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Flipping a House: Beware of Partners

Flip a House

 

 

 

As you might recall, we are currently in the process of flipping a house. We partnered up with a property management/ remodeling company for this project. Basically, they brought us the deal. We are putting up the money, and they are responsible for taking care of repairs and remodeling the property. You can read more about the financial details in the previous two posts.

We Flipped a House!- Part 1, Buying the House

We Flipped a House!-Part 2, Renovating a Distressed Property

My last update had us almost finished and ready to put the property up for sale. However, not very long after that post was published, the wheels fell off, and we have not seen much progress toward finishing the house. If you do want to purchase real estate as an investment, I would be very careful before deciding to take on a partner.

What Happened?

Honestly, I’m not sure. When we noticed that no progress was being made, I repeatedly tried to find out why. I got a whole slew of excuses; everything from “my Mom has been ill” to ”we had an emergency with another rental property”. 

We are pretty reasonable people, but this was getting ridiculous. Short of hiring a lawyer, we felt there wasn’t much we could do. It was worse than frustrating to see weeks, especially prime summer real estate season, go by with nothing happening at our almost finished property.

You Did What?

Although we were frustrated, the next thing that happened was unbelievable. When I was changing homeowners insurance companies recently, I had to provide the policy numbers for our investment properties. Our partners had been responsible for providing insurance on the flip. Because it was a rehab and sell, it falls under a commercial policy. Our partners wanted to insure it because they could get a discounted rate due to other properties they held. No problem, or so we thought.

I soon found out that the policy had expired several months earlier. Basically, what this meant was that if the house had burned down, gotten demolished by vandals, or if some idiot had stumbled through the yard at 2 AM, broken his neck, and sued us, we had no insurance. We had $87,000 invested in this property WITH NO INSURANCE.

I was beyond mad. I had to type a very carefully worded email rather than call because I am not sure what I might have said in the heat of the moment. The reason I got for letting the policy lapse was that it was “pretty pricey.” Yes, it would have been PRETTY PRICEY if something had happened while we were uninsured.

Anyway, I got the policy back in place that day and told the agent to call me directly if it came close to lapsing again. It still makes me sick to my stomach to think about the house sitting there for so long with nothing to safeguard us in the event of something catastrophic. I might as well let my daughter start flushing cash down the toilet. At least she would get some entertainment value out of that.

Ultimatum

At that point, we gave our partners two weeks to come up with a written plan and time line to finish the house. Our ultimatum was that if we had no plan and no progress, we would hire someone else, even if it meant cutting into our final profits.

After that we heard nothing, nada, so we went ahead and got another contractor to give us an estimate. We were also concerned that maybe something was really wrong with the house, and our partners were covering it up, or maybe they used our materials for another project. The mind runs wild when your attempts at communication are not returned. The contractor confirmed that the house was in good shape and could be finished in less that a month! What the $#@! are these people waiting on?

After telling our partners that we were hiring the other contractor, they sprung into action, saying they were devoting their attention to the property full time the following day. They refused to work with the other contractor and offered to buy us out, but they won’t have the money until the property is done and sold!

It makes no sense for us to let them buy us out after the thing is sold. We will make more money with our original agreement. We could buy them out if we can agree on a price, but then, that takes almost all of our cash reserve, a place we don’t want to go. If we did that, we’d still have to come up with the rest of the money to hire the new contractor. Basically, our best options is to hope we have finally lit a fire under these people, and they will get it done so we can wash our hands of this stupid flip.

Before you call me crazy, and you certainly can, know that I spent over a year building a business relationship with our current partners. They have done this type project several times, never with any problems. I still feel like there is something we aren’t being told, but at this point, I want to move forward.

So You Think You Want a Real Estate Partner?

My advice to anyone would be never have a real estate partner, no matter how well you might know them. If you do, I would insist on several things before you make a deal.

  • Get a Lawyer- I didn’t want to spend the $1000 or whatever it might have cost to have a lawyer draw up a contract. As a result, we did one on our own, and I have no idea how it might hold up in court if it came to that.
  • Have a Set Time Line with Consequences- We had a verbal timeline, but didn’t put anything in writing. If I had it to do over again, I would penalize the partner doing the work by decreasing their share of the profit for every month over the time line.
  • Demand Documentation- I should have asked to always have a current copy of our insurance documents. I never thought anyone would be stupid enough to let it lapse, but I was incredibly wrong.
  • Don’t Be a Nice Guy-I don’t mean you have to be mean, but we should have threatened to get the other contractor in there a long time ago. We might be done already if we had.

I still strongly believe investing in real estate is a very important plan for achieving our financial independence. This deal should still make money, even if it takes forever, because we chose a great property that was really under priced. However, in the future, I will never take on a partner in a real estate venture. There are too many things beyond your control,and there are other ways to make money without this much frustration.

What experiences have you had with partners? Should I just burn the thing down now that we’re insured?

 Image: Freedigitalphotos.net/artzsamui

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

34 comments

  1. So sorry to hear about your experience, Kim. Nothing is worse than a contractor who won’t hold up their end of the deal. It’s insane they let the insurance policy lapse! If I ever go into a partnership like this, I will definitely have a lawyer draw up a contract and have legal timelines in place.
    DC @ Young Adult Money recently posted..Things You Should Consider Before Getting a PetMy Profile

  2. As a real estate investor, I hate that you are going through this. I know how frustrating it is to try and get things done right at your property. Your story and others I’ve heard like it are the reason I will never do a partnership. Don’t burn the house down…it will be OK! :)
    Brian @ Luke1428 recently posted..“I’m Rich!” – How to Handle a Lump Sum of MoneyMy Profile

  3. That doesn’t sound like a lot of fun does it? I guess that is why it pays to always double check everything and to never rely on someone else.
    Glen @ Monster Piggy Bank recently posted..How To Stop Spending MoneyMy Profile

  4. This is exactly why I dont want a partner. I know that there is more risk and you stand to lose more but sometimes it can be a real disaster when dealing with people that you need to trust. Sorry for your troubles and this comes as perfect timing for me as I am just looking to get into real estate investing. I have a realtor and now I am working on finding a lawyer.
    Thomas | Your Daily Finance recently posted..How To Survive Unpaid Internships as Summer JobsMy Profile

    • Real estate is a great way to build wealth. I hope to share my experiences good and bad so others can learn from them.

  5. Well this situation just sounds bad. I am sorry to hear that this is happening. Your experience is why I don’t like taking on partners for anything. You never know what can happen and I like being in control over my future. I hope it all works out Kim!
    Grayson @ Debt Roundup recently posted..Encouragement – Spread It Around!My Profile

    • I am way too type A to be in this type of a project, but hopefully it will be a learning experience and we’ll eventually come out ahead.

  6. Sorry they were so crappy. I have a pretty good partner in the UK because he does everything and I just sit there and cash in :). Now I want to be more involved and get a similar deal to yours, but we will surely spend the lawyer fees, even if that hurts up front, better safe than sorry.
    Pauline recently posted..Real estate: things to consider when buying your first rentalMy Profile

    • I’ve learned that less on the hard way. Mr. Lawyer and I will be best friends for any future projects. However, at this point, I never intend to have a partner again.

  7. Ooof. That’s definitely a bad experience! We’ve talked about looking for partners for different investment opportunities as we go forward, but have heard bad stories much like yours. I hope you keep us informed as to how it all wraps up and if your flip ever finishes!
    Mrs. Pop @ Planting Our Pennies recently posted..Debt Payoff SummaryMy Profile

    • I will have a celebration post if it ever does get finished. At some point, we’ll go in there ourselves if it’s not done. Inexperienced as we are, we could probably do most of the finish work.

  8. This sounds horrible! Why do I feel like every story where someone had a “business partner” it always ends up in disaster? Unless its my wife, I’m just going to prefer to work alone.
    My Money Design recently posted..It’s Time to Get Real About Our Household ExpensesMy Profile

    • I am also sticking with spouse only from now on. I have co-owned a commercial building with a partner for years and it has worked out well for what that’s worth, but it was never a remodel or quick sale.

  9. Thanks for sharing your experience! I hope you get the project back on track and get out of it ASAP!
    Emily @ evolvingPF recently posted..Edging toward Quality Food: ProposalMy Profile

  10. Yikes! I can’t believe they let the insurance lapse. What were they thinking? Beyond the fact they obviously weren’t thinking!! Hopefully they got their butts in gear and are finishing up the house. I’m glad nothing happened while the house was uninsured and hopefully in a few short weeks this will all be over!
    Tanya @ The Heavy Purse recently posted..Riding in Cars with Boys: The Money EditionMy Profile

    • As seasoned real estate people, I can’t imagine why you would not insure every property. I can only imagine it was because they don’t have cash tied up in the property.

  11. Oh no! I am hoping to get into real estate investing and your story is my worst fear as an investor without a strong construction background. I hope things turn around for you very quickly!
    Blair@LifeDollarsandSense recently posted..My New Place to Call HomeMy Profile

    • I think the key is being in charge. If we were not in a partnership, we could fire them and hire someone else. I think real estate is a great investment if you don’t pay too much for the property. Learn from me, but don’t let it scare you away.

  12. Wow, that’s so weird that your partners went south on you like that – especially after a history of doing these kinds of things successfully in other situations.
    I like the suggestion you offer for a partnership. I agree that the more clarity you have at the beginning of the partnership – the easier it is for everyone to know what to do when people aren’t following through (and what non-following through party can expect). Good luck, Kim! I’m sure it will work out somehow!
    Lindsey @ Cents & Sensibility recently posted..Teaching Strategies for Money: When is your kid too old for an allowance?My Profile

  13. Sad to your bad experience, anyways eager to know when things get done, All the best. Instead of contractor better do by self
    Rita P @ Digital Spikes recently posted..Save money with online tv : How to get free cableMy Profile

  14. Ugh…what a mess! So sorry you’re going through this. I hope that it works itself out sooner than later and in a way that makes the best sense for you. Good luck!
    Jen @ The Happy Homeowner recently posted..The Waiting is the Hardest Part…My Profile

  15. I am sorry about this. We are actually wanting to flip houses as well but I think after stories like these, it would be best if we tackled all the work ourselves. Hope you are able to find a resolution.
    Debt and the Girl recently posted..My Budget: The Ins and OutsMy Profile

  16. I’ve worked with contractors and find that they frequently transfer money and resources between various projects they are working on. The good contractors can balance all of the projects and still finish their work on time.

    I’ve found that bad contractors respond to pressure, and will focus on the project that is putting the most pressure on them.
    Terry recently posted..Do government regulations inhibit landlords from selecting good tenants? – Radio Interview with Dan RameyMy Profile

  17. I’ve never ventured into this kind of territory, but I would be pretty hesitant about working with someone like this. If I wanted to do it, I think your advice about having a lawyer draw up strict contract terms and requirements would be an absolute must. I’m sorry this experience has been so rough. Best of luck working all of it out.
    Matt Becker recently posted..Guest Posting at Stacking BenjaminsMy Profile

  18. Wow, I can’t believe how some people do business. That’s just downright disgusting. I would have flipped when I found out there was no insurance. I have flipped a house before but it was cheap 25k needed little work and I sold it for 41k in less than a month. I don’t think I could work with a partner.
    Alexa recently posted..The Single Moms Guide to Starting a Side Business is Published!My Profile

  19. Wow this sounds like a terrible experience. Thank you for sharing it.. Every bad experience is a learning opportunity.
    SuburbanFinance recently posted..Get to Know Me – Suburban Finance Has Been Nominated for a Liebster Award!My Profile

  20. I wonder why we always want partners when we hear all the bad stories about them. There is something in us that makes us feel safer when we have a partner I think. Reading the horror stories like yours is always a good reminder.

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