BiggerPockets Real Estate Podcast - 384: Losing $60k on His First 2 Flips so You Won't Have To with Spencer Cornelia

Episode Date: May 28, 2020

You can put a dollar number on the losses Spencer Cornelia took on his first two long-distance flips... but it's hard to quantify the value of the lessons he learned and is now passing on to you. We noticed Spencer's thread detailing his struggles in the BiggerPockets forums and invited him on the show; he bravely accepted. In this episode, you'll learn the pitfalls to watch out for when taking on heavy renovations (anywhere, but especially long-distance), how to ensure quality work is getting done, and the dangers of letting projects drag on when you're locked into expensive short-term financing. Plus, it's not a total downer... because Spencer's seeing a bunch of success with his new Youtube venture, and plans to continue investing in (less aggressively leveraged) real estate projects. Brandon and David add their own perspectives having made some similar errors in their careers, and tomorrow in Part 2 they'll break down the 10 Deadliest Mistakes Investors Make. New investors: heed the advice in these two shows! And as always: run your numbers conservatively, know your own risk tolerance, and run deals by trusted advisors before jumping in. In This Episode We Cover: What went wrong with Spencer's rehabs How to ensure contractors are doing quality work Incentivizing team members and keeping them accountable How much money he paid in interest and fees to his hard money lenders Functional obsolescence and complications with older homes Why you can't always trust an appraisal "Home buyer turnoffs" and why it's easy to miss them Why Spencer sold and took a loss rather than choosing another exit strategy Why he's not giving up on real estate How you can "go broke buying good deals" And SO much more! Links from the Show BiggerPockets Forums BiggerPockets Bookstore BiggerPockets Podcast BiggerPockets Calculators Famous Four Analysis BiggerPockets Podcast 125: The Key to Business Success with Bestselling Author of The E-Myth Michael Gerber Pace Morby's Youtube Channel BiggerPockets Pro Replay BiggerPockets Webinars BiggerPockets Pro  Check the full show notes here: http://biggerpockets.com/show384 Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 384. I'm estimating right now $28,000 loss. But this one compounded for my other property, which resulted in roughly 60 grand of loss, I think about 190K of equity lost. This was the domino for a house of cards. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the hype, You're in the right place.

Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. What's going on, everyone? It's Brandon Turner, host of the Bigger Pockets podcast here with my friend, Mr. Dr. David Green. Not really a doctor. What's up, man?

No, but I play one on this podcast. Yes, you do. Yeah, today's guest calls David a doctor, which was pretty funny. Yeah, that's why I do this podcast. You call me the man, guests call me doctor. I pretty much just show up here because of the nicknames I get. That's pretty much it.

It's a pretty big deal. So it's a new week. It's a new day here on the Bigger Pockets podcast. And today we're going to bring you something a little different than normal. Normally, we love to bring on guests who tell us these amazing stories of how much money they're making and millions of dollars and profit. And, you know, they're sitting on a yacht drinking martinis with a bunch of people around them. Today's show, we don't actually do that. But today's show is very different.

Today we're bringing on a guest named Spencer. It's got the last name right, Cornelia. Spencer Cornelia. And he wrote a really good forum post, a story about a couple deals he had done that went south. And we thought it was such a compelling story. We wanted to bring it on today and have him tell you his story about what went wrong with his rehab. Now, this applies to anybody who wants to be a burr investor, a long distance investor. Do any kind of rehab ever at any point where,

their local or wrong distance, this stuff applies to you. Single family, multi-family, whatever. The mistakes that he went through, the errors that happened, just the flukes that went wrong, could happen to you. And so this show was all about how to avoid that. Then, at the end of today's show, David and I, when Spencer leaves, it's about 40, 45 minutes into the show, Spencer says goodbye. And then David and I actually will walk you through kind of commentary on a bunch of the things

that we noticed that Spencer could have done differently. And we're not saying this to pick on him in any way. He is a rock star and he's actually had a lot of success in a lot of areas of life. But we want to be able to just kind of unpack some of things that in hindsight we would have done differently or he could have done differently. And then finally, tomorrow we are going to launch another episode of the show. So we're going to do two episodes and two days. We've been doing that recently with a few different episodes.

We're going to do a show today. And then tomorrow, David and I are going to do a solo show where the entire time we're just going to unpack 10 different ways that people lose money in real estate and how you can avoid that. So it's kind of connected to today, but it's kind of a follow-up tomorrow. So make sure you listen to tomorrow's episode as well, especially during this whole COVID, like weird social distancing thing. You got time, and this is important because I don't want you guys to lose money. So that's kind of an outline of the next couple hours of your life. And with that, I think it's time to get to today's quick tip.

All right, so today's quick tip is a gentleman on the Bigger Pockets forums posted recently. This is different than Spencer. He posted something. called The Famous Four Deep Dive into the Past Seven Years. Now, what this is, it's by Cedric Mahou. I probably butchered Cedric, your last name, or Cedric. Mahou, because I don't speak French. It looks like a French name anyway, because it ends with an X. But what he did is he basically pulled all of the first seven years

of the Bigger Pockets podcast to determine what answers were given during the famous forest. If you want to know what books were the most popular books recommended, I'm sure you could guess number one, of course, during the Famous Four, best real estate book of all time. David Green was. Rich said poor dad. There you go. Okay, that's the obvious one. What people would recognize you guys on? Number two, what do you think? Did you see this, by the way, David? The book on rental property investing by investing by the

top 10. The book on rental property investing, not in the top 10. In fact, neither was any of your books in the top 10. No, no, I should say one of my books was in the top 10. But my book on rental property investing, the best selling real estate book we have at bigger pockets was not. not. Number two was from your buddy Gary Keller, the millionaire real estate investor, followed by Cashflow Quadrant, the ABCs of real estate investing, and now number five was the book on investing with no and low money down. And if you want to see the rest of the top 10 or so favorite real estate books, make sure you guys go to go to Biggerpockets.com

slash famous for F-O-U-R analysis. Go to biggerpockets.com slash famousfor analysis. You'll also to learn what authors were cited the most on the podcast, what the top business books of all time is. I will give you number one. What do you think number one was, David? Best business book of all time. The best business book of all time. This one book, yeah, almost, yeah, almost twice as much as any other book recommended for business book was this one. What was it?

Give me a small hint. We had the author on the show many years ago, and it was an incredibly weird, weird episode. The Gary V one was kind of interesting, but I don't remember his book. Yeah, I can't think of it. E-myth, Michael Gerber. Oh, yeah. Yeah. Remember that episode?

I mean, it was a fun. It was a good episode, but it was just a weird episode. I think he came out of the gate. His first comment was about how terrible Josh and I were as host. It was like, whoa, all right. We're starting this thing hot. Anyway, but that book was phenomenal. He came out swinging.

Anyway, if you want to see the rest of those again, go to biggerpockets.com slash famous four analysis. and you can look at the entire spreadsheet, you can download it, not especially, but a PowerPoint about all the different things, including a what they call a word cloud of all the advice people give on what separates successful investors from those who give up fail and never get started. It's really cool to look at. Like you have to do something, sticking with it, keep pushing forward, mindset persistence, and hundreds of other things that people have said. Check it out. And with that, that was the very long, quick tip.

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Thanks so much for having me. Been following the podcast for years. Oh, cool. Well, I heard that you recently did a deal that didn't go so well. you put a pretty phenomenal post in the Bigger Pockets forums, a phenomenal update on what exactly happened. And so we thought it'd be interesting to bring you onto this show, which we're talking about when things go wrong and how to avoid those problems. We'd have to be good to begin this with a story of your recent deal. So can you kind of walk us through the beginning? Maybe first of all,

before you get to the actual deal, just a quick, who are you? What do you do? How do you get in the real state, kind of, and then we'll get into that deal. Sure. I live out in Las Vegas, Nevada, I work in tech, so I have a day job and looked at real estate as a fun little hobby on the side, decided to get into flipping houses in Cincinnati, Ohio, 2,000 miles away. And so I took on my first two deals in 2018. So I don't just have one deal for you today. I've got two. Yeah, too.

All right. Two that didn't go well. Long distance. Long distance, yes. Now, you used to live out in Oakland, out in my hood. Is that right? That's correct. Yeah, I lived in Oakland in 2014, 2015.

I work for the A's pro-visable team. That's awesome. So were you in East Oakland? I was actually downtown 12th Street right by the Bart Station, right by the Ash Jeeves old building. Oh, yeah. The 14th and Broadway was the epicenter for like every protest that happened over the last eight years or so in Oakland. I was there. Maybe we ran into each other.

I was there all the time. It's possible. Well, walk us through. First of all, why did you choose to do a lot? I mean, Vegas is not a bad market to flip houses in or to buy even rentals. Why did you choose to do Cincinnati? At the time, I didn't have quite. enough money to compete in Las Vegas. And so I looked at the Midwest as just an opportunity to buy

and hold. And so a buddy and I flew out to Ohio. We checked, you know, we heard all about Ohio on the forums. We heard about these great returns. So we decided to fly out there, did a little trip for Cincinnati, Columbus, and Cleveland. And it just so worked out that I had built up a team in Cincinnati. I felt like I had built up a pretty strong team of good resources out there. And I got back home and started looking at deals. And I really liked the low purchase price. And I felt like I could really compete there. And I found a hard money lender that required very little down. So I felt like I could compete mostly. So that's why I chose that market. And so my first deal took place in 2018. You want me to go ahead and go into it? Yeah, let's hear about it. Let's go into it. So

September 2018, I bought my first flip, Cincinnati, Ohio, very good market. I heard nothing but good things. Found a contractor through bigger pockets, actually. And we met up and discussed the deal. Everything lined up. I really like the numbers. Got a hard money loan. And I started the process of that in October of 2018. Tell us how you found the people that you put on your team. I found my real estate agent through Facebook. There were a couple of Ohio Facebook groups. And so I found a few people that way.

Through my hard money lender, I actually made some really good connections with investors who also worked with our hard money loan. And I found my contractor through Bigger Pocket. So I felt like I had a good group built up. And that's why I decided to go ahead through a flipping. Because obviously we know flipping is very risky. it's 2,000 miles away. It was my first deal. A very, very risky venture. But I was very confident

with the people I had met. And I felt like I had everything lined up to do a successful deal. Okay. Okay. Well, good. We'll find out what happened. Then we'll come back and try to put the pieces together for like how you put the team together and where things could have went wrong. So you found the deal. Was it through an agent? This one was actually on Craigslist. Purchased the property for $39,000. and we were estimating between 55 and 65,000 for rehab. It was in an area, a market within Cincinnati that was hot. Houses were selling quickly, and it seemed like the value was going to be somewhere in the 145 to 155 range.

So I felt like the values were pretty good there. So you bought it without representation or did you go find an agent when you found the house? No, I did this without, I did this for me. I had the agent as a connection and I reached out to him. He liked the neighborhood. He was actually from that neighborhood. So I had heard good things from that neighborhood. And he was going to then sell it on the back end.

So I was very confident in the numbers. I was very confident in the ability to exit and that we were in at a good purchase price and rehab price. Yeah. Okay. All right. So the plan was buy it for $39, put in $55 to $60K. Let's just say you bought for $40, put in $60 to kind of round some numbers. You should be in for $100K.

And then sell it for $1.45, $1.50. You even have to realtor fees and stuff. You should profit $20,000 or $30,000. Is that what happened? Even worse, the property appraised for 170 when I purchased it. When you're looking at those numbers. When you're looking at those numbers, you're thinking, man, this is a home run deal. What in the world went wrong?

How did you lose money? Yeah, let's hear it. The hard money lender was very expensive. Now, I totally take responsibility for the loan I took on, 15% interest. I believe somewhere around three points. They did $10,000 down as the down payment was, regardless of loan size, $10,000 down. So that's what I liked about it. It was very low down payment.

And I figured I've heard all about flipping. You're in and out in three months, maybe a month to sell, a month to close. So we're looking at four or five months. I knew it was very risky. However, everything was lining up to be in and out in five months. All the numbers lined up. And so you want me to go ahead and go through the deal? Well, how did you get it appraised?

Did you just pay for an appraisal on your own? The lender paid for an appraisal. Okay. So part of the deal with you getting the loan was it would appraised. And it appraise, and it's as is condition at 170 and you were paying $3. and you were paying 33? Not as is. That was roughly what it would be worth following it.

I believe the lender did that to then go. I think they did 70% loan of value for the total cost. So there's a fancy word for that. I can't remember, but they basically, the appraiser stakes what the house will be worth when it's fixed up and it looks like the other comparable properties and says

at that point it would be worth this much. Yeah. So you're looking even better, right? You just had another 15K. Yeah, because I had already gotten approved for the loan. So I'm thinking 145, 150. when it comes back 170, that's kind of a magical 20K that came out of nowhere. Then I'm thinking, man, this game's kind of easy.

Yeah. Yeah. So what happened? So essentially, I began the rehab process. And this was my first time flipping. So this is all very new to me. The, a few items were completed. Let's call it the roof and the exterior siding.

I go to the lender to get a draw. They send out an inspector that I pay $150 for. The inspector goes to the property, checks off the line items that were finished. and then sends me the money. And the way the contractor was working is the contractor actually fronted the labor and materials because he's an investor. He was helping me out.

He knew that it was my first deal. And so I'm thinking to myself, he's fronting labor and materials. The inspector goes to the property and checks it off, sends me the money, which was about even for what the cost was, I then send him that money, and then we continue the process. I'm thinking nothing can go wrong.

And essentially what happened is over time, there were also some headaches. This was a full gut rehab in Cincinnati, Ohio for a house that's 100, whatever it was, 105 years old. So you can imagine there's things that come up. There's winter issues there. It was an extremely cold winter, winter 2008-2019. And so the rehab process extended into May and June.

And we'll get into the mistakes I made, but I think the biggest mistake, I didn't have anyone go check. So I was leaning on this inspector, this third-party inspector that was charging me $150, I was using my trust. I put my trust in that person that the quality of work was good enough for him to check off the line items. Well, come to find out at the very end when my agent goes to check out the property to then list it and take pictures, I get told over the phone that's the worst rehab he's ever seen. Oh, wow. Yep. Was that because of because the quality, like the contractor wasn't good enough?

Was it, or do you think it was more because you didn't specify what you want? ask that because like sometimes like contractors will do decent work. I just like they are horrible at design. So like, oh, why? You know, that doesn't look bad. Like that looks great. And you're like, no, that's awful. Or what was the reason for it?

It was very poor quality of work. And if you were to see pictures, if I were to send you pictures following it, there were a lot of things that I felt were skipped. And there were items that I felt were so bad that I've been told by other people that I should have sued the lender for like this, this isn't even close to quality. Like, no one in their right. mind would consider this quality. We're talking holes in window, holes in windows. Yeah, just a lot of

issues and I'll leave it at that. But anyway, so it was one of those worst case scenarios where you find out right at the end that the work was done and you have to go back. And the whole old cliche of, if it's not done correctly the first time, it's going to cost you way more in the long run. Yeah. So what did you end up spending on that first, like, were you in budget at least or were you over budget on the, on that time? Yes. He was very fair on price. And I don't mean. mean to come across as he's not a bad dude he's a very nice guy as a guy have no ill will towards it just was poor quality of work so at that time we were still all in at about 100 110 now with the loan costs the upfront fees and points as you're well aware of of hard money it starts pushing into that

115 120 yeah and what really went wrong is at that moment we're about eight months into it at that moment i have to fix the house in order to exit it so i needed to come out of pocket even more money roughly 20 grand to then fix it enough to sell it. And unfortunately, when I went to sell it, the neighbor had a lot of junk in their yard, which turned off a lot of buyers. This being my first property, I know experienced people out there listen to this. Man, this guy's in a day. There wasn't a driveway, which I didn't calculate as being super important, which turned off buyers. And then at that point, even with the second rehab, the quality of work was still a little shaky here and there. So it took four months to sell.

Well, look, man, just to give you just some quick, make you feel maybe a little better about that. First of all, nobody thinks you're an idiot for any of this stuff, right? You're, you did it. You jumped in. You're doing this like super complicated thing from a long distance. Like, just the bravery alone is awesome. But just to let you know, like, yesterday I went and looked at a house here in Maui. A friend of mine is thinking about moving to the island. I went and looked at a house for him. He asked me to record a video. I walked out on the whole house. Spent 25 minutes with my age, a top agent here. Me, and Ryan Murdoch.

Ryan Murdoch's like, you know, like the mercenary, like the real estate god here, right? The three of us walked down this property, all of us experienced in real estate for years, did the entire thing, video recorded it, talked about it, sent it over to my buddy. He calls me back later and says two things. One, he said, did you notice there was no garage? And we're like, no, I never noticed there was a garage or not a garage. And then he goes, and then you walked by this door and you said on the way down the driveway, you said, oh yeah, look at that red door.

we'll have to go check that out. He's like, you never went in there. In other words, we never went to the basement of the property. So this is three people who have been doing this for combined like 30 years, right, of experience. And we didn't look at the basement and we didn't notice there was no garage there. And so like, just so you know, like even experienced people, like we missed up. This is why like the whole checklist manifesto book or if you read out check like checklists are so important. Because no matter how good you are, like you miss things. If you don't have like a good like so anyway, just don't feel bad about missing things like a driveway because, man, I still miss things all the time that are like obvious. Like, oh, you didn't

go to the basement of the property. You didn't see like, I don't even know if there was a basement. Like, what did that door go to? I don't even know. That does make me feel a little better for sure. David's over there just thinking, I don't make mistakes like that. A bunch of morons here. Yeah. So what to add to the story to make it a little more interesting too is is the closing process was tough. I have no money. We're down to the end. It looks like that we finally find a buyer. We listed initially at 160. We eventually get down to 1.30. over four months. We find a buyer, 4K towards closing costs. Everything's okay. It's FHA buyer. We're looking at 45-day close and come to the end. I'm finally about to sell this. It's actually on Elm Avenue,

so it was nicknamed Nightmare on Elm Street. And so I'm about to close it. And this appraiser, according to my agent, was acting very unprofessionally. I won't bore you with the details, but essentially he did something kind of out of line. He ended up going down to the basement and just finding a couple pieces of wood. Even after termite inspection, he, goes and says, we need a structural engineer because there's termite damage. So it extends closing even more than, of course, this health crisis hits right at the same time. And I'm out here in Las Vegas just freaking out. It was not fun. But we closed. And the story is an interesting one. So they bought the property. They still did. They still bought it. Okay. So that ended. What was the ending?

Like, what did you make? What'd you lose? Like how to turn out then? I'm estimating right now, $28,000 loss. Wow. But this one compounded for my other property, which resulted in roughly 60 grand of loss, I think about 190K of equity lost. This was the domino for a house of cards. Let's go back to that first one real quick.

Sum up the numbers. You bought it for 39. What did your rehab end up being? I need to look. Let's call it 70 to 80. What really got me was in order to close it, it took September to March. that would be roughly what 18 months 16 months at 15% interest is what really got me and the points it's a very

expensive uh loan and then on the back end obviously the the closing cost to close and then another 4k to a buyer and closing costs so you start adding it all up and it gets pretty pricey and we ended up selling at 130 by the way not 170 there we go okay that's my next question so we sold it 130 4k to let's just call it 126 after closing costs to the agents yeah we're yeah i'm i'm I think it was roughly $28,000 in the whole, just from a straight numbers accounting perspective. But the real numbers are all the ancillary costs, the credit cards that I had to hold, all the interest, and additional stuff. You know, it's interesting.

Before we dive into, like, the specifics on this, like, your numbers are almost identical to the worst deal I ever did. I did a flip, but I thought the, and the same thing killed me at the end, which was, I thought the ARV and the lender's ARV, like the after-payer value was $170. That's what we had heard. That's what we all believed. mine ended up selling for 115. And so, like, how we could be off from 170 to 115, I don't, I mean, like, to this day,

that house, I mean, today, like, what, eight years later, that house is worth, like, probably 250. So I don't know why nobody wanted it. I tell you, man, I am all in on seller financing. I really dislike playing games with banks and lenders. That's a whole other conversation. Yeah. Well, let me jump in here.

Because as a real estate agent, I see this from a different perspective. I get the benefit of my deals and all my clients deals instead of just my own. I just met with a guy the other day in a city called San Diego. You know where that is, Spencer, really close to Oakland. He said, hey, I want to sell my house. I had it appraise when I got it refinance a year ago at $750. So I go over there and I look at comps and I can't, it's a condo, not a house. I can't find anything higher than $635, which is the only comparable sale and it sat on the market for 45 days, which in our area is a very long time.

that should not stay on that long for, especially a condo like a starter home. And I don't know what that bank was looking at. I couldn't find anything that came even close to 750 other than it's what I think happened is their reappraiser, sorry, their appraiser did not know that that was a condo and not a home. And they use comparable sales of houses. That's the only thing that makes any sense because it literally nothing in that complex or outside was anything higher than 635. And this is, if you're using that information to determine what you think of property's worth,

you can get burned because appraisers are not perfect. And just like everyone else in the world, there's good ones and bad ones. There's good cops. There's good teachers. There's bad teachers. Educators, real estate agents, all of it. So that's the first thing I want to make is an appraisal is not a complete science that you can just bet on. The other thing is because we've had a market that's been going up, we assume that the appraise value is what it will sell for or less than what it will sell for. But that's not the case all the time either. An appraiser could say it's worth 170, but if there's no demand on the market for it or there's a ton of other inventory, maybe someone's only willing to pay 135. And you have to remember that. It's one factor in an

equation that determines flipping a house or selling it. How much someone's going to pay for it's the ultimate thing. And the appraised value is one component that goes into it. But imagine if you've got like 30 houses and two buyers and they all appraise at 170. Do you think they're going to sell 170? There's no way they're going to sell for less. And conversely, there's the opposite. it. When you've got 30 buyers in two houses, it really doesn't matter what it appraised for. It's going to sell for more than that. That's a man speaking from experience. That's a research paper right there.

Dr. David Green. Exactly. Dr. David. Wow. Dr. David Green. Real estate doctor. I like it. Spencer, why do you think the ARV, the 170 that they were predicting?

Why was it so bad? Do you think it was his lack of skill on the appraiser? Did the market change and shift that much? It was because the quality. wasn't where a 170 house needed to be. And so they just didn't want to pay that much. Like what led to that? I still think 155 was a little more accurate.

The 170 was definitely inflated. So let's kind of get it down to 155. Okay, sure. How much do you value a driveway to maybe they don't really consider that? It was a hot market. That definitely seemed inflated though. So I think the difference in in that real number, the 150, 155 and 130 was quality of work. I'll be honest, I flew up there.

I went in the house right when it was right before it was really ready to sell. maybe it was my interpretation and my experience in other markets. But when I went there and saw the house, I felt like the layout also contributed. The Midwest has some of these weird layouts that were, you know, from 19, 1910. And so when I went in the house, I didn't think anyone would buy it. So this is something really valuable that we don't talk about very often, David. And David, I want to know your thoughts on this too, because I know you deal with it as an agent. But as a buyer, what I found, I often, you guys have probably heard me say weird houses attract

weird tenants. The same thing is true for like buyers, right? like weird houses attract weird buyers or no buyers. And so in other words, an appraiser's job is mathematically to look at bedroom count, bathroom count, square footage, amenities, and that's it, primarily what they look at. They're not thinking, well, that's weird. It doesn't have a driveway, but, you know, like a wife would care about taking her groceries into the house.

Like, they don't think the emotional side of real estate. They're looking at the numbers. And so you could have a house that's three bedroom, two bath, a thousand square feet here. And a three bedroom, two bath, a thousand square feet here. the appraiser would call them both the exact same thing. But one of them, the layout is funky, it's weird, or there's something about it that just emotionally drives people away, that value is significantly less than the other house that didn't have that emotional weirdness.

And so that's something that's hard to calculate what that is, but it's really important that when you're flipping houses or buying rental properties to know that weird houses cause problems down the road that, you know, if there's functional obsolescence or whatever you want to call that. David, what do you think? So first off, very good job mentioning functional obsolescence. Thank you. Do I sound like a doctor when I talk this way?

You do. You should get a stethoscope. So that is something that appraiser should be factoring into the value. They should. And when we say functional obsolescence, it's a very fancy word for a house that doesn't really make sense with how it's designed, right? You might have a three-bedroom, two-bathroom home, but if one of those bathrooms is coming directly off the kitchen, it's kind of weird.

People don't like that. That's exactly what it was. You have that? Yeah, that's totally exactly what it was. Oh, God. I so wish I could have represented. presented you on that. Yeah, that was your red door that you didn't look at because you were in your own world. This is really good info that people are getting. The second thing is that even with

functional obsolescence or a funky layout like Brandon described, you can overcome that if there is enough demand in your market. So if a buyer has to get a house, like kind of what we see in my market right now, it's this beggars, can't be choosers mentality. Yep, it's got a bathroom coming off the kitchen. do you want it or do you want nothing? Because that's the only house you're pre-approved to get and everything else is going for $100,000 over asking price. So understanding your market's really the key. And this is Spencer where you just didn't quite know it as well as what you thought.

You didn't know you had to know it as well because you had lived in the Bay Area for a while. Everything that is built here is going to sell. Then you went to Las Vegas and now you're buying in Cincinnati. That's normal. People make those kind of mistakes in the beginning. Where you could have helped yourself would be if your team, was a little bit stronger. If you had, and we'll go into this in a minute, a really strong agent representing you, not just an agent, because I'll just tell you guys right now, most agents

are terrible. They are not very good at their job. I think everyone listening is like, yep, that's common, right? So not just an agent, but a good one that would have said, dude, I don't want to sell a house that has a bathroom coming off the kitchen. I'm a busy guy. That doesn't seem like an easy house to sell. Let's skip it. That could have caught all the areas that you and your experience weren't seeing. Those were the red doors you missed. that Brandon misses where he needs a Ryan Murdoch who's like, no, Brandon, because every time you do this, it's my job to go actually accomplish it. And I don't want to do something that's going to be hard. So I want to know it's in that basement, right? Like when we have those people on our team

looking at the deals that pay a consequence for the bad decisions we make, they definitely look a little bit closer. So that's what I would say is you can't use the appraised value. Like an engineer likes to think, okay? Here's my spreadsheet. Here's the boxes. Let me put in a number and let me see what the answer is. And then they feel good. It does not work. that way in real estate. This is part science and part art. If you've got a ton of buyers, man, you can you can play it fast and loose because there's a lot of demand. If you're going into a market without that, like Brandon said, you can't have a weird house. I'm going to get a weird person. There's not a lot of weird people. You can't have functional obsolescence.

You've got to have the right, like maybe that house that doesn't have a driveway is going to sit there because there's 19 houses that do. And there's not enough buyers to go buy them on. Really, that's what, like whenever I'm looking into a new market and I'm talking to the top producing agents, not just agents, the ones that sell a lot of houses, they'll tell me, dude, I don't want to sell that house. It doesn't have a driveway. That's going to be really hard. Where that advice can be gold when you end up in your situation, Spencer. That's like a three-hour nuanced conversation that I would love to have. You're 100% correct, man. Yeah. Let me be clear. I just went and bought the property. I didn't, I was so ready to get

in real estate and flip houses that, yes, there are so many things I messed up on. And yes, I should have consulted with others 100%. Yeah. But now everybody listening gets to learn. So thank you, Spencer. But you know what? Like here's what I... And I want to talk about the next deal too.

And I kind of wrap this one and move to the next one here. But like just kind of put this out there. And you might feel differently. I know because it hurts going through the kind of stuff. But the value of information you learn by going through that, I would assume, and I don't know if you agree, is worth over the course of the next 50 years of your career is worth a whole lot more than $30,000 loss. Would you agree?

Easily. Easily. Thankfully, as you know, my little hobby on the side is starting to bring in big money. And yeah, yeah, I'm going to make significantly more because of this experience. And really, it's if you look at the, if you look at like an X, Y chart, the pain of a lesson, the, you get more ROI. You know what I mean? Like the more pain you experience, the longer term ROI you get, in my opinion.

Yeah. Yeah. And here's another way to look at it as well. And by the way, the side thing you're doing is your YouTube channel is blowing up, which is awesome. I didn't know like self-promotion stuff. Yeah, yeah. You have a YouTube channel. I was actually looking at today.

It's awesome. What was the URL again or what was the name? It's my name, Spencer Cornelia. Yeah, because I struggled so much with the real estate, I couldn't continue in that game. So I just let my creative mind start making videos and people seem to like it. All right. All right. So we can talk a little bit more about it too later.

But just one more final point. and we'll move on in the next deal is not only did you may have lost 30 grand on this deal I can guarantee you like right now because you've shared that lesson here to a quarter million people listen to this podcast you will have saved millions and millions of dollars of other people because you went through that right so like I'm not even kidding like millions of dollars of lost revenue that other people would have had but now they've heard this story in your lesson and now we're not going to make the mistake so what's cool about being able to share your wins and your losses, is that like, yeah, that sucks and like that doesn't really benefit you to lose

that $30,000, but you just saved a lot of other people from losing $30,000 or $50 or $100, you know, potentially thousands of people from losing thousands of dollars. So anyway, so I appreciate your, you know, willingness to share that stuff. Is any other final kind of thoughts or mistakes you feel like you could highlight on this first deal before we move to the second? I think we covered them all. Yeah. All right.

Definitely consulting with experts if you're a beginner. Well, I'm sure we'll get to the lessons, but yeah. Can I ask a question of date? David real quick, because David, you wrote the long distance book, you know, long distance real estate investing. I'm wondering, one of the mistakes, the kind of the foundation, foundational mistake here was a contractor that didn't do what the contractor should have done. And so whether that was your fault or their fault, let's just disregard that for now. But David, what should a person do? Because it's hard to flip or to burr out of state.

How do you know about the functional obsolescence? How do you know the contractors doing the right level of work of quality of work? So you can check out about it. For those who are doing long distance work, David, what would you suggest? All right. First thing, do not assume that because they're a licensed contractor, they're good. In fact, don't assume anybody is good at anything. I think that's our first mistake is we're like, oh, you're an agent, your license,

you're going to take care of me. Oh, you're a lawyer. You know the law. Oh, you're a doctor. You know everything. That just is not the case, right? Like, everybody's got to earn the right to have like that blanket. level of trust where you're like, okay, he's doing the rehab.

Our minds take that shortcut because it's a pain in the butt to do that. We like to just fill in the box, check the thing. I followed the steps, Brandon and David gave me, found a contractor, talked to three referrals. I'm good to go. You can't do that. And the reason is that same contractor could be amazing for someone else. And with you, they do a terrible job because you said you live out of state and you paid

them up front. And they turned to, you know, Henry, the new guy and said, hey, Henry, why don't you run with this job? and Henry doesn't know what he's doing. And Henry is, you know, on a fighting with his girlfriend all the time and not focused. And you don't know what you're getting is what I'm getting at. Okay. Yeah.

So use what you know about human nature to incentivize people to want to do a good job for you, which is why the first thing I tell everyone is you don't pay them. You don't pay them. You don't pay them. You don't pay them until you're happy with the work. You don't give them the money up front and say, well, goodwill. If I help you, you're going to help me. That's not the way that it works.

The second thing is everybody works better with accountability. We all hate accountability, but we all thrive under it. So you would need to get somebody involved in literally communicating with that contractor or who's doing the work and going to look at it. Okay, there's a difference when your mom says, I want you to go clean your room. And when she says, I want you to go clean your room. And if it's not done well, you're not going to Disneyland, right? Like it's just a completely different mindset.

It puts you in when you're cleaning the room. So when that contractor knows so-and-so is coming by to look at it to take pictures and they're familiar with construction. and if it's not done, you're not getting paid. Maybe he goes and looks at Henry's work, right? Like all that stuff we don't see going on behind the scenes. You can influence how well a job you get. And then the third piece would be you want, like, it's really hard to find a contractor

right now. They're just, they're in demand. Everybody wants them, right? There's a lot of investors buying properties. The economy's doing well. Regular homeowners, their values are going up. So now they're like, I want to put in that crown molding because it'll make my house worth more.

You see like Home Depot and those stock. They all rise in a good economy because everybody invests. in their house. When markets are tanking, it's the opposite. Contractors can't get any work because no one wants to put money in a house that's losing value. So you're already fighting an uphill battle just getting a contractor. Don't make it harder on yourself by finding the cheapest one you can or the nicest one and saying, I'll give them the work, right? They're probably the cheapest for a reason. You probably want to go with the safety and stability of an established person, even if they're not cheapest, when it's very difficult to find work. If I was going to try to save money and go with a

cheaper contractor. I'd probably want to do that in a down market when there's a whole lot more people for me to pick from instead of, well, you guys are in a ton of demand and you're willing to do it for so much cheaper than someone else. That's a red flag right off the bat. And I don't know if Spencer made those mistakes or not because we didn't talk about that part. But that's what I would tell the people who are thinking about going out of state and investing is that rehab is the number one thing that can bite you. The number two would be, you know, like what the house is worth on the appraisal when it's done if it's a burr or what it's going to sell for when it's done if it's a flip. And I know Spencer, I wanted to ask you, did you guys consider holding it and refinancing it if you

thought you could get that 170 ARV on a refi instead of the 130 on a sale? One, I think the little bit of money you send to someone to go double check work is an investment, not an expense. If it costs you $100 every two weeks, you do it. So save you money. Two, that's a great insight. I actually even considered doing maybe a lease option to sell because we weren't selling. it. However, I had four max credit cards. My credit score was down to about 600, and I would not have been able to

attain a loan. So that would be the reason. And I had so much debt that I needed to pay it off. That was more important than having equity in a house. So having to sell it was priority number one. And David, you made this point recently about sometimes it's better just to sell and take a loss so you can open up for greater opportunity elsewhere than to try to like salvage a deal just to make something off of it. So you can keep your ego intact if I didn't lose a deal. I know you said that recently, David, and I think that was, because I'm doing that flip right now here in Maui, and, you know, it's been on the market now for a week and a half, two weeks. We've had a bunch of showings, but no offers yet, partially due to some of the functional

obsolescence of the house. Not terrible, but just some of the stuff people are like, it's just a little bit emotionally weird. Like I was telling you guys before we started recording, you have to take two steps up to get in the kitchen. It's a super minor thing. I mean, it's just like, they just raised the kitchen for no real reason. I can imagine other than just whoever designed the house was like, you know, would be great.

We should just make the kitchen up behind. No, when they do that, it's because they want to run, like, Like plumbing or whatever, yeah, maybe. Yeah. It just drops back down again in the living room. But people are like looking at that going, well, that's weird. And so like things like that are slowing down the sale. Now, is not going to, so anyway, we had that conversation whether or not I'll keep it

for three months on the market. If it doesn't sell, I'll turn into a rental and it'll be fine. Your mental energy is worth significantly more. Yeah. And so is your capital when you get it back. Yeah. Yeah, because I got a couple hundred grand invested in this thing sitting there. And if I keep that tied up, ugh.

People make this mistake all the time when they call me about selling their house. They say, well, I have one right now we're dealing with in Sacramento. I just spent $110,000 to upgrade my house. And all the houses in that area are selling for about $450. That is a terrible use of $110,000 from an investment standpoint. But she was going to live there her whole life. That's what her plan was. So she didn't care now because of her job changing, she has to move.

But the mindset of, well, I have to sell it for $500 to get my money out, is terrible. It's like saying, well, I got a pair of sixes. I have to play them because I put money into the pot, right? Sometimes when you look like a good hand

and then new carts come out to make it look like not a good hand, the best thing to do is to lose the money you've already put in. Don't put more. It's a quote that I just, yeah, yeah, yeah.

It's a quote that I completely made up. It's called sometimes you got to know when to hold them and sometimes you got to know when to hold them. So I'm pretty clever. David Greys, yeah.

But real estate PhD. There you go. What percentage of the quotes Brandon makes up happen to rhyme. No one to hold them. No one to fold them. All right, guys. So one last question from, do you think either one of you, you know how, Spencer, you said that your agent at the end of the day went and looked at it and was like, oh, like,

you can't sell this thing in this condition. You got to figure it up. Do you think you should have gotten them in earlier, involved earlier to not as like check every two weeks, but like at least get in there at the beginning, in the middle, the end. 100% my fault. I take full responsibility. I told him not to. He mentioned it, but I was paying $150 for the inspector. I didn't want to really waste this time. And being my first deal, I was extremely ignorant to what could go wrong. I can't emphasize that enough. And so it was cognitive dissonance to the max. And I told him not to go. Biggest mistake. That's all right, man.

Well, David, well, if you were asked by a client, I'm just curious, you're a busy agent. You know, one of your clients is flipping houses and they say, hey, can you stop by once a month and just check and make sure this thing's going on good, like up to the standard. Would you do that or would you send one of your people over? Like how should somebody approach that? The problem with that method, because even though it does save 100 bucks or something, is that you're assuming the agent knows what they're looking at, like you know what you're looking at. And they probably don't. Agents are good at selling homes and knowing how, well, they should be at contracts work. That does not mean they have a rehab background. And that's the problem. It's like asking your mechanic to look at the

paint job of the car or something. That's not where they specialize. So if the client had me do it, I would say, well, one of us can go take pictures and videos and send them to you. But I just want to upfront let you know, I can't look at the quality of the work. And I don't want that on me when we go to sell. You need to get a person who understands what they're looking at from that perspective. I wonder if it's worth them bringing in like an outside. You know how like every contractor tears every other contractor apart? Like you ever have two contracts on a job?

They both just talk crap about each other. Like, God, that guy doesn't know what you're doing. Like I wonder if it's at least three inches from that plate on the, yeah. Exactly. Having another one come in. It'd be a really popular movie as a mean girls but contractor edition. where you get them all in the same house and they've got to rehab the house themselves.

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House of cards, baby. House of cards. It was a fun one. Yeah, so the first one I had mentioned that the operation was for the contractor to do the work and labor. I get the money for the draw, send him money. So I'm thinking, man, this is easy. And so my agent comes to me with a house down the street in the same submarket, very hot. This is a big rehab, but the numbers really work out.

We're buying it at $64,000. we're looking at 100 to 110 worst case, roughly 225 or more on the ARV. And so I'm thinking to myself, this first one is going so well. I'm having the labor done. I received the money. I send out the money. Well, okay, get ready for it, guys. I took out a HELOC on my condo, and I used the HELOC to put a down payment on 15% three point interest using the same lender.

Oh, God, David's about to explode. So I'm thinking, I'm thinking to myself, this is fine. And the first one was scheduled to close roughly February, March. I'm a risk taker, baby. I'm looking at the schedule. And I'm going, okay, the second one will start rehab in December or January. And the timeline's going to work out such that I'll sell the first one. The proceeds will then help complete the second one.

And so when the, essentially what happened is the second house was going fine. That contractor is really, really good, high quality work professional can count on him. when the first one, when I received the news that it was poor, I had to pull the contractor from my second property to then go finish my first one. And what happened there is now you take the contractor away from the second house. So that one's sitting. And I ran out of money. So I then couldn't pay him.

So then it was a matter of playing like musical chairs in order to escape the second one. I had to, I'm reasonably high income earner. I received the money in my personal life. And then I could pay him a little bit. you know, and I get one thing done, but he had different timelines. He had other projects to complete. And so it was very difficult to get him back to the property, which extended that timeline. Yeah. Wow. Okay. So it was a mess. Yeah. So what, what, what did that end up at the end of the day? What did that, those numbers look like? Closed on Friday, the previous Friday, on the 15th of

May. And so I was all in at about 145 to 148 on the rehab, bought it. for 64 points and fees. I actually, I'm a licensed agent in Ohio. I got my real estate license, so I sold it myself, so I only paid buyer agent fees. We sold it actually before it hit the MLS, we sold it for 253-9. So it was appraised at 225 when I bought it. It ended up selling for $253.9. And we put, we did $7,000 towards the buyer, about $7,600 for the buyer's agent. And in that one, I'm, I can't remember the exact numbers, but I'm in the $25 to $30,000 loss. range on that one as well. Wait, so, so let me run your number. So you said all in 145, 140, that's rehab. For rehab only. That's not, and so you take the basically 150 plus 60 if you

bought it for, you're in at 210, 215, 220, right? Plus the buying points. Plus the fees and the the hard money stuff. But I held this, I bought this December 4th, 2018. It sold May 15th, 2020. That is five, 12, 17 months of hard money at 15% interest. Yeah. And I, one thing I'm incredibly proud of, I did not miss one payment. 15% interest. I had four max credit cards. I have, you know, three mortgages. Well, really four mortgages at one point because I had a fourplex as well. But I did not miss one payment the whole time. Wow. Crazy. I mean, I've been there. I've done this. It's like, again, don't feel like you're alone in this. Like, I've, I've been there. Every interesting story has

and downs, man. He's going to make for a good story one day. It makes for a good story today. So why, why did it take so long to rehab? What went wrong with the rehab length that you would do differently this time? Taking on two deals when I didn't have the money. I essentially ran out of money. And this contractor operated a little differently. He additionally, we went way over budget. You know, we had planned about, we had 103 from the lender and we hit 145, 148. Right. So that difference is out of pocket, whether cash or credit. And so at some point, I essentially lost all my money. And that contractor had other projects.

Plus, he had his own team, hit some of his guys left. You're also dealing with extended rehab for houses in the Midwest. You know, it was a full gut rehab on a three-story house, 2,000 square foot. We went way over budget. There were a lot that went wrong with the house as well. And, yeah, there were just so many moments where I was behind and getting someone 2,000 miles away to then go do more work when you owe them, say, 10 grand. It's not very easy on a contractor because some of them can't front another 10 grand.

Yep. Yeah, man. It essentially got to a point where I needed to receive money in order to send money for him, but it was only a handful, you know, 5 grand, 10 grand here and there. So we're talking maybe enough to pay for the flooring. And then we need to do the draw, get money to pay for the flooring, and then advance to the kitchen. It was just an extended period of time. Yeah. So what about why, why do you think the rehab budget went so far over? What could you have done differently with the rehab budget on both projects to be on budget? Big mistake was taking on full gut rehabs in the Midwest. I think the reason why the numbers made so much sense on paper is the experienced rehabbers in that market probably passed. One of my good buddies is in Columbus. He lives in Vegas, but he invests in Columbus.

And he said a lot of the experienced flippers out there don't touch any rehab over 30. And I think there's a, I think there's a reason for that. There's correlation. And that is just simply you start getting in the guts of some of these houses and before you know it, the rehab balloons. Yeah, that's so true. I think people don't record, like to make $20,000 on a $20,000 flip or to make $40,000 on a $150,000 flip, I would rather make $20 on a $20 all day long. Way less risk. Yeah, yeah, you make less money. You got to look at the variance, right? On a carpet, paint, and roof, if something goes wrong, There can only, you know, if a 10% increase is only for a grand, but a 10% increase on 150, you know, is significantly more.

Yeah, definitely, definitely true. In both time and labor and material, you know, it's just the cost is get exponentially worse in some ways. Yeah. All right. So at this point now, I'm assuming you got, you know, like the whole equity line of credit that you took out. So you got to pay that thing off and you'll eventually dig out of that.

I guess I'm curious, here's what I'm curious. Looking back, would you do, and this is a hard. question, right? But would you do it again? And what I mean by that is, was it worth the education at the end of the day for both projects? Or would you say, you know what? I wish I would never got into real estate at all. And I won out, guys. I made it on the bigger pockets pot. I'm going to be the first guy to retire after the BP podcast. No, this is just the start, man. Even during my darkest days, I had to sell my car. I had a car for nine months. I was riding the bus to and from work for four hours each day. I was in some really dark days. I was eating rice only for meal.

We're talking about broke of broke. And there's not a minute that went by that I didn't see it as an opportunity. I'm a very optimistic guy. I knew that some of the best stories, some of the best success stories start with a very ugly story. And in the moment it sucks, but I was very self-aware to know that this is just life. It's just numbers on a screen. I lost a little money.

Who cares? The education you talked about, I'm so proud that I used to fear flipping, and now I did it. I finished two projects, and I'm extremely optimistic about the future. and that's only because I went out and did it. Yeah. Spencer, I'm curious if you've had enough time to introspect on this, if not, don't worry about it. But your YouTube channel that's doing really well, how much of that do you feel was a

consequence or a reflection of the pain you went through with these deals that went bad, changing either your drive or your passion or putting something inside you that might not have been there before that led to you having success in a different area of life like your channel. I think it's the energy of the world. I think, you know, I lost on something, but I think if you're a good person and you try really hard and you keep at it, you keep, you know, different ventures, you keep pursuing them. I think eventually you'll get wins. And I think it was just good luck, really. I definitely had a bunch of energy to put towards, I've been doing YouTube for five years. And I just had that energy and finally plenty of time. And I just needed a creative outlet.

And I think the reason why YouTube is succeeding is simply because I had the time to put into it. And yeah, I just think it's the good karma of the world. You take L's in some places, you get W's and others. Yeah, and you keep learning along the way. I'm wondering if maybe like, yeah, I was going to say one of my early projects that didn't go well, I couldn't sell a flip, one of my very first, I think was my very first flip. I ended up like having to go to my parents and being like, hey, can I add you guys to the loan so I can refinance this?

potentially, you know, you could have done a thing like that maybe is like added somebody found a partner, somebody willing to go in on it to help you get the mortgage to be able to refinance it. You would have been out all that cash though, so I'm not sure. I think I probably would have done just what you did, which is just, you know, lick your wounds, move on. Something I didn't add earlier. I actually got money from my parents. They took money out of HELOC. So I owed parents money.

I had four credit cards. I just needed the cash. I needed to pay off debt and so I can move on. Yeah, makes sense. Well, what's long term, man? Like, where are you headed? I'm going to take a couple months off. I can't deny that this was a very traumatic experience.

And I'm going to pay off all debt. I'm almost there. I just need maybe another a month. But I got furloughed from my job. So it's been kind of a challenging period. Obviously with the health pandemic, it's provided a lot of challenges to others. So maybe in a couple months I'll try and I'm definitely going to stick to Cincinnati. I'd really like to stick to creative financing.

I really like this guy, Pace Morby. He's on YouTube. By the way, you guys need to get him on at some point. He's a nice. I look him up. Yeah, he's a great YouTube channel for real estate investors. and I'm definitely going to stay with it. I'd like to do rehab and holds, though, for sure.

Yeah. Ideally, small multifamily, but I do think there's going to be a need for single family. I think we're going to see kind of the surge that we saw in small multi from the bigger pockets community, real estate, those two to four units of the past four years. I think we might see that in single families here. So I'd like to kind of take advantage of that, getting some of these rehabs that need 20 or 30 and hold, hold for the long term. Okay.

My last question for you. there's a reason I'm asking. What do you do for work? What type of work are you in? Software engineering. So I work for a tech company. How did I know? Okay. Very engineer and analytical. Yes. And here's why I asked that question, because as an agent, I'm constantly having to get into my client's heads because I have to help everybody understand the same information, but I can't present it to everybody the same way. Everybody has their own unique filter that they take information in and they process to come to a conclusion. And like Brandon just gave us a great example of the difference.

between how he and Ryan processed things. Brandon looked at that like, oh, I suck. How did I miss it? But when I hear him say that, I'm like, oh, no, no, no, no. I know you're going to miss that. That's why when I'm your friend, I always worry about these things, because you're going to mess that part up. Brandon's thoughts are in a completely different atmosphere

with the perspective that he's looking at that problem. Okay? And that's good because those are his skills. What I want everyone listening to understand is as you hear Spencer talk about it, David talk about it, Brandon talk about it every week's guest. They are sharing how they perceive. the things that go into real estate investing and the mistakes that you make as a person

will have a very strong correlation to the way that you look at the world. So Spencer is a software engineer. The way that your brain works, Spencer, and you can correct me if I'm wrong, is that accuracy is extremely important. Protocol is extremely important. You have to have a super long string of text and if anything is wrong in that entire string, the whole thing doesn't work. Okay, right? Like, you can't make a mistake in code and have it end up working. It has to be completely perfect and what happens is you your mind grows to love the beauty of accuracy and and I don't want to say simpleness but not a lot of creativity the creativity has to happen within confined elements of that codes language or the rules that govern it okay you take

your brain and you stick it into real estate investing and it's going to try to do the same thing to that world what are the boxes i need to fill in what are the checks i have to hit my projected R-O-I is this based on my spreadsheet, that makes me feel safe. I will move forward because now I feel safe. But that world doesn't work exactly like computer coding. And that's why you kind of got rocked. You couldn't see these things coming at you, like a contractor that didn't do what he was supposed to do. How was I supposed to see that coming? Well, the appraisal said 170. How did it possibly sell for 130? That's your own software engineer brain getting involved. So one of the things we tell people was get somebody else looking at your freaking deal, right? You can't expect yourself to know

what you don't know. One of my weaknesses is the rehab. I just don't know what's ugly and what's not. I'm not aesthetically competent. I can't tell, right? I know it looks good to me, but I don't know how it looks to other people. And I can have a friend of mine walk the house,

usually a female, who immediately can say, that is horrible. Why would you put that thing right there? That once she says it, I can recognize it, but I wouldn't have seen it. So I got myself out of that part of the business.

I just don't trust myself. There's other people that are super design-oriented. and they don't pay attention to numbers at all. And Brandon's seeing those ones. They're the ones that put the $110 grand into the $400,000 house because it looks so good. But to sum that up, none of us know our own weaknesses, right? Spencer's good at what he does in life because his brain works that way.

It's kept him safe. He can't see the areas that he's going to miss and he shouldn't hold himself responsible for that either. There's no way he can know, just like Brandon, just like me. That's why you want a team of people that are experienced that can look and see the areas that you're not. missing. Because I think a lot of people beat themselves up when they make these mistakes. But when I hear Spencer talk, I'm like, yeah, I would expect him to make that mistake. Of course, that's what he

made. If he didn't think that way, he would have lost his job. He wouldn't work in that world. And there's lots of components of real estate where when we take the way we look at stuff and we try to apply it to a new world, it doesn't always fit. So don't be too hard on yourself. Recognize that that's the way you are. Spencer will, he'll adapt. His mind will start to look at things differently. the more data that you put into that algorithm of your brain, the more accurate it's going to get and the better you're going to perform. I'm a human, not a computer, David. Even though I can act like one sometimes.

That was really good. That needs to be the bonus chapter. Those who buy the out-of-state investing book, that's the bonus chapter. Yeah. Man, crazy, man. Well, thank you for sharing this again. Like, really, really, really, like, it's, I don't want to say it's good.

It's, it is good for the, listeners to hear this stuff. And the fact that you're so open and honest about what went wrong. And I can't wait to have you back on the show in a few years when you're like, yeah, I just made, you know, 50 grand an out-of-state flip or I just, you know, bought my fourth property. And I know you are doing some other stuff. Like you're doing some house hacking stuff right now. You had some success with condos. So I know we talked a lot about the bad stuff today or with your condo, I think. Yeah. We're talking about the bad mistakes. So like self-proclaimed best house hack in America. Give me, maybe I'll only get invited when I hit like half a million subscribers on YouTube,

but it'll be very nice to get back. That'll be like next month. So you're there. All right, dude. Well, thank you so much for joining us. This was just really, really fantastic today. I really just appreciate it. It's very humbling to be here, and I look forward to talking to you guys in a couple years. Thanks, Spencer. Hey, hey, before you go, Spencer.

Yeah. I know we don't have to do the entire. Actually, let's do the famous four. Why not? Let's do it. Famous for. Number one, favorite real estate book. Do you have one?

I do not. No favorite real estate book. No. Not at all. No. You were traumatized. Yeah. Multi-family millions was good.

Here's my problem with real estate books. I think it's easy to acquire a bunch of information. But really, if you want to learn, just go do it, man. Find someone doing it and buy a deal. I found myself doing this. I read so many real estate books. There's a lot of goings out there and bigger pockets has plenty of guns. I read yours out of state investing.

David, it's really good. All right. Number two. What about your favorite business book? I think talent is overrated as the best book overall. I'm not a big fan of business books, but talent is overrated. really altered my perception of how to succeed. So I think that encompasses real estate, business, all of that.

All right. Number three. What are some of your hobbies? All I do is YouTube and exercise. But I don't have a gym right now, so I've got to go to the park. There you go. That sounded like a line from a rap song. All I do is YouTube and exercise.

The pandemic rap or something. Yeah, I'm a pretty boring, dude. YouTube is growing, so that's all I care about. about. I get very focused and I focus on one or two things and that's it. I hear that. I'm the same way. All right. Last question. What do you think separate successful real estate investors from those who give up, fail, or never get started? An obsession and you need something to lose. Need something to lose. That's good, man. I think that drives you. If you have something to lose

by being stagnant, I think it'll drive you forward no matter what happens. All right, man. Last question. Where can people find out more about you? Spencer Cornelia, all over the internet, LinkedIn, Facebook, YouTube. I'm pretty open. I'd love to connect. All right. Thanks, man. Appreciate it. Thanks, guys.

All right, that was our episode with Spencer Cornelia. Very, very candid open conversation. That was tough. Obviously, the tough situation he went through. But I'm just super thankful that he came on to share his story and then some of the lessons he learned. You made a good point, too, that he saved other people millions of dollars collectively with the advice that he gave for how they can't make decisions.

That was a pretty powerful point. Well, thank you. Well, what are the things? Let's unpack that's a little bit and spend just a couple minutes here discussing what kind of like, what would you have done different, David? What did you see as kind of his fundamental flaws in what happened that led to the downfall of those two deals? Well, Dr. Dave, I've got my chart here. And I'd like to share with you my diagnosis of our question here. So a couple points to take away from this so that you can avoid making the same mistakes as Spencer. First one, on his first deal, he did not have professional representation

from an agent. He basically went in there completely unrepresented, no bulletproof vest, nobody looking over his work. It's kind of like having no immune system and going out into the world right now. It's very risky. Can it work? Of course. Because he went off market. Yeah, he bought an off market deal off Craigslist and he didn't have anyone else looking at it. And there's people they can get away with doing that, but I would definitely not recommend somebody starts off on their first deal that way. You know what? I tell people on webinars all the time. In fact, I'm doing a webinar tonight, which now would have been a few weeks ago from one of this episode airs. But it was called How to Become a Real Estate Millionaire.

If you want to watch that one, if you're a pro member, you can watch webinar replays. Go to BiggerPockets. Go to BiggerPocker Replay. Otherwise, I'll do it again here in a month or two. I try to repeat them every few months, maybe once a quarter. Anyway, in this thing, I talk about three ways to find deals. Number one, I go through is use the MLS. Get an agent, use the MLS.

You're not going to get the world's best deals that way. Number two is like driving for dollars. Number three, directment marketing. But the point I make is that for 99% of people watching that video, they should not worry about method number two or three. Like the first deal, get a great agent. Let them walk you through the first deal. Because you're not going to make, maybe you will, but you probably won't make a ton of money.

Hey, I just got a text saying I got an offer on my flip. That's funny. All right. Anyway, but you may not make a ton of money on that first deal, but having some good representation is going to help you quite a bit. And so, yeah, I think starting with the MLS, starting with listed deals, even if you're not going to get a grand slam, who cares? Get the deal done, get some help and make sure it's the right agent, correct? Yeah. Can you skydive without a person showing you?

your first time, yes, is that a good idea? The odds are pretty big that if you make that mistake, you're going to pay. Yeah, now that said, you make this point in the show today. You made the point where, like, most agents are terrible. So it doesn't mean just having an agent is going to be that immune system protection that you need. You have to have an agent who understands investment real estate, understands ARV, what's going to really be worth, understand, like the functional obsolescence,

understands that stuff, and they can help you with the emotional side as well as maybe some of the math side to be able to help you make a good. decision on what you're buying. Yeah, having a parachute's no good if it has holes in it. Having an agent's no good if they're a bad agent. In fact, people don't realize this, but that's why I'm focusing so much on being a real estate agent right now is I'm trying to help other people build wealth through real estate and I'm seeing how hard it is for them to find a good one. So, like learning what to look for in a parachute and an agent is pretty big. So good point, Renan. Well, thank you. Yeah, you know, this morning I was drinking tea because I've been trying

to go reduce my coffee intake. So I had some tea out here in my office, my sea shed here. I'm drinking tea. And I take a sip, put it down, take a sip, put it down, pick up my, what I thought was my mug and took a sip and realized it was cold and disgusting. And it was from a few days ago, my tea that I left on my thing. And so I took this nice sip of nice moldy, disgusting cream in my coffee or tea from four days ago drink. And of course, it was like the most disgusting thing ever. And I started thinking about how that kind of applies to real estate. Right. So I'm super You're curious how you're going to tie this together. All right. I'm going to tie this together right now.

So, you know, there are a lot of people giving you advice on what you should do and what you should not do in real estate, right? Like everyone from me to David Green here, to the books that you read, to the YouTube videos that you watch, to the celebrities, to the, you know, the whatever, the YouTube or Instagram world, the TikTok videos. And you can get really good advice all day long. But there are people out there who just give bad advice, who just like they are trying to sell you on something. They're trying to convince you to do something. It just doesn't work.

And people will unknowingly pick up that mug and drink it. So my question for you, David Green, what dirty mug are you drinking from today? That's how you do. That's how you tie this together. Boom. You like that? Okay. It's a work in progress. I'm working on my analogies, all right? I had to find a way to put that story in because it was disgusting and I can't let the disgusting moment of my life go to waste. Well, hopefully that text you just got out of this flip that. Funny, we talked about it on today's show. He's wondering if he's going to get an offer. We should talk about the offer you got and I'll give you my advice.

And you probably didn't go hire an agent yourself knowing you were. We have an amazing agent that's representing us on this. That's what the text was from. Okay. All right. Let's move on our list. Just throwing this out there because I just looked at my email. So we're asking 1.14.

They offered 1.1 cash. I don't want to talk about it in front of everybody. what I'm going to do, but that's an interesting, interesting offer. We will put our heads together, Brandon, just like we did when you bought the house you have now. That's why I don't feel guilty staying there for free because you wouldn't have it, if not for me. And that's what I tell myself every time I visit. All right.

All right. Next thing that we noticed about Spencer here, he did not get a home inspection on this property before he closed. So he didn't know everything that was wrong with it. Now, I'm sure what he was thinking is, well, I'm doing a $50,000 rehab. What could I possibly guess? But as you saw, how many of us have, right? Then he realized, oh, that 50,000 can actually somehow become $80,000 if you don't know what you're getting into.

So the home inspection of 300, 400 bucks, maybe less in some parts of the country, is a worthy investment when you're buying an asset just so you can know what you're getting into. And it's nice to hand it to a contractor to say, here's all the stuff that I know we got to fix. Make sure you work that into your budget. True story. So when I got my house that I bought out here in Maui, I think I've told a story in the podcast before. I bought my house in Maui. It was expensive. It was almost $2 million.

David helped me kind of work through the emotional and logical side of that purchase. Thank you, David. And then, of course, I'm going to get an inspection on a $2 million property who wouldn't, right? I mean, it's a lot of money.

I'm putting into it. And what's $500 or $1,000? So I think it was $500 for my inspection. The guy calls me the day of the inspection or maybe the day before and says, you have a pool there. Do you want me to inspect the pool as well? It's going to be an extra like,

it was like $200 bucks. And I was like, you know what? If the house is good, the pool looks amazing. why would I inspect the pool? I'm going to save $200. I have now spent, as of today, I've now spent $16,000

on fixing problems with this pool because I didn't spend $200 on a pool inspection when they were going to be here anyway, and it was a simple yes or no question. Because every single piece of the pool technology had to be replaced, every single piece of it, which had I had that inspection, I would have easily gone to the sellers

who were selling the house. I mean, like, guys, the pool doesn't work. Like, the pump doesn't work. The filter's 30 years old. Like, we're going to need this update. And they would have said, for sure, they would have been like, okay, yeah. Or they would have said, let's put the cost. Or we would have to negotiate something. What I've made more in $200 all day long. Same thing applies to inspection on your property. It's almost impossible not to make money back just from the negotiation standpoint. But even if not from that, just from having the checklist of making sure stuff was done correctly to begin with. And that's why you want a good agent. Because your good agent would have pushed you. No, you need to get that inspection. Give me

some leverage to go negotiate. And conversely, if the sellers had a better agent, they would have got that inspection done and handed it to you ahead of time. And when you were trying to get the house and you really wanted it and you thought someone else was going to buy it, you would have said, well, I'll just have to fix the pool myself because I don't want the other buyer to get the house. And they would have saved themselves the 16 grand. Those inspections and the timing of when they come into play are a very big part in who wins in negotiations. That's good, man. Good man. All right. What else we got with this? Thank you. The next. He had the wrong person checking on the contractors work. So he did follow the stuff in long distance investing, have somebody check on the

contractor's work, but the person that was checking on it did not know what they were looking at and were therefore ineffective. So it's not just a matter of checking boxes and saying you did what you're supposed to do. You have to do it the right way. You need a person who has the skill of understanding what construction should look like, making sure that the construction on your property is being done right. So this is hard. This is really hard because, and I don't fault him for for this necessarily, even though like that was obviously a mistake was a person paid to go out and look at it. But it's like he hired, like the bank hired a person who in my opinion, it's in their interest, like the lender's interest to make sure the work was done right because they're releasing the money.

So I would say in like prior to today, I would say that was good enough what he did. I would say the bank hired somebody. He paid for that person to go out there. This is what they do for that lender, probably across dozens or hundreds of properties. I'm sure it's good enough for inspection wise. Like that, like, well, how, I mean, what do you think? Like, am I wrong on that? I think that anytime you're dealing with a large volume of transactions, which a bank is going to go through lending, like, there's all these standards, right?

Like, if I'm going to borrow, let you borrow money, Brandon. I know you. I can let you borrow it. If I don't know you, I would have to get to know you. Well, if there's a five million people, I can't get to know them all. That's where standards come in. So banks do a lot of these transactions and they have a box. They have to check.

Have someone go check on the work. That doesn't mean they're following up to make sure the person they hired is good. It doesn't mean that they really even care. because there's so many people that are sharing the responsibility of how that job gets done that it easily can be missed. But for you, when you're buying the house,

you are the only person sharing that responsibility. So you have to take the initiative of making sure that the right person's in place. That's good, man. And this is the reason, one thing I do, instead of hiring like these people, I mean, if the bank requires that fine, I'll pay these people if I'm going to do

an out-of-state rehab project. But what I'm a bigger fan of is building solid relationships with existing real estate investors in that market, who are who you can ask or pay to go over and look at that property. Like you have a good friend in Cincinnati who already owns a bunch of rental properties. And you're like, hey, man, can you stop by the property, make sure the contractor did a good job

on that flooring before I pay them? You know, I'll pay a couple hundred bucks or I'll take out the dinner next time I'm in town. That might go because those people are experienced. They understand what they're looking for. Again, if it's an experienced real estate investor, you may have more luck there than some guy who's just checking off a box for the bank because it's a relationship-based thing. So there's just another idea for people. All right.

Okay, very good. thing. He was using an agent to sell the house. So Spencer assumed that that agent was going to be looking over the work that they did. But we didn't ask him how experienced was that agent. Do they sell a lot of homes? Like, is this agent even any good? Because most of the time, people hate real estate agents. They hate paying them. So they go for the cheapest one that they can possibly find. And you end up losing way more money than you saved using a bad agent. It's very similar to, well, I don't want to pay for a defense attorney. So I'm going to hire the cheapest one I can to try to keep me out of jail. That's foolish, but I see it all the time. Or being your own attorney,

which is even more foolish. What's that saying? The client who represents himself as a fool for a client or something like that, the person who represents himself as a fool. I have no client. Sure. It's like that with real estate agents. So don't just say I have an agent. Look up and see, does your agent sell a lot of homes? Do they know the market really good? It's okay to pay them a good amount of money if they can show you how they're going to make you more money than the delta that you paid them versus what you could have saved. That's good, man. It's really good.

Okay. All right. This would be, yeah, he only had one exit option when he was selling. So this was a house. He could not rent out. And that's because, yeah, we didn't talk about the cash flow, but he couldn't get a loan. That was dangerous. He should have probably got a partner that could qualify for financing.

So when he realized I can only sell it for 130, but I could refinance it at an appraisal of 170. He could have just said, well, I'm not going to sell that thing. Let me get my money out on a rehab instead of a sale, ended up with the rental property, got his capital back and went in and mitigated the losses if you had any or maybe avoided them. This is why Brandon and I always say you want more than one option. You've talked about your flipping Maui. And if it doesn't sell, that you can rent it out.

You can do that Airbnb. I don't remember what it said. But you had several options. And that's really, really important. Options can keep you alive. Options keep you alive. I like to say option or the equity gives you options because you have equity. You can have different multiple exit strategy options.

When you're up against the ropes, you don't have a lot of options. And therefore, you don't have a lot of chance to live if something goes wrong. So, all right. Is that it? There was one more. The next one is that in his zealusiness, Spencer bought the second property before he could incorporate everything that he learned from the first one. So he ended up buying two properties, but making the same mistakes in both.

You don't want to move forward so fast that you can't incorporate the things you learn from the first step into the second. And you don't want to spread yourself too thin. He had so many things going on that he was probably. missing stuff and that's why these houses took so long to get ready to sell and sale. And his hard money costs were astronomical, which just beat him up. If that one thing was different, his hard money cost, these deals might have looked a lot different.

Yeah, I bet you he paid 30. I think I figured I was like 30 or 40 grand in hard money costs on that second deal. You know, so like it's a dramatic amount of money that you pay for that, which I mean, it's part of the business. You're working in your numbers, but this is also why being a hard money lender sounds a lot more fun than being a flipper because when you're lending money, Yeah. Like, they make their money before you make your money.

That's a good place to be. That's true. That's the difference between the people that went in the gold rush to find the gold and the ones that sold them the shovels. Yep. This is how it is. Yeah, you know, the, I like that point you make about people oftentimes rush into the second deal.

I did it. I mean, I did one flip and then while on that flip, I tried to get a second flip. And my actual hard money lender at the time said, no, he wouldn't fund me. He said, you haven't, basically, you haven't learned the lessons from the first one to do the second one yet. And it was true. I never sold the first one. That was one I mentioned a little bit ago

that I ended up having to refinance because I couldn't sell it. The market was tanking. So that lender knew more. So yeah, don't spread yourself too thin. This is why I talk a lot about the stack.

This is part of that webinar that I just did the other day the real estate millionaire webinar webinar is like this idea of the stack which is where you scale up your business but you do it slowly. So you buy maybe a duplex, then you buy maybe a fourplex,

then an eight unit. But you spread them out. So like you buy the duplex. You wait a year or eight months, six months, whatever, you learn all the lessons about what you learned, what you did right, what you did wrong, then you apply it to a slightly bigger deal,

a fourplex, then you learn all the lessons from that one, you apply it to an eight unit. You learn the lessons they apply to a 10 unit, then a 20 unit, then a 50 unit. But you're not going from zero to 50 overnight. You're not going from, you know, two to four within a month. It's like you've got to scale conservatively, but also scale aggressively if you want to grow well fast.

And that's kind of the way to do it as I call it the stack. It's part of the, I'm writing a book right now in multifamily real estate. It won't be out for a year from now, but it's a big piece of that book. is on that concept of here's how you become a multi-multimillioner through real estate. You do it by scaling safely yet aggressively. Good stuff, bro.

That's really, really good to hear safe and aggressive. That's a perfect combination. Yeah. All right, man. All right. Well, let's wrap this thing up. And for everybody listening, make sure that you listen to the next episode, which is going to come out tomorrow, or if you're already listening to this, it's right

there. And you can learn more about more ways that people lose money in real estate that Brandon and I are going to share with you. so you can avoid those mistakes in addition to the ones that Spencer made. All right, man. Well, appreciate you being here, David. And yeah, everyone, go listen to the second episode right now if you can or wait until tomorrow. And check it out.

I think you'll like it. All right. This is David Green for Brandon. What's Behind Red Door Number One, Turner. Signing up. You're listening to Bigger Pockets Radio. Simplifying Real Estate for investors large and small. If you're here looking to learn about real estate investing, without all the height, you're in the right place.

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