In 2017, I bought what was probably the fifth house of my real estate investing career.
I had flipped exactly zero houses.
This one was going to make somewhere around $80,000 to $100,000.
Instead, we lost roughly $120,000.
It remains one of the most important houses I ever bought.
The Deal
The house was more than 100 years old in an improving part of Oklahoma City. It had the charm people want from an old house and, we thought, plenty of financial room for a major renovation.
We bought it for around $90,000 and believed the after-renovation value could be roughly $350,000.
My partner and I also thought we had assembled the right people. The person bringing us the deal was an experienced real estate investor who also operated a construction company. His partner was a licensed real estate broker. There was a designer involved. We looked at previous projects and checked public records.
They appeared to have done this before.
Our role was essentially supposed to be the money. And that money wasn’t sitting harmlessly in a bank account. We were financing the investment on personal credit.
We trusted their experience and lowered our own standard for verification.
That was the beginning of the problem.
We Didn’t Know What We Didn’t Know
We knew the foundation was bad. We didn’t understand how bad it was or what properly fixing it would require.
We didn’t get a structural engineer. We didn’t scope the sewer. We didn’t get independent foundation estimates. We didn’t even get a normal home inspection.
Today, that sounds crazy.
At the time, we thought we had experts handling those questions for us.
The house eventually revealed major foundation problems, two sewer lines at different depths, electrical issues, HVAC problems and the endless complications that can come from rehabilitating a century-old house.
Our contractor draw structure wasn’t much better.
We had divided the project into broad thirds. The problem was that we hadn’t done a good job defining what one-third complete actually meant.
That’s where I learned an important construction lesson:
Visible progress and actual progress aren’t the same thing.
Demolition happens quickly. Sheetrock goes up. Cabinets get hung. Suddenly a destroyed house looks like a house again.
But behind all of that are foundations, electrical circuits, plumbing, HVAC and dozens of details that have to be right.
A renovation can look nearly finished and still be a long way from being finished.
Eventually the original contractor became insolvent and work stopped. We hadn’t paid the final draw, but that didn’t matter much. The money remaining wasn’t enough to finish the amount of work actually left.
Money paid did not equal value completed.
Fixing the Fixes
We went through multiple contractors trying to finish the house.
One produced work that was closer to a basic rental renovation than what the property and neighborhood required. Another created additional problems, and materials we purchased disappeared from the job.
Eventually, a fourth contractor helped get the house working correctly.
By then we weren’t just renovating an old house.
We were paying people to fix the work of the people we had previously paid to fix the house.
The most memorable example came when the house was finally listed for sale.
During a showing, our realtor discovered that part of the upstairs ceiling had collapsed.
Someone had installed the air conditioner without properly plumbing the condensation line to a drain. When the AC started running during the summer, the condensation went into the house.
Eventually the sheetrock gave way.
The ceiling fell down.
At that point, it almost seemed appropriate for the project.
The Problems Eventually Find You
We also discovered that permits hadn’t been handled the way we assumed.
When it came time to turn the gas back on, the city required testing and inspection. That exposed additional problems with the HVAC, electrical work and other parts of the renovation.
The things we had failed to independently verify at the beginning were finding us at the end.
And problems are considerably more expensive to fix at the end.
Eventually we stopped trying to force a sale and rented the house for roughly a year and a half. We gave the tenants a good deal and aggressively fixed issues as they appeared.
Eventually, we sold it.
Between construction overruns, contractors, work that had to be redone, carrying costs and a selling price below what we originally envisioned, we lost roughly $120,000.
My first six-figure loss.
Taking Your Stripes
I could turn this into a construction checklist.
Get an inspection. Use engineers when appropriate. Verify permits. Vet contractors. Define draws. Inspect work before releasing money.
I learned all of those things.
But that’s not really why this house matters to me.
It was one of the most formative experiences of my early business career because it taught me how much I didn’t know.
It taught me construction. It taught me how contractors and vendors talk. It taught me to recognize the difference between someone trying to finish a job and someone trying to get to the next check. It gave me patterns I still use today when selecting vendors.
I’ll write separately about How to Pick Vendors, because much of what I believe about vendors today started with experiences like this one.
But the larger lesson was simpler.
Business is hard.
Sometimes you make a bad decision. Sometimes someone takes advantage of you. Sometimes you simply aren’t experienced enough yet to recognize the difference between confidence and competence.
And sometimes all three happen at once.
You take your stripes.
You figure out what happened. You change how you operate. You learn enough that you’re less likely to make the same mistake again.
And then you keep going.
The $120,000 loss didn’t make me better at business. What I did after the loss did.