How I lost $500k in 2022

#1 - Cryptocurrency
#2 - Real Estate

Why am I telling you this? Because nobody wins 100% of the time, even the so-called gurus and experts. My goal is to help other realtors by sharing best practices… and the not so best practices.

I had money burning a hole in my pocket and entered rapid cash deployment mode because I wanted my money “working” out in the streets. So, the crypto makes sense. But the real estate?

Yes.

“But Temp, isn’t real estate your home court advantage, how’d you lose money?”

Flipping houses.

I have successfully flipped 100+ houses. For now, we’ll define success as any house flipped with a profit of more than $1 after all expenses. Let me tell you how it happened, with a painful step by step through all 20 of them.

1. When you flip homes, you start by estimating ARV

   (60 second ARV explanation).

2. Project all costs (renovations, holding costs, closing costs).

3. Most flips take 90-120 days, so the market and your ARV can change.

4. Usually fine because house prices don’t typically change rapidly.

   

   From 2017-2019, house prices increased 9% annually in Phoenix

5. On average this is a .75% increase per month with a range of +/- 2% usually, so during this time, it meant selling prices increased 3-5% during renovations… BONUS!

6. Median home price in 2017-2019 was around $255k, so 3-5% was an additional $10k in sales price.

7. This means as renovations were delayed which increased costs, I wasn’t punished with lower profits because the prices went up to cover me.

8. Now look at the graph from 2020-2021… things accelerated, FAST
   2020 - 14.5% increase
   2021 - 25.2% increase

9. Wow, that escalated quickly. These increases were so rapid, they outpaced holding costs.

10. Wait. What? This meant we were being rewarded for taking too long.

11. Our holding costs were $2.5k/month but prices were going up $6k/month, so we kept making more money by missing deadlines.
    

    

    What a time to be alive.

12. Except things can’t always go up forever… and when it reversed, it went hard in the paint.

13. Our prices peaked in May at $475k average sales price, and by September we were at $439k.

14. This means houses we bought in May were already down 8% in 4 months while we were renovating.
    

    

15. Oh shit. We thought we’d sell at $475k. Now we are selling at $439k… and realistically $400k.

16. Expected $50k profit winners quickly became losers. And it had the risk of going down further, and it had our money locked up!

17. So why did this go down so fast? Rapidly rising interest rates (3% to 7%) + major supply increase (3x the houses for sale).

18. Could we have predicted this? ABSOLUTELY NOT.

19. Could we have been more conservative in deploying capital? YES.

20. Riding the wave for 2020-2021 more than outpaced the pain of 2022, so the reward was worth it. But it carried a huge risk.

What’s the moral of the story? It’s easy to feel like you have things all figured out, even for experienced investors and agents. However, you can be out in the cold very quickly.

Be prepared to take advantage of the market opportunities, but not at the expense of a disciplined cash deployment strategy. Going forward I’ll potentially leave some meat on the bone in peak times, so I can have a higher cash position in the tough times.

— Temp