BiggerPockets Real Estate Podcast - 857: The House That Almost “Broke” Me: Losing $350K on ONE Property w/Mindy Jensen

Starting point is 00:00:00 Welcome to the Bigger Pockets podcast. Today we are going to be dropping into your feed with a bonus show. This is the first of two episodes about deals gone wrong. That's right, because David, if you can believe it, even to expert investors like ourselves, make bad deals. And we want you to learn from our mistakes so that you don't go out and make the same said mistakes. That is right. Our heart wants to help protect you, your money, your future, and your wealth.

Starting point is 00:00:24 So we're going to be bringing you some mistakes that other investors made. Today's episode will be Mindy so you can hopefully avoid. doing the same. This is one of the toughest real estate markets that I have ever seen. It is much more unforgivable than it's ever been in the past. And the wrong deal can sink you. That's right. And on today's show, we're going to actually be talking to Mindy Jensen about a deal that almost sank her quite literally and figuratively, actually. So without further ado, let's bring in Mindy. Welcome back. How are you to today? I am doing great. Thank you for having me back, David. I am so excited to be bigger pockets biggest loser. What did we talk about last time? My deal that was

Starting point is 00:01:03 negative cash flow. And now I'm talking about my deal that went wrong. Yeah, that's one of our running jokes. Every time we do a show where we're like, all right, let's talk about everything that went terrible, the dumpster fires of real estate. We're like, Mindy and James, that's our people. These are bigger pockets, biggest losers. It's the only time that you can brag about losing. It's like, all right, who here lost the most? And it's like, oh, I've got a good one. All right, Mindy, how much did you lose on this deal? How much did it cost you? Well, my deal took place in 2006 was when I made my original ARV. So I lost approximately $350,000 on paper and so many hours of sleep and so much stress and so much anxiety over this deal that just took forever.

Starting point is 00:01:51 Now, when you said ARV, do you think you could just briefly explain? to people what you mean by that. ARV stands for after rehab value or after repair value. So this was the projected amount that I thought this property was going to be worth after we had finished all the rehab we were doing. Got it. Okay. Okay. Great. So a $350,000 paper loss. Not bad. Pretty good. David and I are going to run you through some rapid fire questions to get all the details on the deal. And then we'll pick apart where things went wrong. Mindy, let's start with you. I'm getting a little bit of heart palpitations here. This is the deal that almost broke me for real estate. I have loved real estate since as long as I can remember. And this deal,

Starting point is 00:02:29 I was like, I am out. This was our fifth live-in flip and our first pop top. It was our first time hiring contractors foreshadowing there. All right. So we ended up jump into this deal. Before I do, you mentioned this as a pop top. And just so that I'm clear on this, pop top is basically the concept of quote unquote chopping off the top of a property like the roof so that you can add another floor, right? Yes. Okay, cool, cool, cool, cool. All right, so when did this deal happen and how experienced were you? This was our fifth live and flip and our first pop top, and we purchased it in September of 2006. And just to recap here, this is a property you said you had a $350,000 paper loss, right? Correct. And I say paper loss because my projected ARV was $1.1 million in 2006 when we

Starting point is 00:03:20 bought it. But my actual sales price in 2012 was $750,000. So by projected paper loss, you mean money you lost off of what you thought you would profit. Yes, I didn't actually lose $350,000. I was just hoping to have made $350,000 more than I actually made. Okay. And what kind of property was this? This was a single family home located on the beautiful shores of Lake Minona in Manona, Wisconsin. And how did you find this property? We had been looking for a deal on Lake Manona specifically. And we would just drive around. It's not that big of a lake. We would just drive around. And anytime there was a house for sale, we would stop in and see it or, you know, make an appointment with our real estate agent. This particular property was up for

Starting point is 00:04:08 auction. And we attended the auction. It went for $700,000. And we were like, gosh, that stinks. So we left. And then like five minutes later, they were calling everybody, hey, the people who won the auction actually don't have the funds to buy the house. So it's back on the market. This is what happens to those children in grade school that raise their hands. And then the teacher calls on them. And they're like, actually, I don't have anything to say.

Starting point is 00:04:36 They grow up to go to auctions and hold up a stick. And then they don't have the funds to actually. I always wondered how those kids turned out. And now I know where they went. They went to Manona, Wisconsin. Johnson in 2006. All of them. So on this deal, how much did you end up paying for it, Mindy? We ended up paying $535,000 for this house. Okay. And so what was the plan for this property? Was it meant to be a flip, rental, burr? What was the ultimate exit strategy here?

Starting point is 00:05:02 It was going to be a live-in flip and we had a two to five-year timeline for the flip, two years because at the minimum, because that's what you have to live in for the Section 121 exclusion where we don't pay any capital gains taxes. And five years because we wanted to be able to enjoy living on a lane. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed.

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Starting point is 00:08:35 You left the closing table. So we bought this house. My daughter was, my first daughter was born in February of 2007. And we bought this house in September of 2006. We weren't living there full time until March after my baby was born. And we started work in March. And in April, we had what is called a 500-year flood. The state of the house in April was that we had removed the brand new roof that they installed right before they put it on the market and added the second story.

Starting point is 00:09:15 We had the outside walls but no siding. We had the roof trusses and the plywood, but that's not waterproof. And we had for some reason we had ripped out the driveway. So there was just mud. Then came the wind one night. There was tarps on the roof. The tarps got shredded. Then it started raining.

Starting point is 00:09:40 We had a 500-year flood is the kind of flood that only happens once every 500 years. It's a weather event. We had water in the basement. I think it was like six inches of water in the basement. It was raining all throughout the house because we didn't have any sort of waterproofing up there. I had an infant. I had her in the middle of the bed in one room, which was the only place that wasn't raining. It was raining in the light fixtures.

Starting point is 00:10:09 It was raining down the sides of the walls. And it was just like we were watching this storm come through on weather underground.com. And it was like purple. You know, yellow is like light mist and red is like, wow, it's really pouring outside. And purple is like, it's a hurricane. and a tornado all mixed up and they're raining frogs. And it was just like the most stress inducing. And we couldn't do anything except like all night long. Just watch this storm come in and try to keep our baby dry. And so just to clarify, a 500 year flood property doesn't mean that it only floods once every 500.

Starting point is 00:10:48 It can flood many times in that 500 years. It's just the really catastrophic floods are once every 500 years, right? Yes. Yeah. Okay. So now you could sell it though and say, hey, you got 480 years before you have to worry about this. Shouldn't that make the value of the house go up? You have five centuries. We've already done all the heavy lifting for you. The worst is out of the way. Now you're good. That might not be the exact definition. It's like a leasehold deal, but you have 500 years before the leases up versus when you bought it, it was like you had, you know, a month or something before the rain started. But wait, there's more. Over that winter, Wisconsin got. a record 101 inches of snow, which is not normal for Wisconsin at that time. And that snow all melted

Starting point is 00:11:33 during a rainstorm in June. And I don't know if you remember, I said we had flooding in the basement. We had more flooding in the basement because everything just melted and it didn't have any place to go. So we cleaned up the basement and then we had more stuff and we cleaned up the basement again. We had just put all the flooring in the basement, so that's good timing. It was pergo, which is not waterproof. So that was ruined. Had to do that again. Right.

Starting point is 00:11:59 You're already going to pay a lot in the repairs. So you may as well save money on the people doing the repairs. Exactly. It was going to be $100,000, but somebody else quoted us $150,000. That's a $50,000 savings right there. I'm saving money. It's such a deal. Okay.

Starting point is 00:12:15 So these contractors, one of them showed up to work drunk and then subsequently got fired. Oh, did I say that he was the foreman? Because he was. I think he was the only one who knew anything about construction. But he didn't know anything about don't do construction when you're drunk. They stole from us. I just had a baby. They stole my pain meds from my delivery, which I didn't discover right away. You really scared us all right there, Mindy. We thought you were going to say they stole my baby. You did word that a very specific way that I was like, wait a minute. This was heading down that rumple-spilt skin path right there. They still. stole from us. I had just had a baby. Pause. We had scope creep. We had cost creep. We had

Starting point is 00:12:56 timeline creep. It was supposed to be all done in three months. It was not done until six months later. Sometimes they wouldn't even show up to work. Sometimes they would. They'd show up. They'd work for an hour and then they'd leave. It was just this like constant stressor. When are you going to be here? When am I going to see you? When are you going to get anything done? So it sounds like from a, from the standpoint of what you learn that listeners can apply. First one is the cheapest contractor isn't always the best contractor. Lesson number one. And then it sounds like was there like some accountability learnings that you had there with sort of how to keep your your contractors on track, on budget, on scope, all that stuff? Yes. I need to do my due diligence whenever I hire a contractor. I need to

Starting point is 00:13:41 call for references. I need to ask those references what the contractors did for them. The references that I checked for these guys all said that they were great guys. But I didn't get a lot of, like, I got warm fuzzies, but I didn't get, oh, they do great work and they're always on time and, you know, that kind of thing. Were the references like local bartenders? Great guy. Tips well. Tips well.

Starting point is 00:14:07 Yeah, he's awesome. That guy could smash a Coors, man. Tell you what. Knows a difference between a Manhattan and an old fashion. It was such a bad experience with contractors that, We do most of the work ourselves on our live-in flips. I know how to do electrical work and plumbing work and painting. And I don't, I have a very small list of things that I don't do because it's easier to learn a new skill than to properly vet a contractor for me.

Starting point is 00:14:37 So, yeah, that was a big lesson learned. What you described was like real estate math, right? I need to save 50 grand. So instead of hiring a good contractor, I'll hire a bad one and convince myself that I've saved 50 grand, but then it spirals into a problem, right? I was using it as an example that we've all made that mistake. We're like, I'm over budget. Let me skimp on the realtor.

Starting point is 00:15:00 Let me hire a discount realtor because I can't pay a full 3%. Or let me use the bad contractor or let me put in the cheap flooring and then the flooring bubbles up. It always ends up being more expensive than what it sounded like. Yes. Now, what I was going to say was, you know, run the bottom line is run your numbers and run them again and make sure that they're right. Cut costs where you can, but not on the important things. Like when you're deciding on which tile to put in your house and it's like two of the same thing and one of them's $12 a square foot and one of them is $3 a square foot, if it's just like, oh, go with the $3 a square foot.

Starting point is 00:15:41 If it's the same, like one's porcelain and one's ceramic, like, I hate porcelain tile. I always want to go with ceramic or like stone. But, you know, don't cut costs on your contractors. Don't cut costs on the important things. And don't, oh my God, don't skimp out on stupid stuff. But don't like, don't look for ways to spend more money than you have to if you don't have to. Can you tell us what did you do right that helped you get out of this or made it so that the deal didn't completely sink you because most people would hear this story and be like, oh yeah, it must have been

Starting point is 00:16:15 over for your real estate career. So what happened? Give us a little bit of insight there. What did I do right? I controlled a lot of the costs when it came time to do the finishing touches. My husband and I did the, we installed the flooring. We installed the bathrooms. We installed, we hired out to the drywall and then we did the rest of it. And we were able to, kind of tweak the costs there because we had such a horrible experience with all these other people. We finished up with the contractors. I was having a casual conversation with my dad who happens to be building a plant for his

Starting point is 00:17:01 company at the time. And he threw in this comment, oh, make sure you get signed lien waivers from all the subcontractors before you give them their final payment. And I was like, oh, I've never heard of this before. Tell me more about this. And he explained to me that a lien waiver is a document that the contractor signs that says, I will not place a lien on your house because I've been paid in full. And this saved me $11,000 because the drywaller did not get paid because those contractors were skeezy losers. And, but I gave them the final check because they gave me the lien waivers from all the subcontractors. So subcontractors out there, don't sign a lien waiver until you get paid.

Starting point is 00:17:49 And don't, if you're making payments to your contractors, don't pay them the final amount until you have signed lien waivers from all your contractors. That's a, that's a good tip right there. So has this deal, bad experience helped you on any deals since? Oh my God. Yes. I don't hire contractors anymore. We just do it all ourselves. We actually have hired a few contractors, and we have thoroughly vetted them, and for the most part, had good experiences. There's no perfect way to vet somebody. They start off great, and then they turn into terribleness. One great tip is to look at what they're doing. We found our best contractor by, we were just walking around the neighborhood, and we happened to see this house that was being worked on. We stopped by.

Starting point is 00:18:35 and they were there working. They're like, oh, you want to come in and see what we're doing? And they happened to have, it wasn't drywall day yet. So all of the, all of the beams were open. And we were looking around, we're like, wow, this is really cool. And then he showed us how he does stairs. He's got this really fabulous way to do stairs. You walk up the stairs.

Starting point is 00:18:54 They don't squeak. It's just everything he was doing was like, who can we hire you? He said, we've got a couple more weeks here and then we can come over. So being able to tour, they're doing currently is a really great tip. If I had a dollar for every time that I've entered someone's house that they didn't know who I was, like, because the contractor let me in, I'd have a pretty decent stack of $1 bills from when I knock on the door. And I'm like, hey, who's the drywaller here? And they're like, come in, let me show you. And I'm like,

Starting point is 00:19:21 you can't do this, but let's do it. Well, that's awesome. So it sounds like a, yeah, a couple learning lessons here. Obviously, vet your contractor, do some due diligence, keep them accountable. Don't pay for the cheapest contractor. And your biggest learning lesson here is no one's going to do the work better than you. So now you do a lot of your own work still. And you've used that to prosper even through such a big tragic deal. The deal that almost broke Mindy Jensen. The deal that almost broke Mindy Jensen. But it did not break me because I had so much in reserves. I have a lot of different buckets to choose from. And I am a huge proponent of having reserves. If you don't have reserves, if you don't have other places to fund these unexpected,

Starting point is 00:20:09 outsized costs or, you know, to fire this guy and hire this guy, even though it's going to cost more. If you don't have all these different buckets to choose from, you are going to get hosed. You need to have reserves. You need to have way more than you think you do. And if you don't, then you need to look into what are you doing? Partner with somebody who has. has reserves, who has funds available so that you don't find yourself in a pinch. Because if I ran out of money, I would have had a house with no roof that's turning into a mold festival. And that's just not good for anybody. And that is one of the reasons that we frequently tell people that real estate investing and building wealth is more than just the deal. It's your

Starting point is 00:20:51 overall financial picture. And having sound principles like saving your money and good work ethic that will help you to make more money. We'll both assist you greatly when it comes to putting the together. And a big thanks to Mindy for dragging up the details of her deal so that we could all learn from it. Tune in tomorrow for more of the same as James takes his turn in the hot seat. And as always, if you'd like to connect with Rob, I, or any of our guests, check out the show notes for this episode. This is David Green for Rob. He's a bad man Abasolo. Signing on. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast.

Starting point is 00:21:50 platform. Our new episodes come out Monday, Wednesday, and Friday. On the host, an executive producer of the show, Dave Meyer, the show is produced by Ian K, copywriting is by Calicoe content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.w.w.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. You can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC

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BiggerPockets Real Estate Podcast - 857: The House That Almost “Broke” Me: Losing $350K on ONE Property w/Mindy Jensen

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