How Losing Over $400,000 Taught Me How To Be A Good Loser

“It Be Like That Sometimes”

I was shocked, amazed, and felt like a failure. For the past 3 years I was going to real estate investing meetup groups, talking to people, and investing in my own projects. Every year my net worth doubled because of my investments. I thought I knew it all. After my first flip, I thought rehabs were easy and that I could just sit back and chill while everyone else worked on the job for me. I was wrong.

I thought I got into the deal of a lifetime! In May of 2018, I sent out another batch of mailers to a few thousand homes in Sunnyvale. At the time, the market was RED HOT. I only had one deal under my belt and was sick of seeing all this cash in my bank account just sitting there, earning one percent a year in interest. I wanted to put it to work, I wanted another deal, I wanted to prove that I wasn’t just a one-shot-wonder.

The Home

Then we got the phone call. The owners were an middle aged couple who had a beautiful home in Sunnyvale. The house was actually on the market for $2,000,000 but wasn’t selling. They received our letter and had their agent call us. Their agent was from Turlok, about an hour and a half away from the property. The photos they took and put on the MLS were subpar. It was as if they were taken with a flip-phone camera. In the description it said, “NO OPEN HOUSE, CONTACT SELLER DIRECTLY FOR SHOWINGS”.

We thought we spotted an opportunity! No one would want to check out a home that was 1) over priced, 2) had bad photos, and 3) had to call the seller directly to see the home. After a month or so of negotiating, we managed to acquire the property for $1,757,923. Yes, it’s an odd number, and we believed that by offering it like this that they would be more willing to take it. Essentially, we negotiated $250k off the original asking price. The best part was that after they agreed to that number, the agent told us to write the contract! I’m a licensed agent, but I don’t really practice it, but when I heard he would let us write the contract, I immediately jumped in and represented myself as the buyer, earning another 2.5% of the sales price as commission (~$45,000).

The house wasn’t a fixer, it already looked pretty good. We thought we would be in and out in one month. We were wrong.

Trying New Things

At the time, we were looking to expand our reach. We were all still relatively new to the field and wanted to try different things. We brought in an architect to check out the floor plan to see where we could do some improvements. Someone suggested that we remove the chimney and create an open-floor layout. We agreed and started the process of drawing it up, getting a structural engineer to approve it, and find a contractor to do the job for us. The kitchen was a little outdated and the bathrooms didn’t look great. Instead of trying to do the least amount of work, we decided to do a complete remodel. That was a mistake.

Delays

A month after we decided to replace the beam, we started the work. Very quickly, we ran into some issues. The property was on a concrete slab, which meant we had to cut through all of the concrete to get into the plumbing. When we tried to put the support beam to replace the chimney load, the city inspector noticed that there was a discrepancy with the foundation and the original drawing that required us to use a joist. To be honest, I’m not exactly clear on the exact issue, which is a problem because I should have been on the floor making sure everything ran smoothly. Instead, I just continued to sit back and assume other people would handle it. To get an approval to move forward with the city, we needed a letter from our structural engineer to say that it was ok.

Waiting on Structural…

After a week of waiting (out of courtesy), I started asking on the status of that letter. Two weeks later, I was still getting the run-around from everyone. Three weeks later, I finally get a letter that says we’re good to go. The letter was three sentences… No one was pushing the structural engineer. I don’t think anyone even told him we needed the letter until I started hunting him down.

When we finally got going, we were hit with other miscellaneous delays, the one month project didn’t complete until mid/late October, which was 4 months! By the end of October, I was just happy that we were done. I was expecting a big payday, when you sell you get all the money you put into it plus the profit! I was even planning on taking that money and purchasing some commercial multifamily real estate in Cincinnati!

Nuclear Winter

Then it happened. Like the Thanos snap in “Avengers”, the market took a nosedive and froze. PG&E caused a great fire in Paradise, California. The air was so polluted that people didn’t want to go outside, much less look at open houses. The stock market also plunged, reducing my reserves significantly. People have often said, ‘when it rains, it pours’. I didn’t understand what that meant until the beginning of November 2018.

The property would sit on the market for months with zero offers. Zero! It’s in one of the hottest locations in the Bay Area, just two blocks away from Apple’s spaceship campus. The remodel was done beautifully, you can see photos here: https://everythingrei.com/projects/ – Check out the photos for Hampton Dr.

One Major, Unforgivable, Flaw…

But there was one major flaw that I failed to take into consideration when I purchased the property… there was no garage! Normally, having no garage on the property isn’t a big deal. People rarely park their cars in the garage, they park their stuff! The property was on a large lot and had a large storage shed in the back. There’s plenty of driveway space and there was even a carport, I thought we were good.

For months, people would come in, take a peek at the property, comment on how beautiful the property looked, but would back away when told that there was no garage. For months, I would get reports about how people complained that there was no garage. I went to the city’s planning department to find out if it was even possible to put on one. Turns out, it was impossible. For some odd reason, the home was built crooked on the lot, preventing us from creating a driveway to the back shed. The house was also built up close to the driveway and wide. Setback laws prevented us from doing anything, we were stuck with what we had.

Drowning with No Hope

Every single month, I had to pay $11,500 in interest payments alone. This is just for one property, I still had to make sure my other projects were staying afloat. On the day of my Thanksgiving party, I got a letter in the mail saying we owed an additional $15,000 for supplemental property taxes. Awesome. I just paid it and moved on with my life.

Why Refinancing Wasn’t an Option

This was a problem. Luckily, I had the funds to support it, but it was dwindling my bank account at a rapid pace. Every month, I would make large payments with no expectation of seeing that money ever again. We started looking at alternative options like trying to rent it out or refinancing it. More problems arose. Our combined incomes from our W-2 jobs weren’t enough to support a traditional loan. For a jumbo loan you typically need 43% DTI or lower, and we all owned our own primary residences, plus some rentals. We also purchased it with just 10% down, so to refinance, it was likely that we would have to come up with some additional capital to be in a 20% equity position.

Why Airbnb Wouldn’t Work

Rents in Sunnyvale go for about $4,500 a month. Which may sound like a lot, but it’s really not when you’re paying $11,500 in interest only. We thought of other methods to hold onto it like creating it into a co-living space where we would shove 15 or so tech workers into the home and charge them $1,000/month each. We ended up not going with that idea because we had no experience in that field. The City of Sunnyvale also had an ordinance that limited the rules on short term housing. We would need everyone to get on 30 day + leases

Finally, our loan term was coming up. Short term loans are usually only held for 1 year. Our one month flip ended up taking almost a whole year to sell. After one year was up, we could either extend, or refinance, which are extremely expensive to do. In the end, I decided to just let it go to get it off the books.

A Glimmer of Hope

In early 2019, the market started picking back up again. The situation didn’t look as dire as it did in the end of 2018, I was optimistic that I could put the property back on the market and get more traction.

The same issues came up, people really wanted a garage. We even tried stupid mojo hacks like burying a Saint Joseph statue in the front yard.

Dumping the Body

Finally, I decided that I couldn’t hold it any longer. I had to give it up. We slashed the price by a ridiculous amount to get offers. It worked! We got offers…low, low, low offers. We got what we asked for. We ended up accepting an offer that was under $100,000 then what we paid for initially! I’ve lost more money on this single home than any one I’ve talked to (post-recession).

How to Be a Great Loser

But throughout the time that I was going through this ordeal (I’m still going through it now), I managed to keep my cool and maintain a positive attitude. I think a lot of people wouldn’t be able to handle this situation as well as I have. A lot of people would break down, or go to some destructive form of coping with a problem. I actually did the opposite. To cope with my problem, I go to the gym almost every single day to put me in a good mood. I gave up alcohol and have been sober for over 5 months now. Yes, I go to parties sober. I read autobiographies and see how famous people in history have gone through dark periods and managed to turn their lives around. To learn more about the business, I started making Real Estate Investing Podcasts and started interviewing some of the best investors in the area. I also started creating Meetup Groups to greatly increase my network. I have hope that the future is bright.

I’ve had an overwhelming amount of support from all of my friends and family telling me that it’ll be alright and that I’ll recover. At one point, I was telling my sob story to my friends, and telling them how I felt like a loser and a failure. After saying that, one of my friends said: “Do you measure your self-worth by how much money you have?” That hit me hard, and I stopped complaining instantly. She was right, it’s just money. There are millions of other problems out there.

Conclusion

When you make an investment, you never think that you’ll lose money. You send your money out to go to work in the hope that it’ll come back to you with friends. Losing money has been one of the most interesting learning experiences I’ve had. The only real pain comes from a wounded ego, which isn’t real to begin with. I sleep great every single night. I smile all the time. My standard of living won’t change. I’ll still live in the same house, on the same bed. I’ll drive my same car and I’ll eat the same kinds of food I’ve been eating. After listening to other people’s stories, I can tell that my life is pretty good. I love my parents, I love my friends, and I’m healthy.

What more can you ask for?