I Just Lost $25,000: What I Learned from My Worst Real Estate Deal (Ever)

0:00Everyone loves hearing about the deals that worked, the BRRRRs, the home runs, the ones that changed everything. But nobody talks about the deals that quietly drain your bank account. So today we're doing the opposite. We're breaking down deals that we actually lost money on. And we'll walk through what went wrong, the red flags we missed, and what we'll probably never do again if we were rookie investors.

0:27This is the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's get into the episode for today. So Tony, I thought today would be a great episode to talk about a deal I just lost money on. And it's actually the first deal that I have lost money on. And I say this with some disclaimers, as in I haven't sold a ton of properties, only done four flips, I think, and two were with like a super experienced investor. So two were really only on my own. So I don't have a larger frame of properties that I've sold. So maybe down the road, there'll be more losses when I actually sell a property.

1:10But yesterday, I just closed on my first bad deal. So I thought we could use this as a therapeutic session to talk about the emotional damage, the financial damage, and the lessons learned moving forward. Before we jump in, Ash, I just want to frame for the listeners, is a deal automatically a bad deal if you lose money on it? Or is there a scenario where you maybe lose money on a deal, but it's still a good deal? Just like from a theoretic standpoint, like, you know, strategic standpoint, do you feel that there's a scenario where you could lose money on a deal, lose money on a transaction, but in your mind, it's still be qualified as a good deal?

1:57I guess if I got tax benefits from it, maybe. You know, like maybe if I looked at the my tax savings and it kind of like actually balanced out, like even though the deal sold at a loss. And I don't know if there's a right or wrong answer to that. Right. You know, it's just as we talk about this, I'm just trying to make sure that our Ricky's going to it with the right frame of mind. And obviously, as hosts of this podcast, we're never going to encourage someone to step into a deal where they're actively losing money. But I think there is one scenario that I can think of, and this is maybe more so specific to my niche, but it can actually probably be applied in maybe a few different scenarios.

2:39One scenario is if you buy a short-term rental and your primary goal on that property is not necessarily to generate cash flow or even get the tax benefits, but just to maybe subsidize the cost of owning a vacation rental and a place that you truly like to go. Like I know folks who want like lake houses and they grew up on the lake house, you know, their grandparents had a lake house. They went to every summer and they spent a lot of time there. And it's like, it's so expensive where maybe it doesn't make sense. Like we're not going to be cashflow positive, but I'm fine contributing a little bit of cash towards this deal because in the grand scheme of things, it's still cheaper than if I were to, uh, you know, continuing just a vacation in that market.

3:24Right. And I'm still getting the benefit of, of, of having that. Um, I think about you and the deal you did with your sister or even someone that's maybe looking like to house hack. I think that is a great example that you gave. I think I've looked at it. I flipped the mindset on that because I did buy a lake house going to rent it out a little bit, but I'm definitely not making money on it. But I looked at it not as this is a deal I'm losing money on. I looked at it as more of this is a property that I'm saving money on instead of not renting it out at all. I'm getting into the property for less money because I am able to rent it out.

4:09So I guess like two different ways of looking at it. Like if you're looking at it from a business standpoint, yeah, it's not a great deal. But if you're looking at it on a personal level, as in like, this is offsetting some of my costs, this is a good deal to me compared to a property that I couldn't rent out at all. Yeah. And you kind of hit on the second point I was going to make as well as like, if you're doing maybe something that's like similar to a house hack or you're getting some sort of utility from it. I know, I know a guy who's actually my trainer for my first fitness competition. And he had a house that instead of turning into a rental, he let his aging parents move into it.

4:48And again, you think about like investment wise, he's losing money on this deal. But it's solving something else for him in the sense that now his parents have a home that they can move into as they get older into age. So I think a lot of it It does come down to like personal situation and maybe motivations aside from just the cash flow. Like you mentioned tax benefits. I definitely wouldn't encourage someone to buy a deal that doesn't cash flow just to get the tax benefit because in theory, you're going to eat up all of that tax benefit by this negative cash flow. But maybe you're getting a significantly large tax break by buying this deal.

5:20And there's a ton of appreciation. A ton of appreciation, right? But you're still putting in, you know, however much on every single month. It's a bad deal in a cash flow sense. But from the tax benefit and the appreciation, you're making out significantly more. So I just wanted to ask that question first, because I just want to be able to frame what we talk about next from the right perspective. And then I think even above and beyond all of that, actually, like the the idea that especially for rookie investors, that we should view our first few deals really as education more than anything else is a hill that I'm willing to die on.

5:57because I think even if we lose a little bit of money on our first or our second or some of our first few deals, as long as we learn from those mistakes and we continue to move forward, we are now in a better position to make sure that the next deal does even better and that the deal after that does even better and the deal after that does even better. So it's the cost of education sometimes to kind of get those, you know, the school of hard knocks to teach you the right way and wrong way to do things, which will ultimately allow you to be a truly successful real estate investor. So with that out of the way, Ash, let's get to your deal, right?

6:30Drum roll, cue the scary music. Let's get into the deal itself. So first, tell us what the deal was. What kind of property was this? So this was 10 acres. It was two different five-acre parcels. And on the one five-acre parcel, it was a house with a small barn.

6:56It in the back of the acreage. And then there was, this was the real selling point of the house, the real bonus. You don't see this amenity often, but a double seater outhouse. So it had running water for the sink to wash your hands. It had electric for the lights run to this outhouse, and then it had two seats. So thinking romantic getaway, you want to go side by side with your partner hold hands. This was the place. I had it, but we just closed my house. Wait, Ash, I was confused when you first said that, but as you continued, it started to make more sense. Side by side. Toilet holes for the outhouse.

7:41That is a different level of commitment that I don't yet think my wife and I have reached to do side by side outhouse excursions. Obviously, that was a selling point. That was one of the five acre parcels. What was on the other side? The other side was just a vacant lot. So this property, I was somewhere. We bought this property. We got it under contract in 2021. So this was Daryl and I were buying this property together in our LLC. This was his second deal, I think. And he went with the agent to look at this property. It had been listed online for$75 ,000. It was a for your house. So this lady, she was one hundred and two.

8:22I think some guy came to deliver her wood. Her only source of heat was a fireplace. He looked at her living conditions and he called family like social services or whatever. they came and basically took her away, removed her from the home and took her somewhere. I don't know. But all of her stuff was left there. I don't think she had any family or anyone. And somehow an agent was hired by the state to actually sell her house and sell the property. So Daryl actually went and looked at the property and sent me videos, pictures. I mean, And you could barely walk through this place. And we decided that then there was a lot of people looking at it.

9:09So we actually offered$102 ,000 for the property. It was us and one other buyer that was really competitive offers. And we ended up getting the deal, said everything could be left behind. We'd take it as is. So we got it under contract for$102 ,000. Got it. Now, given the condition, I'm assuming traditional financing probably wasn't an option here. So how did you fund it? I actually used a line of credit that I had on another property. So I used my line of credit to make a cash offer. Now, for a rookie listening, there might have been a few things that you stated that would have scared them off, right?

9:51Hoarder house, those terms can be scary. and usually when there's so much stuff that you can't even look around as you start to remove things you start to uncover other surprises but what about this deal made you feel confident that it was worth the you know north of 100k that you invested uh the land um our our goal of this property was to turn it into a short-term rental and rent out the house and turn the the barn into like a bunkhouse that had electric already run to it and was like the the barn was actually nicer than the house um and there was it was a 1200 square foot house but it had three like full bathrooms in it only one bedroom like it was a very weird layout and it was like the outside of the house was like um uh had a lot of like stonework like beautiful stonework and somebody had told us that the lady actually built the house herself and stuff like that.

10:52But there was no drywall. There was no flooring. It was all concrete floors. And the bathroom walls were put up, but it wasn't even drywall. There was paneling and stuff. So we ended up getting everything out. We paid a contractor. He did garbage removal,$3 ,500 to go in and throw everything out. I am pretty sure he undercharged us. And on NextJobs we used, overcharged us to make up for that one because it definitely should have cost us a lot more. And then after that was all done, we decided that we would just go and do demo on everything and just get it to zero and start completely fresh. So then we got more dumpsters, put about another, I don't know, $2 ,000 into dumpsters and demo removal of toilets, the kitchen cabinets, things like that, and threw all that out.

11:57So that was really the only money we put into it, besides holding costs of insurance, property taxes. Once in a while, while we had it listed for sale, we paid for snow removal. But other than that, we didn't have a ton of holding costs. So what were some of the red flags then, Ash, as you guys started the junk removal process that maybe you saw, but you're like, eh, you know, you kind of shrugged them off. I think the hardest part for me when I looked at this property is, first of all, I was in a place where I wanted a deal. I had been, this was like, you know, when the height of properties were and, you know, everybody was looking for deals and interest rates were low and things like that.

12:48And so I was trying so hard to get a deal locked up that I was more worried about getting a deal locked up than making sure that it was a really, really good deal. The first thing was we shouldn't have paid that much. I should have spent more time looking at comparables. I mean, it's hard to say that, oh, this was the height of the market that I should have known I couldn't sell the property. So like one thing that was off was my timeline was, yeah, if I would have gotten this ready and I went really, really fast and refinanced it, then yes, it probably could have worked out. But I didn't account for interest rates going up and for the market changing and things like that when I took my sweet time.

13:33And I would have to say this property was a bad deal because of me, the operator of the property. I dragged my feet. Other opportunities on other things came up and I took that money for the rehab. And I, you know what, that can wait. We don't have a lot of holding costs on it. I'm just going to go and I'm going to do this other opportunity. Then after a year gone by, I'd paid off my line of credit. So after I did a flip, so I used the proceeds from that to sell the, to pay off my line of credit. So then I had no even payment on it besides the insurance and the property taxes, which was very, very minimal.

14:16And so then it just kind of, so this bad deal wasn't the property itself. It was me as the operator, not having a consistent plan in place and kind of like sticking to it. Well, I want to get into the plan and why you didn't stick to it and what came as you thought about going into the rehab. But first, we're going to take a quick break to hear a word from today's show sponsors. For decades, real estate has been a cornerstone of the world's largest portfolios, but it's also historically been sort of complex, time-consuming, and expensive. But imagine if real estate investing was suddenly easy.

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17:15This and other information can be found in the fund's prospectus at fundrise.com slash flagship. This is a paid advertisement. All right, we're back here with today's guest, Ashley Kerr. and Ash just broke down one of the deals or her first deal where she lost money and we're breaking down why. So you talked about how you found the deal, talked about some of your initial assumptions and challenges, but obviously you said you tore it down basically to the studs. So let's go into the rehab. Obviously this is a really, really big rehab and I know you mentioned before the break that you kind of paused and diverted your attention and your funds elsewhere before coming back to this deal.

17:51Once you came back, walk us through the rehab because it was a big job. Just what were your thoughts? What was the initial scope that you had kind of put together? So I took a couple of contractors through and they were basically like, this is a$200 ,000 job for us to come in here and do it. And I was thinking$100 ,000 job. So then we started toying with the idea of doing the work ourselves because we have done that on a bunch of different properties and just hiring out what we need to do and things like that. Tony, I never did anything more. The property just closed yesterday, completely tore apart down to the studs.

18:35So that was, I guess looking at it, I didn't estimate my repair costs correctly because if I wanted to have somebody else do the work, that was a$200 ,000 bill and that was a a hundred thousand over what I had estimated on the property. So that right there was my fault for not getting estimates ahead of time. Um, with this property, I had to buy it in the, that market condition with no inspection. There really was no way to get into the property to get contractors in before closing or to have time to do that. It was, Daryl saw the property, the offer was written, the offer submitted and, you know, I had to all be done by the end of that day.

19:19There wasn't time to get contractors in and stuff to actually give us an accurate estimate. As did you at any point consider just like a full teardown and building something new? Because I mean, you had two parcels. So like in theory, you could have maybe just torn that one down, built something on parcel A, built something on parcel B. And even if maybe you didn't keep them both the short term, maybe you sell them. Was that ever part of like your thought process? It was, it definitely was something I considered. And at that point it was pretty much comparable to, because the actual like structure of the house was really solid.

19:59So it wasn't, I mean, it was like all concrete cement. The house itself was really sturdy. So it wasn't, the roof was in great shape. So it didn't make sense to tear it down, but I definitely did think about building something else on that other parcel. But then again, it went back to the point of I had other opportunities that came up that I could deploy my money towards and I ended up taking those routes. So I guess where it all kind of, it was a year ago. I've had this property listed for a year. A year ago, I finally made the decision. I'm not doing anything with this property. I've let it sit now for three years.

20:50I just need to get rid of it. I'm already using funds for other opportunities. Why not cash out of this property and take that cash and deploy it into something else? that I'm more passionate about. And at this time too, when I bought this property, I was really gung ho about like getting campgrounds and things like that. And this already had like the bunk house in the back. So like that was even like part of the bigger vision of like, how can we create this into like maybe even a campground or something like that where glamping or something like this. So I was really like shiny object chasing at this time period too.

21:26So, um, the, and the lady that owned it she actually did like goat retreats there at one point in time and that's what you would say it's a bunkhouse and like i didn't own a goat then so like goats didn't have any meaning to me but now i have my own little goat so i understand but um that's just funny and it came around full circle completely different no but somewhat related have you seen the tv show severance no i haven't no okay you got to watch severance because there's a lot of reference to baby goats and that TV show as well. So maybe you'll enjoy it. Has there ever been a TV show that you have said you watched that I have watched and vice versa?

22:06I don't think so. I don't think we've ever watched this. Actually, I think the only one, and I didn't mention it, but I was surprised you were watching it, was The Wire. Oh, yeah. And I think that's the only show. But aside from that, no. You have, your taste in good television is similar to my taste in good movies, according to you. So we got to swap seats there. But going back to your point, Ash, about the scope, it is challenging when you're trying to hustle for a deal and you can't get inside. So what would your advice be to all of the rookies? Because I've actually never done that. I've never purchased a property where I couldn't get access first.

22:45Even when I'm working with wholesalers, one of my conditions is I need to get in before we close. And that's a big part of the reason why I typically don't buy properties with like from wholesalers that have tenants, because a lot of times the tenants don't, you know, they're not super amenable to that. So in that situation, what would your advice be to other rookies in terms of how do you make sure that your scope is as close to accurate as possible if you can't actually get access to the property? Yeah. The first thing I would say is if you're a rookie and you don't have a ton of construction experience, don't buy it.

23:17Like if this would have been my first, second or third deal, putting this money into it and then not actually doing the rehab and renovating it and refinancing it. And I just let it sit. That would have been detrimental to me of having that property just sitting. And I definitely at that time period, I wouldn't have been able to pay off the line of credit with cashflow from other houses and things like that or doing a flip. So I would say until you get more experience, don't take that risk. But one thing that you can do is like better pictures, better videos. Like I said, I literally was on FaceTime, got a couple of pictures sent to me and like analyze the back of napkin math of like, okay, here's what I'm thinking we will need to do.

24:06Here's what it is. And then let's put the offer in. And I think now I have like an actual checklist template to actually fill out more of the rehab because that property would have been my only the third time that I really did a full gut rehab. And the other two were like$20 ,000 purchases where it wasn't like, you know, $100 ,000 I'm buying a property yet. So I think that made a big difference, but actually taking the time and getting really good photos and videos so that you can go room by room for each property, write down everything that needs to be done, and then put a cost associated with it and do a 20 % contingency that you're going to go 20 % over budget.

24:56Or take someone through that, even if it isn't a contractor, your dad, your friend, whoever that knows something about construction that can point things out to you too. Yeah. I think you agree 1000 % on your point of just don't do the deal. If you're a Ricky investor and you don't have that experience, that's where a lot of folks, they end up going into the forums and posting about a deal where they're super upside down is because they just kind of got in over their head. And we talk about this a lot on the podcast, this concept of comfortable versus growing versus dangerous. And where some rookies get stuck is that they only focus on what's comfortable for them.

25:33And because of that, they find themselves stagnant. And then on the opposite end of that spectrum, there are some folks who just jump so far off the deep end that they end up drowning. So we don't want to go that far either. We want to go just outside of our current skills and abilities, push ourselves just ever so slightly because that's how we get better. I heard this analogy the other day, Ash, and I'll share it quickly, but it was talking about playing basketball. I love basketball. And if I were to play basketball against a bunch of fifth graders, it would pretty quickly get boring because I'm 6 '2", 220 pounds.

26:09It wouldn't be a bunch of competition. Okay, no need to brag here, Tony. We get it. But on the flip side, if I went and I played against a bunch of NBA players, you know, who are 6 '8", 6 '10", 6 '11", it would also wouldn't be a ton of fun because I would just be getting my butt kicked all the time. But if I went and I played against a bunch of other middle-aged 30-year-olds, we're like on the same path and we can push each other to get a little bit better. So as you're thinking about your progress as an entrepreneur and a real estate investor, you want that same thing. Find those deals that push you just outside of your comfort zone so that you can take a baby step towards getting better and not necessarily jumping off the deep end.

26:52But I love that advice, Ash. So that's the rehab. So you kind of went through this and realized, man, this is going to be way more. And actually, one last thing I'll add to it. It's like if you are in a situation where deals kind of move in quickly, a lot of times this is going to be more so if you're working with like a wholesaler, usually on market deals, you have a little bit more time. You can do inspections and all those things. But let's say you're working with a wholesaler and you like the deal. Everything kind of checks out initially. And you don't want to use this too often because you'll end up burning that bridge with the wholesaler.