BiggerPockets Real Estate Podcast - 966: Top Investors Reveal Their Worst Real Estate Deals (DON'T Repeat Them!)

Episode Date: June 5, 2024

Think you've got a bad real estate deal? We doubt it comes even close to what we’re about to share. Today, the experts are in to talk about bee-infested rental properties, risky flips, “wholetail��� failures, and other ways that they’ve lost money with real estate deals gone wrong. Why are we sharing such horrific stories? Because we want YOU to be able to avoid the same fate on your first or next investment property. Take a seat, get some popcorn, and pray that your properties won’t turn out like this… First, Henry Washington from the On the Market podcast shares his recent luxury flip…or should we say, luxury “flop.” This property was poised to make him up to a six-figure profit, but it didn’t work out that way. One simple mistake ruined this real estate deal and forced Henry to slowly pay away all his profits to a hard money lender. Next, our own Rob Absolo talks about the dangers of NOT looking at the comps when doing a “wholetail” deal and how you could easily find yourself with a home worth less than what you put into it. Finally, the deal of all horrible deals comes out…David Greene’s deal. Where do we even start? Permit problems, mold, bee infestations, and NO way out—this short-term rental gone wrong is costing David hundreds of thousands of dollars, and with little light at the end of the tunnel, he may be forced to do something drastic. So, how do YOU avoid these nightmarish real estate deals? Stick around so you know exactly what NOT to do. In This Episode We Cover Three of the worst real estate deals our investing experts have ever done Why not knowing your neighborhood can cost you BIG on your next house flip The danger of hard money loans and the massive interest they come with Why you NEED a partner/mentor in your area to confirm a property’s worth The so-called “landlord-friendly” state that’s actively trying to ruin David Greene  How nosy neighbors can end up costing you hundreds of thousands of dollars  Whether or not our investing experts regret investing in real estate after this  And So Much More! (00:00) Intro (01:24) A Risky Luxury Flip (06:02) Final Numbers and Exit Plans (09:19) Henry’s Mistake (11:14) An Overpriced Wholetail (15:04) Rob’s Mistake (23:23) The City Ruined My Real Estate (32:43) David Lost HOW Much!? (36:19) How to Avoid This (39:07) Do We Regret It? Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-966 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

Let me ask y'all something. When you started in investing, did you assume that everyone with more experience than you knew exactly what they were doing? Absolutely. I remember I sat down with an investor and I asked him to be my mentor and he chuckled at me and said, bro, I don't know what I'm doing yet. I can't help you. And he was wrong. He helped me a ton. But that's when I started to realize everybody was still just kind of figuring this thing out. What about you, Dave? Oh, I remember the feeling when I realized, wait, I'm the one that everybody thinks knows more. And I know how little I know this is terrible. And that's exactly what we're going to be talking about on today's episode. We're going to be airing all of our

dirty, dirty laundry on deals that we've lost out on, lost money on, or are still recovering from that all happened within the last six months or so. And welcome to the bigger pockets real estate podcast. You might think that we're the experts, but on today's show, let me assure you, we are still figuring things out ourselves. I'm your host of the podcast, David Green, and with me today are Henry Washington and Rob Abasolo. That is right. We are each going to reveal some of the biggest investing mistakes that we've made in the last six months. And we're going to talk about what happened, how much it cost us, and what we learned.

So hopefully you can take away some gems so that you're not in these same positions like we were. Well, it's now or never, I guess. All right. So we've each come prepared with a recent investing mistake in the last six months or so. Henry, why don't you kick us off? What's the headline for your big L? My headline is Arkansas Man buys killer flip in prime location, but holding costs and time on market killed him. All right.

I love it. So break it down, what happened? Oh, man, the age old story of buying a flip and running your numbers and coming up with an ARV and then realizing after you're done renovating it that you might not get that ARV. So really fast, can you break down what is ARV in the context of a flip? Yes, so this is the after repair value. So when I ran the numbers on the deal, I wanted to know what is the value of this property after I fix it up? So I'd know what I'd be able to sell it for. And what happened is as I started to market it on the market and get sellers in there, the feedback we were getting is that sellers really wanted to pay substantially less for the property.

So demand for properties at this price point in this particular neighborhood started to come down. Now, fortunately for me, less homes are on the market now and demand has ticked up. So we actually did get a buyer to buy this property for 20 grand less than we had it listed for, which normally would be okay because we estimated making about an $80,000 profit. but because it's been listed for almost eight months now and I used a hard money loan to buy it, if you calculate that 12% interest month over month, my profits have dwindled down to almost nothing. Okay. Well, hey, you know, in Vegas, they say a push is a win. So I think even if you're, if you're pretty close here, that's not so bad. So let's back up a little bit. You said it's a luxury flip. Do you do a lot of luxury flips? What about this one? Yeah, it was a

even appealing. Yeah, I do not do a lot of luxury flips. I typically like to have two exit strategies that are going to potentially make me money when I buy a deal. So I did. I broke a couple of my rules. This would be considered a luxury flip. So the catch is, this is in an area of Bentonville, Arkansas that is extremely in extremely high demand. And so people want to live in this area. And so the prices are a little inflated. And so this property, we bought for 337 and we were planning on putting about 40 to 50 into it and selling for 500,000. And we had comps to support that 500,000 sale price in this area. What really stuck me was that this house was on a cul-de-sac.

And so you couldn't really walk to the areas of. Bentonville that people like to be able to walk to when they buy properties in this in this area. They have to kind of walk out of that cul-de-sac onto a busy street and then around to get there. And I misrepresented what people would be willing to do, even though still proximity-wise, it's close to where people want to be, but because they can't just easily walk to it. And it was one of it's only the second or third house on the street that has undergone a complete renovation. And so you have a lot of properties around it that are still very old. and there's a lot, there's some dilapidated properties on that cul-de-sac.

And so, guys, so you were like one of the first movers and a lot of people, yeah, they don't have the faith in that little pocket quite yet. Correct. So, all right, let me ask you something because this seems like a totally understandable mistake. In my mind, I've always thought that cul-de-sacs were very desirable. Me as a father, right, of two and a son of a mother. I think of cul-de-sac's as nice because you don't have to worry about kids in cars and traffic and all this stuff. But that's not the demo or that's not the avatar of your street?

It normally would be in a more suburban neighborhood. But this is a neighborhood where people are willing to pay the higher prices so they can be close to the downtown amenities. But because the cul-de-sac kind of blocked their access to be able to easily walk or bike ride, Now they have to go all the way. It's a long cul-de-sac. They have to go all the way down the cul-de-sac around a busy street and then down another road. In my mind, I didn't think that was that big of a deal. But to the buyers, they would just rather buy something else at the same price point on a street that gave them more access. All right. So now walk us through the profits on this. He said you're going to stuff for 500K. Total all in. What were you on this renovation,

purchase price, all that stuff? Yep. We did. We paid 337 when we bought it. We ended up being closer to about $50,000, $55,000 on the renovation. We were eight months on the market at a 12% interest rate and we're selling for 20 grand less. So we're under contract at $480. So when you calculate closing costs, commissions, holding costs, we, if it closes next week like it's supposed to, then we will make about $5 to $10,000. Which is still $5 to $10,000, but... But taking on the risk of a $500,000 flip for $5 to $10,000 is extremely risky. But if the closing gets delayed and I have to make another mortgage payment and utility payment,

that's going to drop down to about half of what it is. Right. And that could be, that could really, I mean, if the seller or let's say if the buyer is buying let's say their financing falls out last second, no fall to your own. That's a $5,000 mistake, or a $5,000, I guess, loss at that point. Absolutely. So we're barely going to make it through by the skin of our chinny, chin, if it closes, if it doesn't close, then our backup plan is to make it a midterm rental.

And hopefully that will allow us to sustain the property. I don't know that we'll make a ton of money, but it should cover the mortgage in some of the expenses. So obviously you do this a lot. You've just released a book called the real estate dealmaker. And you're no newbie here. I'm sure that you have calculated or you usually calculate the worst case scenario here. What was that worst case scenario previous to this in your mind? Yeah, worst case scenario was always to turn around and make this a short term rental if we needed to. because it is still a desirable neighborhood. It is still, the values are still high there.

I just think we're a little bit too early on this street and we misrepresented what conveniences people are willing to make. But the worst case scenario was that we would have to pay the money to furnish it in order to make it a midterm rental so that we can hold it until this neighborhood absolutely turns because this neighborhood will turn and it will be much more. desirable than it is now. It is just too closely located to the amenities that people are looking for. We're just a little ahead of our time, I think. Sure. Well, here's the good news. If you hold on to it for 30 years, 30 years from it, you're going to look like a genius. They're going to be, you got it for how much?

So there's always that. But if you cash out refi and do this plan, you'll be leaving a pretty good amount of equity in the home. Yeah, I don't know. I wouldn't be able to pull much out on a refi. So we are refying it. I'm not going to pull anything out. And I think, I think I'm barely going to make the cut to be able to do that in terms of equity in the deal because of the holding costs. The holding costs are what absolutely ate this deal up. Yeah. So let's break this down at one kind of easy headline.

What's like one thing, if you could give advice to everyone listening right now to avoid this type of thing happening to them? What's your advice? Yeah. So for me in this scenario, I fell in love with having the property in this desirable part of town and overlooked some of the normal dynamics you would look at when looking at a property. And that is, you got to take a look at your neighbors and see, how is that going to impact your potential buyer?

I needed to put on my buyer's hat here and think, would I want to pay half a million dollars for a house on a street where all of the other houses aren't in that price range yet? and I think if I would have asked myself that question on the front side, I would have been, it's not that I wouldn't have bought the property, it's that I would have made an offer less because I would have anticipated the ARV, the after repair value, to be lower based on what the rest of the neighborhood looked like, even though the comps supported $500,000. It's just local, real estate analytics. Yeah, which, you know, is a good segue into mine. And the issue that I had with my property. Should we get into it? Let's hear it. Leave me out here feeling like I'm the only

one to screwed up. Well, yeah, Rob and I actually are sharing amazing deals that we did that went way better than we possibly could have dreamed. We checked with Henry and we call it the good deal sandwich, except we started with the bad part first. So David, you recently made $7 million on your on your real estate deal, right? Well, I was expecting to make six, but yeah, it turned out a little better than I thought and I ended up with seven. You lost a potential profit of a million, but you still made six. So yeah, same, same here. All right, everybody, thanks for listening.

I'm just kidding. Our producer called it the bad deal, Tostata instead of the good deal sandwich. That's right. That's good. But for real, we're just kidding. We definitely have some bad deals here. And Henry's out of the hot seat,

but rest assured that David and I will spill our guts on our worst deals right after the break. I have an uncomfortable question for you. If your rent collection drop to 80% next month, How long would your cash flow hold up? What about 70% for the next three months? Would your cash reserves cover it? I talk all the time about scenario planning.

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That's instant cash flow improvement. Cost segregation guys is the number one firm nationwide, specializing and identifying these faster depreciating assets in your property. They've completed tens of thousands of studies across all 50 states from remote cabins to apartment complexes. So if you own investment property, this is a no-referral. So visit costsegregationguise.com slash BP for your free proposal and find out how much you could save this tax season. Welcome back investors. David Rob and I are here talking about our biggest mistakes. Let's get back into it. So Rob, tell me, what is the headline of your bad deal? Yes, okay. The headline is area newbie flipper trust wholesalers comps on a quote unquote quick wholesale deal. All right. So here's what I have. I've kind of talked about it on the show in bits and pieces,

but here's the whole story. So the whole, I was looking for, I wanted to foray into a new niche within the real estate world. They say, why don't I try something new? You know, I like to learn. Sometimes that learning is a very costly education for me, and that's okay. So a wholesaler slash contractor sent me a deal on Instagram. And he was like, hey, dude, I've got this. insane deal. It's a wholesale that I'm working on. And it is basically a two-week deal. And if you go in, clean it up, fix some of the framing, yada, yada, take this off, add about $25,000 of work on it. I'll do the contracting at cost, and you'll make $20,000 in two weeks. And so what was really appealing to me was I was like, okay, well, hey, if I've already got the contractor in place,

that's honestly the biggest battle for this type of thing. And he's basically going to do it at his cost because he was making, I think, $25,000 on the wholesale fee or something like that. I didn't know it at that time. But for me, I was like, oh, yeah, I don't care. As long as I make my $25,000 in two weeks, I'm good to go. That's like 100% return in two weeks, blah, blah, blah. Well, I'll break it down. The deal costs $75,000. It needed $25,000 of work. So I was going to be all in about $100,000. And it was a pretty guaranteed bid from him. There wasn't really like much question on what needed to be done. Well, then I got like one change order and two change orders that resulted in about an extra $5,000. So all in on the deal, I was at about $105,000. Now, the reason

this was really appealing to me, though, was again, trusted contractor. I still like them. There's no hard feelings here. This is on Papa Rob here. But I had the contractor, and so I was thinking, okay, he's going to fix it. But the other thing that he really brought to the table was he's like, oh dude, because I do this so much, I've actually got an amazing buyer's list of investors that will buy this deal. He's like, I'm already talking to them. They're ready to go. They say, hey, do these things and then I'll come in and finish out the property. So all in 105K, he does everything, and then he shoots it out to the buyer's list. And, well, basically, we were going to list it for $130,000 and kind of see how it went. All the offers he was getting for this quote-unquote quick

hotel deal was basically $80,000, $60,000, $90,000. So way below the $130,000 price point that we thought we were going to get. And so basically, I was like, well, dang, dude, now what? And he was like, well, I guess you have to list it traditionally, you know, good luck. And I was like, all right, luckily, I've got a, my cousin, Bridget, thank you, Bridget. She's an amazing realtor in Houston and she's like, I'll list this thing for you at a 1% commission so that you don't have to take a huge haircut on this. And so she's been listing it for me for the past, I don't know, at this point, five months. All these offers are still coming in at like $60,000 to $90,000. And if I were to sell it at the highest offer I've gotten, which I think is $105,000, which seems like a break-even,

I would lose $5,000 to $7,000 on this deal. And that's, yeah, that's kind of where I'm at. I trusted the contractor. I listed it. It didn't sell. Now I got to sell it traditionally. And all those, you know, I don't have holding costs because I bought it cash. But, you know, the realtor fees, commissions, brokerage, all that stuff is going to cost me quite a bit. It sounds like if I'm hearing you correctly, your biggest regret is trusting this contractor. Is that fair? No. Well, maybe. I'm a very trusting person. I think the biggest regret was not corroborating

his comps more because I did a quick scan on it and he was kind of like, hey, here are the comps. They looked good. But the problem is, and obviously I'd say this feeling like an idiot as I broadcast this to hundreds of thousands of people, but he's the one selling me the deal. So obviously whatever comps he's bringing to the table, but they were truthfully the only comps. There weren't that many comps to pull from, but I didn't like get deep into it. I didn't corroborate it with other people in the area because then I went to like a conference and there was a flipper in that exact neighborhood. He goes, bro, he's like, I live two houses from there growing up. He's like, I'll buy that right now. And I told him the deal. And he's like, oh, no, dude. He's like,

I'd give you $85,000 for that max. He's like, I can't sell it for more than that. He knew his numbers like that, like every down to the T. And if had I talked to him, I would never have bought the deal. That is not uncommon though. I think every piece of information we get came from somebody else at some point. Everything you hear on the news, even a comp, right? Like a realtor extend you comps, they're picking the comps that they're going to send you. It always comes from somewhere. So don't beat yourself too much because I think a lot of people in today's market are having these things go wrong, but we're doing the same things that we were doing in the last five years and they were working out just fine. It's just kind of the nature of the beast. You never

know exactly what you can trust. What would you do differently if you could go back? Would you have sought out people like the guy that said, oh, I wouldn't have paid more than 85,000, just a little bit more experience. Definitely. I would have found a local flipper in the area and actually talk to them. And again, like, not wholesale, not all wholesalers are out to just make a buck and like, you know, mess with you kind of thing. I don't think that was his intention, but his job was a wholesaler contractor. His job was not on the exit, right? That ultimately falls on me, which means I need to talk to people who make their living on the exits on flips, right? So I should have found multiple flippers in the same.

South Houston area and said, hey, check this out. What do you think? It's not like I don't have the network, right? I know a lot of people that do it, but it seemed like such a clear-cut deal. That contractor has done so many wholesals in that area. And granted, I mean, you know, I did trust them quite a bit. So I was like, okay, yeah, let's do it. Like, I was like, worse comes to worse. I was like, what's going to happen here? It's like, well, worse comes to worse, you have to do the full-on flip. And you'll just have to put in another $65,000 and you'll make, you know, $30 or $40,000 at that time. And I was like, all right, yeah, that's not so bad. So that's kind of where I'm at now.

I could finish the flip, put in $65,000, make really now, I would say 10 to $20,000 after all fees and everything, or sell it for a, you know, $5 to $10,000 loss at this point. I had a very similar decision to make on a property where I could finish the rehab, maybe make $30,000, grand in six to eight months or I could sell it as it is and take a $7,000 loss. And I chose to take the loss so that I could move on and put my money to work, put my money to work on something else that I know is going to get me the return that I'm looking for. But just a couple of questions. A couple of questions, dummy. I can't be the only one feeling dumb here. Your turn. So did you have a relationship or know this person before they brought you this deal? Nor.

No, you did not? Is that what I did not? No, yeah. I mean, we chatted on Instagram back and forth and he was like, dude, I got one. And I was like, all right. So we actually met in person. So it wasn't like I just bought it from him on Instagram. We went to the house. We toured it. It checked out to me at that moment. And why would, or is it not an exit for you to just finish it to rental property standards, throw a tenant in it and cash flow it? Because I am busy. Yeah. That's it. It totally is. Yeah, it is. I mean, that's the thing is like, you, and I think we did an episode where you and Dave Meyer were like, dude, lose the five grand. And David has told me many times, he's like, just lose the $5,000, man. And I'm like, I know. But if I lose the $5,000, I have to accept that I lost on a real estate deal. I've never done it. I think it is worth it. I think it would be a burr that I could finish out, cash out, get like, you know, $150,000 of my $180,000 out. Yeah, somewhere around there. And maybe cash. But I've already established on the show, I'd make an awful landlord. It's not what I do. I'm a short-term rental guy and I do other real estate. So I think I kind of want to, but it's just not my wheelhouse, I guess, is the moral of the story right now. You got that Floyd Mayweather 50 no record that you're really trying to protect really hard. Yeah. Well, if I hold onto it for 14 years, I can sell it at a game. If I just don't count the holding cops. That's right. I'll look like a

genius in 30 years, guys. Right now, all the YouTube comments are tear me apart, but they don't know that this will make me $500,000 in 30 years. And with that $500,000, you'll be able to buy yourself a ring pop because that's about how much inflation is destroying as apart. I'm actually a little upset with you, Rob, because both you and Henry have brought up what we're supposed to be bad deals that are basically break-even. And it's kind of a lightweight flex. You're like, well, my terrible deal was actually just a break. I'm so good that when I completely screw it up and bring my worst deal ever to bigger pockets,

it ends up being a deal that I broke even on. It's so hard to be me. This is like the equivalent of when there's that one really skinny person in the room that wants to call attention to how skinny they are, but they don't want to look arrogant. So would they just say how cold they are? Henry, you and I have talked about this. They're just like, is anybody else cold in here?

It's so cold and everybody's fine, but the skinny person is freezing. That's what you two both just did, Okay, but I have $100,000 locked up in this property. So, to be fair, I could do things with that $100,000 that would further my real estate goals. So right now it's kind of in an equity limbo, as they call it. That's why I'm telling you that you should sell it because you have many better things you could do with the money. But still, these are not else. Like most people lose way more money than this that are listening to the podcast and they're like, yeah, this confirms.

I never should have been an investor. because if the good guys are sharing their worst deals and they broke even, this is just not for me. Do you realize the negative impact you're having on the youth rob by sharing a story like this? Yeah, they're like, oh, the worst case is I'm only going to lose $5,000? Real estate's awesome. I can make half a million or lose $5,000. We'll never fear, folks, because we get into my story, everybody here is going to say, you know what, maybe I just don't want to invest in real estate at all. Mine's horrific.

And I just wanted to point out to you guys that you're going to make me look really bad when you brought such good examples. Well, let's get into it. Let me give one piece of advice to everybody and then we'll move into yours. I would say if you're in a similar situation, if you want to try a flip, if you want to foray into a sector of real estate that's not your jam, find a mentor, find a partner, find someone who's done it before and ask them for help. I mean, I literally have access to Henry Washington, David Green, James Dainard,

all of you guys would have picked up the phone. And obviously, there's several other people I could have called to that I didn't because I was just like, oh, I'll figure it out. But I'll figure it out has cost me five to ten thousand bucks. So find someone that's already figured it out, lost that $5 to $10,000 that has learned the hard way so that you can learn the easy way. Don't find someone that's lost $5 to $10,000. Find someone that's lost $50 to $100,000, like a real loss and actually get actual good advice from somebody. Like who needs to ask Floyd Mayweather for boxing advice? Like, you know, Floyd, I'm really trying to work on my jab here.

Like, you don't need to ask Floyd unless you're an Olympian level boxer. That's so funny that you're saying this. I hope you guys just know. We all know that you're prideful. And that's why you didn't want to share actual losses. Or you're both really that good, in which case I'm just going to like bend the knee and bow. I'm going to hire both of you as a real estate coach. All right.

We have to take one more quick break. But stick around. As promised, D.G. walks us through his epic loss right after this. Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late night fridge raids. Yeah, when you're gone, your place is basically on unpaid leave.

It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation. spending money like it's a sport while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property, you can hire a vetted local co-host with real hosting experience to handle it all. A co-host can

handle guest communications, it can manage reservations, and keep things running smoothly, so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax, knowing guests are taken care of, and your place is in good hands. You travel, your house works. Everyone wins. If you're ready to host but could use some help,

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Tell us, tell us the headline for today's show. I would be so happy if I had lost $50,000. I would be like literally jumping up and down and shouting if it was only that bad. I'm scared to hear this. My headline reads, Experience investor underestimates local city's ability to ruin perfectly good deals. Good, good.

As you can see, I'm taking complete responsibility for these deals going horribly. Jocka Willen could be very proud with the ownership that I'm showing here. This is a bad show reverse toastata, the worst ones at the end. Oh, yeah, for sure. What I found out the hard way is that, there are many cities in this country that do not want short-term rentals. And even though there are landlord-friendly laws or owner-friendly laws in those areas, meaning that they cannot tell you don't put in a short-term rental, that is not enough.

And I'm saying that because so many people think, well, if I just go to a landlord-friendly state, I'm not going to have problems with tenants or whatever. But it is much more complicated than that. There's several layers. So I've had this problem in California, which everyone's going to say, well, obviously you have. but also in Florida, which is like a bastion of freedom right now, right? This is where everybody's moving to that's pro business and pro real estate and doesn't like taxes. And in South Florida, I've had an absolute nightmare.

So I bought some properties, this one in particular that we're talking about. And the city doesn't like short-term rentals, but there's nothing on the books that tells them that they are allowed to tell me I can't do it. I just have to apply for the permit. So like a good little boy, I went to the city and said, I would like a pommet, please. I'm trying to play by the wolves. And they said, really, are you sure you want to do this? And I'm like, yes, because I'm honest and I'm going to do things the right way. So they send an inspector to the property who goes through the entire property and ends up tagging it for things that I didn't do to it.

So I did get the house and I did apply for some permits to put a new roof on it, to replace the windows. Obviously, Florida's known for hurricanes. So the city walks the house and there's a neighbor that does not want it. And she immediately starts calling the city every single day and says they're doing work. and the city is like, well, they got a permit. So she starts looking at every single piece of work that's being done. Now, you hire the general contractor who applies for the permits, who does the work. Well, he did some work without getting permits.

Like, well, we're taking off the roof. We're putting a new roof on or placing the doors and the windows. Like, let's replace the cabinets while we're here. Let's do some flooring stuff while we're here. And he doesn't go get permits for those little things. Well, she's in there taking pictures of the house and sending it to the city, gets on the city's radar. So the city starts to like, man, we need you to pull permits for this. We need you to pull permits for that. That's kind of

normal. The general contractor is taking care of it. I don't have to worry about it very much. Then she starts calling the rest of the neighbors in the city. And she's like, this guy's trying to turn our beautiful city into a short-term rental hotel and we need to stop this. So everybody in the city starts, or sorry, everyone in the neighborhood starts calling the city and complaining about this project. Long story short, the short-term rental person comes to give me the permit after I've already done the work because I'm trying to get that insurance down from $26,000 a year. I've spent about $130,000 improving this property that was built in like the early 1900s, like 1902 or something like that. The person comes and starts tagging stuff that we never did to the house. Owners before

me added two bathrooms to the property. It's a big 3,600 square foot main house and a 1400 square foot duplex in the back. Well, the bathrooms have been there for decades. Doesn't matter. He's like, oh, you're not allowed to have these. They see that the, uh, water heater isn't big enough for what the house is supposed to be. They tag me for that. They just start making things up. Like, oh, look at this point, you had a, you had some work done. They put an island bar in your kitchen. And we don't have anything on record in the permits. Now, this wasn't a kitchen remodel I did. I'm telling you, this was something people did way before I bought the house. Here's the kicker. I bought the property because it's a 3,600 square foot main house and it really

close to the beach and just north of Miami. And it had a duplex on the back of the lot. They tell me that I have to take the duplex down. We look at the at the zoning and you're allowed to have three units. Okay. When I bought the property, it said on Zillow legal triplex, zone triplex. It has already three different electrical panels and meters for every single unit. They said, yeah, well, the person who built this thing in 1943 didn't complete the permitting process, so we're going to make you tear down that duplex. We say every single house on the street has a duplex. And the, and the, And the city official told us, yeah, but we only enforce it when someone applies for a short-term rental permit. And I'm like, okay, well, never mind.

I will sell the house. I don't want a short-term rental. It's too late. We've already put in the system. It can't be taken out. You have to tear down the duplex. So I hire a consultant to go try to argue. And this person is great.

His name's Derek. He's actually that ADU guy on Instagram. Awesome dude. He finds, oh, that guy. Yeah, yeah, yeah. Yeah. He's going through like the microfilm and stuff of the newspapers. I don't know what he does.

but this guy puts his gum shoe hat on. And he does show at one point there was, it was allowed, even though they didn't complete the permitting process, the city saw it and said, you're okay. And so he makes his argument that at that point, you can't come back and make him tear it down. Well, they're like, okay, fine, but you can't have a duplex. You can only have one unit.

And so until you get rid of one of the two units in the duplex were shutting off the power, they turned the power off to the entire house in South Florida. A couple months later, there's mold. Oh, no, there's more? Bro, long story short, that duplex is now overrun with mold because it hasn't had air conditioning run to it for like almost 24 months now. So they've told us, you have to tear that duplex down. And now that it's a health hazard because of your mold, you have to like rip it out.

And when you do that, it now qualifies for a substantial renovation, which means now you're not allowed to have the duplex at all, so you have to tear it down. Like, I am in this horrible, horrible mess with the city. the deal itself was great. I paid 100 grand less for it than what it appraised for when I bought it. The numbers on it looked really, really good. I had to go spend all that money to try to get it up and running again, and then this happened. So now here's where we are.

I cannot put anyone in the house because it doesn't have power and I can't get the permit. The neighbor's still watching every single thing that I do and they've been horrible. It ended up getting infested with bees during this period of time. And 50,000 bees made their way into the intubes. here of the siding of the home through the roof. Okay. So like they're calling to complain about the bees that are in the house every single day. Uh, if I tear down the duplex, I lose my zoning. And then that hot water heater that they said I need to have being bigger, the house is at the maximum capacity that is allowed to have for electricity. So if I put a higher, a better, bigger hot water

heater and I have to upgrade electrical. But when I upgrade the main panel, it needs more amperage to pull in from the city. Which, They shut down. Yeah, well, that is shut down. But the line that city has run is already at max capacity, meaning they can't supply the power that they are telling me I need to have, which they are now saying you have to go dig an underground like tunnel basically to run power to get the level of power you need just to get a bigger water heater because these two

bathrooms were added in the freaking 60s that nobody told us about. In order to add the power line, I have to move the neighbor's fence and dig underneath it. and the neighbors have said, no, we're not going to agree to anything. So I am just stuck in this limbo that I cannot get out of, and I can't sell the house to anyone else because they'd be inheriting all these tags, and they're stuck there. And that's why I'm mostly blaming the city because they ruined a perfectly good deal. But the moral of the story here is it's not the stuff you know about that's going to hurt you in real estate. It's like if you've seen it happen before, you usually have a contingency plan.

It's the things that you didn't anticipate, that you didn't see coming that creates, the problems that you've got. Oh, man. I think I need a cigarette. I don't even smoke. And that lady, you can't be more thrilled about what's sitting next to your property now than if it would have been a functional short-term rental. That was my argument to the city. It's like, do you guys realize it is heading to foreclosure at a certain point? And you're going to have a like rotted out, be infested, mold-infested property in a historical district because you didn't want a short-term rental. Like, is anyone here? But here's the problem, Henry. The person you talk to in the building department doesn't really care because this is just a W-2 job. Their supervisors like,

don't ever let anyone get to me. So we can't talk to their supervisor. When you do get someone from the building department to work with you, they say, now the zoning department has to agree to this. And then they kick you to like the business department that oversees the permits. And then they have the planning department. And none of these people make a decision. Right. So like, I absent trying to find a lawyer out there that could sue the city for like the damages that they've been causing because they're not treating me the same as everyone else. They've admitted everybody else has the same duplex and we don't care, but you wanted the short-term rental permit. So we're going to go after you specifically. So let me ask, let me ask you this. How much are you out as a result of all of this?

Like how much money has gone into this entire like process? Eight grand a month for two years. You got that right off the bat, right? So that's what about 100 grand a year, 200,000. there. $125 I had to spend in the beginning. And then you've also got like the B problem and the other little things. All of the permit applications we've had to payer probably in the $30,000 to $40,000. Like I just at some point you stopped counting. And here's the worst part.

I still don't see a way out. I don't know what you can do at this point to try to like, I guess this normally when something goes this terrible, you sell it, you take the loss. I mean, if it's you, you only get a $5,000 profit. But for a normal person, they take the loss. loss and they get out from underneath the deal and they move on. But because the city's involved, I can't sell it. And the lender doesn't care. You can't go to them and say, well, I'm not going to make the payment because I'm stuck here. That's not their problem, right? And the city won't

let you fix it. So I'm just, I'm kind of at a loss. Like, I don't know what you do do other than illegally pay somebody in the city money and then they look the other way or something. Okay. Here's what we do. We start a go fund me and we raise more. than what you've lost, and then it's a win. So everybody will leave that information in the show notes down below. Donate to David. Dude, I need time to process that. I will call you separately with ideas, but geezel Louisa. Oh, man. You need to go move into this house. Yeah, and take up like a very loud instrument, like drums. I'm afraid of bees. Oh, well, that you could get fixed. I had a bee infestation at one of my properties like a year or two ago. Well, he had to

How are you going to live in a house without power? Like, dude, this is like Darth Vader and the evil empire that have put all of the powers of the empire against me here. Kind of already look like a caveman, though, with your beard. So you could just go like full, like a nomad, you know, no power, no hot water. Be like a squatter, a squatter in my own house. You could squat in your own house. If it's your primary, don't they have to turn the power on? I think you might have a lot more leverage to get them to do what needs to be done.

if it's considered a primary. There may be something here. Yeah, maybe that is what I have. Dude, yeah, you're looking to move. You're looking to move states. I mean, this could be it. Bring my Coleman's ice chest and a tent and a little barbecue. Park on your front yard and then always like just park a little on theirs and be like, oh,

sorry. Just throw those stink bombs over the fence into the neighbor's yard. And so, yeah, I'm still kind of trying to figure out what I'm supposed to do with this thing. I'd love it if there was a real estate attorney that was out there that knew, like, what could be done to get things going. but I've got about four properties that all have the exact same thing happen. And these are all over a million dollars, between one and three and a half million dollars

over these four properties, where that the city all did the same thing. And you can't make any progress. They don't want to help fix the problem. Maybe we could do a show on that. You bring on an attorney to consult you and say, hey, how can this be, you know, how can you go up against the city in these types of scenarios? Because I think a lot of people in your scenario, not as bad as yours, but are always lost.

Like, man, I'm helpless against the city. so maybe we could make a show about, you know, like how you can fight back against the city that's kind of like bullying you around. If you're an attorney out there and you would like to be on the show, we would love to talk to you. But let me ask you guys, do you feel a little bit better about your two deals after hearing this? Well, mine's not done yet. So, TBD. But I definitely feel better compared to hearing about yours. I guess what I want to know is like, because there's a lot of people who are still looking into doing short-term rentals.

in luxury markets and providing these cool homes and these unique places and these cool experiences. And so how does somebody, like, what advice would you give to somebody on how to avoid landing in a situation like this? You know, that's the question I've thought so much being on this platform about how do you advise people against it? If I'm being completely transparent right now, I don't know that I'm the best person to advise people how to avoid it because I haven't figured out how I ended up in this thing. I still, in the middle of the night, get hit with anxiety about this.

Like, how did this even happen? Because there were no laws that prohibited short-term rental ownership. There was nothing on the books. I would say this. Here's a piece of advice for everyone at home. Not necessarily around this, but I would say, like, never go into a situation that, like, you know, luxury homes are expensive, right? And so if you don't have the reserves or the war chest saved up or the financial backing

to be able to weather this storm, you could very easily. be in a very, very, very bad financial situation. David, you've built many businesses. You've built a real estate portfolio. You've built kind of an empire in this entire world. And so because of that, as unfortunate as it is, the silver lining is you are able to actually withstand this, whereas most people would probably go bankrupt in the process. So I think it just goes to show if you're looking to step up whatever that home purchases to the next level, always make sure that you can afford a good one, two years reserves. I mean, really, I would have said six months, but this now shows me, hey, having two months or two years of reserves is not

that crazy. There you have it. That's why I give that advice so often to everybody. I don't always share the details of these things going wrong, but the principle behind the advice I give is because this can happen. It can be a perfect storm. Now, this also all happened at the same time that interest rates went up. So all these burr projects that I had going on that I expected a six and a half percent interest rate went up to like 11 and a half percent on a lot of these deals and all the revenue coming in from selling homes and doing mortgages and everything else stops because interest rates go up and people aren't transacting home. So it is a perfect storm. And when that happens, the only way you survive, like you said, Rob, is you just have way more reserves than what you

thought, which is why we give the advice that you should keep working. You should keep saving. You should still live underneath your means and not, I got a little bit of money. Let me go spend it all. Yeah, man. Well, thank you for coming on and sharing that. I know that's not easy to share. I know you've given us a look under the hood for, you know, the past while this has been happening. But I hope that people take away from this and actually learn, like, make sure you can afford to step into whatever business, whatever real estate transaction. And thankfully, you were. You'll get through this. You're David Green.

You always do. And I guess what I'd say, too, is yes, we're all sharing deals that didn't go well. do any of us regret investing in real estate during this economic time, given these bad situations? No, not me. No, I don't regret investing in real estate. I regret buying so many houses at once and getting into a new asset class, relatively new for me, short-term rentals. I should have waited in, like a little bit at a time. But I jumped in and bought a whole bunch of them and just didn't anticipate.

this happening. But if you look at the entire time of real estate investing, my wins are still a lot more than these losses I've had in the last two years. Yeah. And that's, I mean, that's how real estate is, right? Like, more wins than losses if you're consistent and strategic. I feel the same way. And I just want people to understand that. Like, yes, we all made mistakes. We're all going to make mistakes again in the future. But it's not stopping us from continuing to invest or making smart investing decisions. I think we've all learned something that will make us better in the future. But even that still isn't going to stop us from making mistakes. I think we just have to really understand the deals that we're getting into.

And if we don't understand the deals with a new segment that we may be getting into, then like my rule has always been, if it's something that's not my bread and butter, it's got to have two things. Either it needs to be such a screaming deal, I can't lose. So I'm basically getting paid to get an education in this new space. or I have a partner on this deal who is specialized in this new space. If it's not one of those two things, I typically try to stay away from it. Totally.

And as I always say this, all my mistakes add to the millions, right? Over time, I'm going to be investing. I'm going to be building equity. I'm going to be building my net worth in the world of real estate. And the only way I can do that is by making mistakes. So they help you avoid the big ones and you get better and better over time. I mean, I'm happy for everything that I've lost in a weird way. Never in the moment, but always in retrospect.

Awesome. Thanks, guys. I appreciate you both. This is David Green for Rob and Henry the Bad News Tostata Amigos. 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 platform.

Our new episodes come out Monday, Wednesday, and Friday. I'm 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.biggerpockets.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.

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