.<\/p>\n
That\u2019s all the best. I love that. And Sean and I, we actually did some arts and crafts for Sarah as well for Mother\u2019s Day.<\/p>\n
I saw the scrapbook. Yeah, it\u2019s so nice, so sweet.<\/p>\n
She\u2019s pregnant right now. We\u2019re trying to think what\u2019s 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, \u201cWhere do we even start? What do we do?\u201d So we had to ask the Hobby Lobby employees like, \u201cWhat do people usually buy when they\u2019re making a scrapbook?\u201d 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.<\/p>\n
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\u2019t 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.<\/p>\n
Scrap booking, that\u2019s what it is.<\/p>\n
That\u2019s how you return a text to see has 200 text messages that-<\/p>\n
I\u2019ve got too busy scrap booking. That\u2019s my new passion.<\/p>\n
Today, we\u2019re going to have a very different episode. So get cozy, grab yourself a blanket, sit back in your comfortable chair. I\u2019ve got my chai tea. And we are going to take the agony, the grueling pain of someone else\u2019s loss and turn it into our entertainment and life lessons learned today. So I\u2019d 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.<\/p>\n
I think that was by far the best intro to a podcast we\u2019ve ever done.<\/p>\n
I wish I could just riff like that every time.<\/p>\n
If we don\u2019t get an Emmy nomination for that cold open ash, I quit. If we don\u2019t get it, then I quit.<\/p>\n
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.<\/p>\n
That was good. I felt like I was on Oprah or something, or like a Dr. Phil episode. I\u2019m here for it. But unfortunately what you said is true, right? What you said is true. We\u2019re here to talk about my pain and agony today. So I\u2019ll just give the quick backstory we\u2019ll go into, but basically the long story short is that we had a rehab project that we\u2019re going to end up losing a little over a $100,000 on.<\/p>\n
You guys a $100,000.<\/p>\n
A $100,000. And my producers asked me like, \u201cOh, this is like a paper loss a $100,000.\u201d \u201cNo, this is Tony wiring a $100,000 from a business bank account into our lender\u2019s account to be able to cover this.\u201d 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\u2019s not always rainbows and butterflies when you\u2019re 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.<\/p>\n
And it\u2019s not even only about wrong decisions, it\u2019s about other things that are out of your control too. And that\u2019s 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\u2019ll go into Tony\u2019s story, he\u2019ll set the table as to what exactly happened and then we\u2019ll go back through and what are the things he would\u2019ve done differently? What should you be watching out for? There\u2019s 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\u2019ll probably hear me rant a lot about property management over the next couple of months as I\u2019m 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\u2019s start off with Tony\u2019s 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\u2019s face.<\/p>\n
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\u2019s 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, \u201cHey, we\u2019re going to buy this entity jointly together.\u201d And then Tony\u2019s entity will be the one that\u2019s in charge of managing it long term. So it\u2019s a really sweet deal for our partner because they get a turnkey property, they don\u2019t have to worry about managing it. And it\u2019s a sweet deal for us because we\u2019re 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.<\/p>\n
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?<\/p>\n
In total I want to say we\u2019ve done I think seven or eight of those.<\/p>\n
Sp quite a few, yeah.<\/p>\n
Yeah, we\u2019ve 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\u2019s our business model. We know how to do it. We\u2019ve done it successfully multiple times and we\u2019ve made multiple six figures with that process as we\u2019ve done it successfully. But there were a few things that went wrong with this one that I\u2019ll detail. So I\u2019ll give you guys the timeline and Ash, feel free to jump in as I\u2019m 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\u2019t 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\u2019t 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\u2019t 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\u2019re doing that, we\u2019re 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, \u201cLook guys, I\u2019m 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.\u201d And we\u2019re like, \u201cYou know what? It\u2019s fine. We\u2019re already renting it as short term rentals. So we\u2019re generating revenue there. We can wait 90 to 120 days.\u201d But as we get closer to that timeframe, she starts to go, the responsiveness starts to decrease, and the amount of communication we\u2019re getting starts to slow down as well.<\/p>\n
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\u2019s asking to hold it?<\/p>\n
That\u2019s a great question, Ashley. And probably one of our first mistakes was that there was no EMD. We didn\u2019t even have her sign the purchase agreement. It was just like a handshake deal where she said, Hey guys, yeah, I\u2019m super interested and I\u2019m 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\u2019t just some person that we didn\u2019t know. So we knew that she was legit. But yeah, probably having them sign the purchase agreement upfront would\u2019ve made more sense. Just so you know, there was a little bit more accountability on both sides. But we didn\u2019t do that. And for one reason or another, after those three, four months had expired, that person came back and said that they weren\u2019t in a position to move forward anymore, didn\u2019t have the desire to move forward anymore.
So now we\u2019re in the back half of the year at this point. It\u2019s like, I don\u2019t know, fall of 2022. So now we have to shuffle to try and find another partner to sell this property to. Luckily, there\u2019s 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\u2019s 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\u2019s what we bought it for.
We put about another, I\u2019d say after we invested that last 12K, maybe like $125 into it. So let me just do that math really quickly. So we\u2019re 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\u2019re 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\u2019re just not able to do it. So at this point it\u2019s like, \u201cI don\u2019t know, I think that was January, mid-January when we got the news.\u201d So that person wasn\u2019t going to be able to get approved and now we\u2019re resetting and starting this whole process over again.<\/p>\n
And Tony, is there really a way to\u2026 When you\u2019re 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\u2019t get the financing?<\/p>\n
That one, honestly, I don\u2019t know if I would\u2019ve done anything differently because whenever we flip our homes, we have a lender that we always use. That\u2019s part of the requirements of buying one of our properties is that you have to use our lender if you\u2019re doing it as part of our partnership. So this is something that we\u2019ve 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\u2019t 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\u2019t get there. And then the buyer ended up having to back out. So sometimes you don\u2019t know until you get to that point that a person won\u2019t get approved.<\/p>\n
That is so important to talk about is just because somebody has that pre-approval doesn\u2019t mean they\u2019re actually going to get the loan on the property too.<\/p>\n
And just generally speaking, everyone should be careful. Don\u2019t 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.<\/p>\n
The same too goes with cash offers. Like, \u201cOh, if you need proof of funds, like hey, we\u2019ll give you proof of funds.\u201d You see a lot of hard moneylenders doing that too.<\/p>\n
So there\u2019s a little bit of both of that. So the second buyer ends up pushing us back, I\u2019d say another, I don\u2019t know, two months or so. We went back and forth with that buyer. So now we\u2019re 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\u2019t 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\u2019s not what\u2019s 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\u2019re looking at a 7%. And that difference between a 5% and 7% can really squeeze returns, especially when there\u2019s multiple parties involved.<\/p>\n
And during that time too, were there some changes on vacation home loans too?<\/p>\n
Yes.<\/p>\n
Going from 10% to 15% because I feel like that would greatly impact it.<\/p>\n
That also hurt.<\/p>\n
You\u2019re buying $500,000 houses. That 5% does make a difference in the capital someone has to bring.<\/p>\n
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\u2019s still a 10% down payment, if there\u2019s 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.<\/p>\n
And all things that were not in your control. Yeah, I think is very important to point out, yeah.<\/p>\n
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\u2019re hopefully going to be closing here shortly with that person and they\u2019ve 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\u2019d owe our private moneylenders $510,000. So just between what we are, private moneylenders and the other, that\u2019s 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\u2019s going to be close to about a hundred thousand dollars check that we\u2019re going to have to write to pay this whole thing off.
So it\u2019s 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\u2019t anticipate how quickly things would shift, but to lose, we\u2019re talking $589 to 140,000, that\u2019s %140,000 almost $150,000 in equity that we lost over the span of just a few months. And I don\u2019t think any of us saw that shift coming in that market and now we just have to deal with those consequences.<\/p>\n
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\u2019re like, \u201cOh my gosh, the comms, I could make a 100% return on my money.\u201d I invested into this like, \u201cOh my gosh.\u201d 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.<\/p>\n
It\u2019s 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\u2019re going to own like 50%. That\u2019s 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\u2019s going to be terrible, right? We\u2019re almost going to be managing this thing for pennies on the dollar, so our partner\u2019s getting a solid deal because he\u2019s got a really experienced management team that\u2019s going to take care of everything and make it profitable for him. But for us, it\u2019s 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\u2019ve come back down to a more reasonable rate, not quite where they were before 2021. I wouldn\u2019t say it\u2019s as low as it was in 2020, but definitely not as high as it was in peak 2022. So we\u2019re seeing it start to stabilize, and our hope is that as that market stabilizes over time, we\u2019ll recoup some of that value. And when it makes sense, whether it\u2019s five years, 10 years from now, that portfolio that we have out there are properties where maybe we would\u2019ve liked to have sold them, but we had to hold onto them. We can revisit at that point of getting them sold.<\/p>\n
So what are the things that looking back maybe you would\u2019ve done different and then maybe we can go into here\u2019s the things you should be watching out for that maybe you can\u2019t control. But what are the first of all the things you would\u2019ve done different?<\/p>\n
So there\u2019s a few things. Honestly, I think the first thing is one of the things that I\u2019m most concerned with now as we continue to flip in this market is our\u2026 I don\u2019t 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\u2019t 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\u2019s five months, but the market\u2019s 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\u2019s us learning from that mistake of, \u201cHey, we want to make sure that we\u2019re protecting ourselves.\u201d 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\u2019s one of the big things I\u2019d say we learned.<\/p>\n
To close that gap are you taking on properties that don\u2019t need as much rehab?<\/p>\n
So we\u2019re 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, \u201cHey, you\u2019re fired. And then bring back in our main crew to finish it off.\u201d
So what we realize is that it\u2019s 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\u2019ve 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, \u201cHey, we\u2019re going to do one project at a time, we\u2019re going to knock it out, then we\u2019ll roll into the next one.\u201d<\/p>\n
So what\u2019s next for you guys? You\u2019ve taken this loss, very painful loss. Tony\u2019s been sobbing uncontrollably this whole episode if you guys haven\u2019t noticed, but what\u2019s kind of the future? You\u2019ve said you just recently did another flip, but what are some other things that you\u2019re going to be maybe pivoting or changing with your business model, if any?<\/p>\n
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, \u201cHey, let\u2019s roll into the next one.\u201d And usually we\u2019re able to give them their money back in six months, and now we\u2019re going on month 14, I think, with this deal.<\/p>\n
So how did you structure it with them and did you have to go and ask for an extension?<\/p>\n
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, \u201cWe haven\u2019t had any deal get close to 12 months, so I don\u2019t even think we need to worry about that, but we put it in there.\u201d
Luckily my real estate attorney was the one that said, \u201cYou should probably just have it in there just in case.\u201d And it really came back to save us. But I still had to, we had to communicate to those folks and say, \u201cHey, look, things aren\u2019t going as planned, kind of here\u2019s where we stand, here\u2019s what we\u2019re looking to do.\u201d And obviously not all of them were happy because sometimes they have other plans for these funds and it\u2019s not something that\u2019s super liquid. It\u2019s 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.<\/p>\n
And I think as investors too, if you are listening and you\u2019re 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, \u201cYou know what? My loan is like due now, but I cannot pay it.\u201d And then have to go and ask for an extension that wasn\u2019t even in the contract either. And it\u2019s like, \u201cOkay, 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?\u201d So definitely, I\u2019m glad that you brought this up, it\u2019s talking about the private moneylenders.<\/p>\n
And most private moneylenders don\u2019t want to deal with the hassle of going through a foreclosure. They didn\u2019t 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\u2019ve 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, \u201cHey, 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?\u201d<\/p>\n
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\u2019t 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\u2019t think banks really use them since they\u2019re not an actual appraiser that does them. And this is the first time I\u2019ve 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\u2019t 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\u2019s almost like a very similar timeline and the same thing to happen.<\/p>\n
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\u2019m kidding. No that was-<\/p>\n
No, it\u2019s okay. I think this is the best jam you\u2019ve ever told Debbie, the only jab you\u2019ve ever given me.<\/p>\n
Yeah, I can\u2019t even take credit for that because Eric, our producer, put in it in the chat, so I\u2019m just reading what he wrote.<\/p>\n
Do you know what? The kitchen didn\u2019t have backslash, and actually I\u2019m sitting in that unit right now while we\u2019re recording and it still does not have the backslash. So maybe that\u2019s the big mistake there is you need backslash.<\/p>\n
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\u2019s 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\u2019s 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\u2019t 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\u2019re 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\u2019t want any blow back on them if there\u2019s 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\u2019s this combination of appraisers, thinking back to 2008, understand that there\u2019s risk involved to them personally, professionally, if they overstate the value of some of these properties, that they\u2019re being even more conservative than what they probably need to be. So there\u2019s just a lot of things that come on and I think that that can kind of impact what we\u2019ve got here.
So you asked Ashley kind of like, \u201cWhat\u2019s next for us?\u201d So I mentioned one piece, right? We are still going to continue to flip. I think that there\u2019s still a need for it. I still think that it\u2019s specifically for the kind of product that we have where it\u2019s a turnkey short term rental where people can take it and day one, they\u2019re 99% ready to go. I still think there\u2019s a need for that, but now it\u2019s just, \u201cOkay, how do we make sure that we\u2019re protecting ourselves?\u201d
So one of the things I said is the time that we\u2019re taking to do projects, we want to make sure that we\u2019re keeping that timeline super short from closing to closing. The second thing that we\u2019re doing is we\u2019re just being a little bit more patient with the volume of deals that we\u2019re doing. So there\u2019s 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, \u201cLook, we\u2019re not going to buy anything else until we disposition this flip that we currently have.\u201d
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\u2019re 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\u2019re back in the same position all over again. So I\u2019m trying to talk internally to make sure that we\u2019re approaching these things with the ultimate amount of conservative or conservatism, conservativeness, I don\u2019t know what the correct word is, but that we\u2019re being conservative and that we don\u2019t move forward until we\u2019ve got our own kind of numbers in house to prove what we think that these values should be worth.<\/p>\n
And if you end up doing multiple and then that does happen where it decreases anymore, that\u2019s the couple checks you have to write out instead of just one.<\/p>\n
Instead of one, instead of one, right. But overall, I still think the business model makes sense. And I think what we\u2019re 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\u2019re thinking, \u201cOkay, does it make sense to spread that risk out across different markets and can we potentially rebuild the team that we\u2019ve built in this market and take it elsewhere? Can we take it somewhere else?\u201d Because honestly, as a short term rental, that market is still doing really well. It\u2019s just the resale values where we\u2019re seeing this market get hit. So from a revenue perspective, most all of properties are still net positive, but it\u2019s like how can we balance out that equity loss potentially by going into other markets as well?<\/p>\n
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\u2019s Tony, he lost a $100,000, but he\u2019s still going a real estate investor. He didn\u2019t quit. He\u2019s 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\u2019s maybe not such a big loss. So maybe you need to look at different markets to be able to find something that\u2019s 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\u2019re real estate, but different kind of income streams from your real estate. So you have the flip business. Are you wholesaling some houses too?<\/p>\n
Yeah, we did-<\/p>\n
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-<\/p>\n
Yeah, we have a cleaning company.<\/p>\n
\u2026 designer. You\u2019re cleaning, and then you\u2019re 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\u2019s foundation was buying short-term rentals and building that and then branching off and going, Tony didn\u2019t start out with, I\u2019m going to flip, I\u2019m going to buy short-term rentals. I\u2019m going to start a cleaning company, I\u2019m 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\u2019ve 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?<\/p>\n
Yeah, I think one of the best decisions that I\u2019ve made as an entrepreneur was narrowing down on one specific niche. And when I made the decision, I literally told myself like, \u201cOkay, if I\u2019m 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.\u201d And it wasn\u2019t 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, \u201cOkay, if we\u2019re doing this really well internally, can we offer this to other people.\u201d Cleaning, we literally just couldn\u2019t find good cleaners in Joshua Tree so we built our own team. And once we had that team built and stabilized, then we said, \u201cWell, hey, if we have these processes internally, can we give them out to other people?\u201d
Property management. We had to build out and become really good at managing short-term rentals at scale. Okay, now we\u2019ve 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\u2019t try and do a thousand things at once to start with focus on getting really, really good at one thing, and then naturally you\u2019ll start to figure out where the other opportunities are. So guys, I know this is supposed to be Ashley\u2019s talk show moment where she\u2019s the host here, but I just want to give a few takeaways before I let you guys go. So first thing I\u2019d 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\u2019t always mean they\u2019ll actually end up closing. The reason it\u2019s called a pre-approval and not a final approval is because there\u2019s 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\u2019s 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\u2019s 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\u2019t not just for flips, but even for your BRRRRs. If you\u2019re 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\u2019re flipping, whether you\u2019re 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\u2019s 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\u2019re actually able to do. And then two more points here. Appraisals are subjective and you don\u2019t 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\u2019s 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\u2019s 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\u2019re 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.<\/p>\n
Thank you guys so much for listening to this week\u2019s rookie reply. I\u2019m Ashley at Wealth From Rentals, and he\u2019s Tony @tonyjrobinson, and we will be back on Wednesday with a guest.<\/p>\n