Mistakes to Avoid on Flipping
Knowing when to walk away from a situational scenario that does not look promising, is not a prophetic science. Without question, some of the flips I closed and bought from builders in 2005 were clearly non-deal laggards that I should have walked away from. And I mean literally. At the escrow closing signing table, I could have, but did not, just get up and walk away. And it’s not as if I had never done that before. One of my first flips in 2003 resulted in just that outcome, wherein the loan terms were explicitly not as they were supposed to be. Three days later, when the loan terms were rectified to my liking, I came back to escrow, resigned the loan docs, flipped the house, and made a quick $68,000.
As to why more prudence wasn’t exercised in the five intended quick flip homes in 2005-three in Southern California and two in Las Vegas, that were meant for a fast profit-can be answered easily. Greed. It was greed that got the better half of me. Although Gordon Gekko may have said that “greed is good,” I can tell you the gospel, and that is that “greed is destructive” if not manipulated correctly. Think of greed as fire. You can use it to warm your shelter and provide comfort to your family, or you can misuse it and it will burn your shelter and kill you and your family! It sounds crude, but I don’t know how to make it any clearer. In terms of time frame, the five homes were bought during 2005 and should have been off the books during the first half of 2006 (given an average marketing time of three to six months) but, instead, weren’t completely off the books until early 2007.
Ultimately, these were five quick flip deals-after I had successfully quick flipped about thirty to thirty Five properties in Phoenix, Las Vegas, and Riverside precedent to them-that I should have just walked away from. Although these five homes alone were not the primary reason for the financial meltdown, they substantially undermined my cash reserves at the time, which had the domino effect and was the contributing cause of not meeting the mortgage debt service of the nine condos I had recently bought. In short, it was too much too soon. And simply stated, I had gotten over my head. At my pinnacle I had approximately a dozen properties either in contract for purchase, under development, or in escrow on the flip side. My level of activity probably equaled that of a small property management company or local developer. The velocity of activity, in which I was working sixty-plus hours a week and clocking 25,000-plus thousand miles a year on my car between travel to Phoenix, Las Vegas, and Riverside, on a more reasonable level should have taken a three-year period to play out, rather than the eighteen months that I squeezed it into during the five year run that Potter Equities actively functioned.
In total, these five deals, or rather laggards, cost me nearly a quarter million, which is a quarter million dollars I’ll never see again. Much of that monetary loss was primarily from mortgage debt service on the five flips, which I may have netted $15,000 out of those five properties, but all of which I nearly wrote a check at escrow to close, which is always a painful experience. I hope you never experience writing a check at escrow. It’s an awful, sick feeling.
The other half of the meltdown was the nine condos that should have never been purchased. Without getting into the bitter detail, the nine deals on paper just didn’t pencil out in the aggregate.
But almost more frightening-and three years into already successfully flipping new tract homes by 2005, my best being a $104,000 flip in Moreno Valley-was that I had already at this point walked away from at least five to six deals that were clearly and demonstratively not textbook flip deals. Hence, the past experience and decision making was there, the discipline was there, the gumption, balls, and the Machiavellian cut-throat ability to walk away from a deal was there, so why didn’t I walk away? Simply stated, it’s complicated. And quite frankly, I’m not certain. It’s like asking a compulsive gambler why he didn’t just get up from the roulette table and walk away but instead just gambled away his daughter’s college tuition money. Or it’s like asking why an alcoholic gets drunk when he knows of its destructive impact upon his own life and his family. As you can sense, a clear explanation is complicated.
I do know with absolute clarity, however, and one that I’m personally disappointed in, that I deviated from a successful business plan that had created substantial wealth for me in a short time span. The fact is, house flipping of new tract homes was and can be a successful investment strategy for the small real estate investor. And just because my mistakes contributed substantially to my inability to continue flipping, it does not undermine the validity, soundness, and time tested practice of flipping new tract homes for a quick profit.