Transcript: We’re doing house flipping mistakes here. It’s going to get ugly in here. Maybe put my sunglasses on because oh, it’s ugly. It’s ugly. Bryce and I were doing some analysis. In this file here is like the last 100 deals that we’ve done, and so every page represents a deal and what I did with that info is put it into a laptop here, made a matrix of all the things that can go wrong on your deals. Bryce and I we’re about half-way through this right now and it’s amazing because we’re going to go through all the mistakes you can make, which is-
Bryce: A lot.
stefan aarnio: A lot of mistakes. I don’t know, there’s maybe 45 different mistakes you can make or 50. We’re going to break it down for you guys so maybe you can avoid some of them or we can help you avoid some of them because it’s fricking serious man. All right, you ready guys.
Speaker 3: This is the roadmap to financial distress.
stefan aarnio: Here’s how it works, here’s the theory. If you can have 10 mistakes or less what we found up until the date of the last 100 deals, you’re in profit. If you are about 15 mistakes you’re in a break even position. If you get to 18 mistakes, this is per our data, that’s going to be a minus 10% ARV loss. You’re going to lose 10% of your value of your property, it’s going to hurt you. If you get to 25 mistakes you have a mortal wound that could take your company down and you could go bankrupt. If you get a mortal wound deal, so this is … We happen to coach people. I don’t make this video to sell you guys coaching but this is why people need coaching because if you get into the market and you do 25 mistakes you could go bankrupt on a 25 mistake deal.
Bryce: Yes and lose $50,000.
stefan aarnio: The main categories, what’s the first category?
Bryce: First one is fog of war.
stefan aarnio: Fog of war, so this is your own ignorance, this is your ignorance. What are some of the things that we can screw up in our own ignorance, and this is stuff like surprises, you didn’t see it.
Bryce: The first one is new business model, that’s always going to be an untested thing. New business models.
stefan aarnio: New business model, Bryce, just tell me the heading and I’ll explain what it means. New business model means you’re a new person who’s trying out something new. Maybe you flip houses, single families and you’re trying to flip duplexes, that’s new business model, that’s a risk. If you’re getting new into real estate that’s a new business model, that’s a risk. Okay what’s the second one.
Bryce: Fraudulent contractor.
stefan aarnio: Fraudulent contractor, that’s where contractor steals from you or is fraudulent. That can happen and you can’t really mitigate that too well. I mean you can do your due diligence but it happens.
Bryce: Death by city inspector.
stefan aarnio: Death by city inspector, so if the city comes in and they start smashing your face against the ground that can sink your boat. Okay, what’s the next one?
Bryce: Asset class loses value in the market.
stefan aarnio: Oh asset class loses value, so let’s say you’re flipping or something and asset class loses value while you are flipping, that sucks. Next one, number five.
Bryce: Furnace problems.
stefan aarnio: Okay, you might get a dead furnace. That’s okay. Remember guys, you can have about 10 of these before … You get to 15 you’re breaking even, you get to 18 life’s bad. What’s number six.
Bryce: Materials stolen.
stefan aarnio: Materials stolen, oh boy. Every single one of these I’ve lived through. Okay, number seven.
Bryce: Grow op or meth lab.
stefan aarnio: Yes, if you find out you have a grow op or a meth lab. Now I’ve always avoided that one.
Bryce: Or murder house.
stefan aarnio: But it is there, okay number eight a murder house. We have flipped a murder house that was not fun. What else?
Bryce: Surprise contractor overages, my favorite.
stefan aarnio: Okay over here surprised … Oh you had some this morning.
stefan aarnio: I told you it was happening because I looked at the data matrix and it was in there.
Bryce: Now that’s property burns, you had that one.
stefan aarnio: Yes, if you do 50 deals you’re going to have one burn down. We had a burn down deal. What’s number 11?
Bryce: Sex offenders in the area that people don’t want to live in.
stefan aarnio: Yes sex offender lives next door. I had a deal I flagged it as sex offender. We had a bunch of prostitutes that were running a sex business out of the shed in the back yard. They had sex swings a butt plugs and porno and all sorts of weird things. That’s reality of business. Okay, number 12.
Bryce: Invisible force, an undefined invisible force.
stefan aarnio: Invisible force, so this is some thing that is attacking you but you don’t know what it is. It could be a condo board, it could be the city, just some invisible force more powerful than you comes in.
Bryce: Now we’re into the buying negligence.
stefan aarnio: Now we get into buying negligence. Is that where we’re in Bryce?
stefan aarnio: Second category of problems is buying negligence. I’ll put it up here in pink, buying negligence, ouch. What have we got for buying negligence?
Bryce: Well the first one’s just a bad buy.
stefan aarnio: Oh just a bad buy, just generally a bad buy. That’s one thing very hard to recover from just overpaying, just buying badly. A good buy you win off, a bad buy you don’t. Okay, number two.
Bryce: Fail to wholesale a contract.
stefan aarnio: Let’s say you tie something up, you’re trying to wholesale it and you fail and then somehow you fund it. Dumb idea usually, okay number three.
Bryce: The condo board coming at you, not leaving the docks even.
stefan aarnio: Condo board, so this is related to invisible force. If you’re flipping a condo and the condo board comes after you that’s an invisible force. Number four.
Bryce: Gun slinging.
stefan aarnio: Gun slinging Bryce, what is gun slinging mean?
Bryce: Not doing the due diligence that you probably should be doing for your deals.
stefan aarnio: Gun slinging is general improvisation. If you’re just improvising you will die a horrible, horrible death. Bryce is that probably one of our biggest offenders on bad deals?
Bryce: Yes I learned it from some guy.
stefan aarnio: Okay yes, well I had good gun slinging.
Bryce: And I’m not the [crosstalk 00:06:35].
stefan aarnio: You got bad gun slinging. Okay, number five.
Bryce: You can fix gun slinging with-
stefan aarnio: Systems.
Bryce: No ARV comp matrix.
stefan aarnio: Which is a system, that’s a system. If you have a system like ARV comp matrix it’s going to keep you from gun slinging, so we’re all about systems. Okay, number five.
stefan aarnio: Over-renovated, now this is an interesting one because over-renovating it does pinch your profit but it usually doesn’t sink you. You get a strong sale but you get less profit, so it’s bad but it’s not super bad. Number six.
Bryce: Train tracks.
stefan aarnio: Train tracks next to your property, it’s never going to work. That’s a mistake. Number seven.
Bryce: Basement overages, spending too much in the basement.
stefan aarnio: Spending too much money in the basement will kill you. Basement’s don’t make money. We have several deals where we left our profit in the basement. Number eight.
Bryce: On site warning signs, so ignoring them I guess.
stefan aarnio: Yes, so what’s an on site warning sign Bryce?
Bryce: Crime, the street being in disrepair like physical bad street.
stefan aarnio: Yes exactly, so sex offenders, when you got prostitutes on the street and you’re ignoring that that’s probably not good for you. You see some stuff, you see some train tracks, you see some power lines overhead, you see a slopy floor, that’s an on site warning sign. Number nine.
Bryce: Red zones, buying in the red zones.
stefan aarnio: What’s a red zone Bryce?
Bryce: The place in the city where no property moves, it’s kind of a like a dead lock.
stefan aarnio: Right, so the red zone’s an official banking and insurance term and it’s a part of town where insurance and banking does not want to underwrite loans or insurance policies. That’s a fact Bryce. I don’t know if you knew that. The red zone is a banking and insurance zone, and so if you go to your insurance and your bank and you say, “Where’s the red zone?” They’ll show you the map. This is where we do not underwrite loans, this is where we do not do insurance policies. Private lenders don’t even want to lend in red zones, so just stay away from them. It’s bad. I’ve done lots of deals in the red zone, I’ve made money, I’ve lost money as well. Number 10.
Bryce: Dollars per square approach.
stefan aarnio: Tell me about that one Bryce. What does that mean dollars per square foot approach?
Bryce: Well you fun out of comps, you’re trying to find comparables and you start taking deals and dividing the value over the square footage and guessing that maybe the house you’re buying will equal the same. It’s not good.
stefan aarnio: Here’s the sin. The real problem is you can’t find enough comps so you go with dollars per square foot, and you don’t really have the data, and you buy anyways, and you get smashed. Doesn’t really work that well. I don’t recommend it. If you can’t fill out your matrix don’t do it. Okay, next one.
Bryce: Slab three-quarter, half, or any non-full basement.
stefan aarnio: Non-full basement, so if you’re in a market with full basements and that’s the favorite basement, if you buy a non-full basement in a full basement city that’s on offense. Okay, next one.
Bryce: This is the last one for the category, ARV is just wrong.
stefan aarnio: Wrong ARV, if you get the ARV wrong that’s going to turn into a bad buy. A lot of these go together guys. Often if you make one of these mistakes it’s going to turn into two, three, four, five, six, because a lot of them are related. Next category, so buying negligence, what’s our next category my friend?
Bryce: Strategic error.
stefan aarnio: Okay, so strategic error means just general … I don’t know how to spell strategic okay. Strategic error is general bad decision making, so just you just made a bad strategy call. What are some of the strategical errors?
Bryce: They have condos, so doing a condo when our business model isn’t really condos.
stefan aarnio: Okay, doing a condo is just a strategic error. Anything that’s not a house in flipping houses is a strategic error. What’s number two?
Bryce: No property or land lock, so the house doesn’t have a back lane, something like that.
stefan aarnio: Tell him to sit down because I’m getting low here. No property, so land locked property that means that there’s no access to park on the property, land locked. What was the other Bryce?
Bryce: Just no parking, it’s got no parking.
stefan aarnio: No parking major killer of real estate deals. Number three.
Bryce: No land, just no land, a condo.
stefan aarnio: No land, so that goes again with condos. If you own a condo you don’t own land. People buy land, they’re not buying the building. The building’s worthless, the land is what’s worth something. Number four.
Bryce: Duplexes, so just more non-business model.
stefan aarnio: Okay, so again non-conforming business model. If you do a duplex, try to flip a duplex bad idea. Number five.
Bryce: This is really important, lender hesitation or refusal.
stefan aarnio: Okay, lender hesitation or refusal. If you bring it to your lenders and they refuse or they hesitate that’s time to kill the deal because if they think your deal sucks it probably does suck. Would that have been a good one to fix Bryce?
Bryce: Yes, there’s a few [crosstalk 00:11:35] here.
stefan aarnio: That’s why you want to bring your deal in when it’s still conditional so you can drop it. Number six.
Bryce: BSS syndrome.
stefan aarnio: What does BSS stand for?
Bryce: Busy street syndrome.
stefan aarnio: Busy street syndrome, so this is buying on a main street, lots of traffic, families don’t want to live there, they’re scared of their kids getting hit by a car or maybe a sex offender coming down the busy street. Number seven.
Bryce: Commercial adjacent.
stefan aarnio: Commercial adjacent.
Bryce: For residential.
stefan aarnio: Is where your house that you’re trying to flip is next to a commercial building. Homeowners hate that. Number eight.
Bryce: The last one in this is crime slash break ins, so if you’re getting broken into.
stefan aarnio: Crime and break ins, so if you’re buying in a crime zone the way I put it there Bryce is crime is a strategic error, it means you’re buying in a crime zone. Crime can happen in a non-crime zone, but usually in a city the crime is in one area and actually again, the train tracks, where was train tracks? That was over here.
Bryce: In the buy negligence.
stefan aarnio: Train tracks go with crime. I don’t know if you know that. The crime zones are where the train tracks are. These things go together, see we’re linking them and that’s why you could do one or two errors and that could turn into 10 errors and then you’re done. What’s the next category here Bryce? I’ll just make some more room.
Bryce: Production deficiencies.
stefan aarnio: Production deficiencies, so now we’re into screwing up the renovations and screwing up the things that you’re trying to fix. What are the production deficiencies?
Bryce: Bad design.
stefan aarnio: Bad design, what does that mean?
Bryce: I guess you didn’t get a designer or it just turned out bad.
stefan aarnio: The way I look at bad design is it’s the home is just a poor floor plan, it’s just a bad design and no matter what you do it’s still a bad design. We did St. Pierre, it had three or four extensions, that’s just a bad design and we shouldn’t buy a bad design. Number two.
Bryce: Amateur design, just as offensive.
stefan aarnio: What’s an amateur design Bryce?
Bryce: Well letting the contractors have any say.
stefan aarnio: Doing it yourself.
Bryce: That’d be amateur.
stefan aarnio: Doing it yourself. If you don’t have a designer hired that’s watching your shit that’s an amateur design. Number three.
Bryce: No designer, just period.
stefan aarnio: No designer at all, oh boy. Who’s making the design decisions actually? That’s a very scary one.
Bryce: That’s be the contractor at that point. Under-renovating.
stefan aarnio: Well no Bryce it’s not … Actually it’s nobody, he just buys whatever. He’s not the designer, it’s no one’s the designer.
stefan aarnio: Okay, number four.
Bryce: Under-renovating is the last one for this category.
stefan aarnio: Under-renovating, okay so over there we had over-renovating and where was that? Buyer negligence?
Bryce: Yes, over-renovating is in buying negligence.
stefan aarnio: Over-renovating is one thing but then under-renovating is the worst side because for a little bit more money you can get the full ARV. Typically you’ll lost your ARV under-renovating. What’s the next category?
Bryce: Production management.
stefan aarnio: Production management.
Bryce: So managing the deal.
stefan aarnio: Now this is managing the deal and managing the contractor, so what’s the first offense?
Bryce: General over budget, so you just let it get out of hand.
stefan aarnio: General over budget, okay so this is just all in all the whole thing is just generally over budget. Okay, next one.
Bryce: Over time, which is pretty much the same but-
stefan aarnio: No they’re not. You can be generally over budget but do it quickly. You could do it quickly but then you can also just generally be over time. Over time usually leads to over budget, but over budget doesn’t mean over time. Okay, what’s the next one?
Bryce: Sandbagging the deal after purchase and not starting right away I guess.
stefan aarnio: Sandbagging the deal means that you are just holding the deal and you’re-
stefan aarnio: Well you buy it but you don’t get the reno started right away. Horrible idea, okay number four.
Bryce: Construction crew body death.
stefan aarnio: Okay, what does that mean Bryce?
Bryce: When the contractor’s kind of given up on the job itself.
stefan aarnio: Right, so this is the contractor’s team could dissolve or they’re demoralized or no one’s showing up.
Bryce: Or they start quitting, it starts to fall apart.
stefan aarnio: They quit, their employees quit. It’s just a demoralization of contractors to the point of them not doing their job anymore. Number five.
Bryce: Which usually leads to dragging contractor timelines.
stefan aarnio: That’s independent. I’m teaching you some things right now dude because these are independent problems. A demoralization and body death of the contractor, that can be linked to fraudulent contractor on fog of war. A dragging contractor, that’s probably something you can fix.
Bryce: Yes, that’s [crosstalk 00:16:20].
stefan aarnio: You can fix the dragging. The demoralization you have to get out of the trenches and remoralize them. You’re might have to buy them some pizzas, some beer, or whatever it takes.
Bryce: Fire them up.
stefan aarnio: Do something, dragging contractor’s a whole other thing. Okay, number six.
Bryce: That’s it, that’s all we got for production management.
stefan aarnio: Okay then the last section is what? Human error?
stefan aarnio: Then the last section for mistakes … You guys see there’s lots of mistakes in flipping isn’t there? Human error, so this is stuff where it’s like people just weren’t checking the boxes. What’s human error? What are the mistakes in human error?
Bryce: Verification of use.
stefan aarnio: If you’re buying a multi-unit you need to get a verification of use from your lawyer to verify it is indeed a duplex, triplex, whatever. Your lawyer can do this. If your lawyer doesn’t do this it can smash your face like a watermelon on cement. Okay, number two.
Bryce: No title insurance.
stefan aarnio: No title insurance, another lawyer thing that your lawyer should do. If you don’t do it you can die. Okay, number three.
Bryce: Bookkeeping issues.
stefan aarnio: Your bookkeeper being generally dumb and not understanding the business. I’ve had nine bookkeepers over four years. I’ve trained several of them. Although they’re trained they’re still dumb and they get it wrong and they put things in the wrong category. That’s why we created the PNL checker to check on those bookkeepers and make sure that they’re putting things in the right categories. What’s the next one Bryce?
Bryce: The last one here on the chart is over paying partners.
stefan aarnio: Over paying partners, so we don’t have this problem anymore. When I started I do 50/50 splits, and the 50/50 split would be paid out before the bookkeeping was done, so these two things can go together where if you don’t have the profit calculator properly with the bookkeeping and the bank reconciliations you can over pay a partner. At the end of the day guys, get a wide shot of this. Look at all these problems. House flipping mistakes.
Just to reiterate, if you are at 10 or less of these mistakes you are going to win. If you are 15 or less you’re probably in a break even position. If you’re in an 18 mistakes or more you’re probably going to lose 10% of your ARV. If you get 25 of these wrong on one deal you could lose your whole company. Now Bryce this morning we were talking about timeframe. What is the amount of days we can’t go over?
Bryce: I think it was-
stefan aarnio: 180.
Bryce: Well that’s for the whole deal.
stefan aarnio: The whole deal has to be in and out in a 180 days.
Bryce: And your production should be 17 weeks.
stefan aarnio: 118, 118. This is an ideal deal, it’s about four months. A perfect deal, 118 days if you’re doing it perfectly. If you get to 180 you’re not making money anymore. You got to be in and out in three, four, five months. When you get to eight, nine, 10 months your carrying destroys you. I’m Stefan Aarnio guys. This is house flipping mistakes. Here’s the thing, I don’t want you to be scared, there’s lots of money to make in real estate, but at the end of the day if you want this risk analysis product that we use it’s in the system. If you’re a coaching student or we’re doing this group coaching in the system you get that and you’ve got to run your deal before you take it to the market and-
Bryce: Before you can buy it.
stefan aarnio: Analyze all these mistakes in advance before they happen because preventative mistakes is where you want to be. That’s going to be your best bet. I’m Stefan Aarnio. Respect the grind. Coach Bryce right here. We’ll see you guys on the next video.