EP #26 - House Flipping 101: How This Investor Lost Money (Key Lessons)

Join Jacob Sandoval and Michael Magno in this episode as they dive into the inspiring journey of Lorenzo Mercado, a pediatric RN turned real estate investor. Lorenzo shares his evolution from struggling financially, living paycheck to paycheck, to making significant strides in the real estate space. Despite encountering unexpected challenges with his first flip, Lorenzo's story highlights the importance of perseverance, strategic action, and learning from both successes and setbacks. His future ambitions to master direct-to-seller strategies and provide genuine solutions for homeowners are testament to his passion and commitment to real estate.

Connect with Lorenzo:
Instagram: https://www.instagram.com/lorenzo.mercado_/
YouTube: https://www.youtube.com/@thelo-down
Spotify: https://tinyurl.com/u9aeen4u
Apple: https://tinyurl.com/yjv3v8x7

Connect with Jacob:
Instagram: https://www.instagram.com/cashflowsaga/
Website: https://www.cashflowsaga.com/
YouTube: https://www.youtube.com/@cashflowsaga
Twitter: https://twitter.com/cashflowsaga

Connect with Mike:
Instagram: https://www.instagram.com/realtormichaelmagno/
Website: https://themagnogroup.com/
YouTube: https://www.youtube.com/@realtormichaelmagno

Transcript

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Nancy 0:00

This is the Financial Freedom Fighters Podcast

jacob 0:13

Welcome everybody to the financial freedom fighters podcast. I'm your host, Jacob Sandoval, AKA cashflow saga. I have with me, my co host, he is the best realtor in Cleveland, realtor, Michael Magno, and we have a very, very special guest today. I meet a lot of cool people at these real estate meetups. Um, and some of those people you meet and then you kind of never see from them again, and they never go on to do anything in real estate. And then some people you meet. And they become friends and they make a lot of moves in the real estate space. And this person is the latter. He's a good friend of mine. Now he has done a lot in the real estate space since he went to his first meetup. I'm very excited to dive into his story today. He is a man of many talents. Welcome everybody to the podcast, Lorenzo Mercado. Lorenzo say what's up to the people.

lorenzo 1:08

What's up, everyone? Thanks for tuning in, and thank you, Jacob, for that amazing intro. That's the best one I've ever heard, so, appreciate it.

jacob 1:14

Of course, man, of course. excited to dive into your story today. Obviously let's just hop in and let's tell the listeners a little bit about your story. Let's go obviously pre real estate first. You know, what was your life like before real estate? And you know, what kind of drove you to real estate in the first place?

lorenzo 1:30

Yeah, so, my name is Lorenzo Mercado, like Jacob said. I'm 31 years old, and I was born and raised in Fairfield, California, which is about an hour northeast of San Francisco. And I've been in Santa Clara for the past 10 years where I've worked as a pediatric RN at Stanford Children's Hospital. it's been an amazing job. I love my job. It has a lot of flexibility. what got me into real estate funny enough was actually, I didn't really have where to go, with the intention of getting into real estate. So like a couple of years ago, I started reading books about just like how to be better with my finances because For a long time, I was not the best with it. I was honestly living like paycheck to paycheck because my nursing job was my first job. And so going from no money to like a couple thousand dollars every couple weeks was like crazy to me. And so, um, honestly, graduating college at like 21 years old, all I knew was like, Oh shit, this is awesome. I'm gonna blow my money. So honestly, for the past, like eight years, all I did was just go to music festivals, party it up. And, um, things started to change when I met my fiance. And so that was in 2018. And so at that time, um, obviously I knew things had to change because I knew I was going to eventually propose. And so I was like, I can't be living paycheck to paycheck anymore. And so the first book I ever read was a simple path to wealth. And that was like, um, very eyeopening for me. And then from there it was rich dad, poor dad, which is like, obviously every real estate investors Bible. And then, um, yeah, from there, eventually I joined a coaching program and, uh, I finished my first flip. I sold that two months ago and I also got my real estate license. So juggling lots of different things, but that's kind of like the bird's eye view.

jacob 3:05

yeah, yeah, absolutely. No. So we're going to dive a lot deeper into the story today, but I want to talk about a couple of very important points here, which is, you know, growing up in the Bay area, like myself, it's not very common to, think about real estate, You just think that's like something that rich people do. Right. And, and very similar to you, Lorenzo, you know, I didn't have any money in college and then graduating from college, I did the same thing, right? I didn't know how to manage my money. And it's not something that's like very common in our culture. Like we don't talk about money in Filipino culture and we just, it's just not something we're very good at. Right. And so the fact that you. At your own point, With your fiance's help said, Hey, look, I need to get serious about that. Like, I want to commend you for that. Because, a lot of people don't even get to that point, They think about their finances as something that is so far off into the distant future that they do themselves a disservice, If you just make moves a lot sooner, real estate, investing. You know, and I like that you read the simple path to wealth. It's a great book, right? I think everybody should read that book. If you just make the moves a lot sooner, the most powerful thing you can do is just give yourself the time. And that's why I try to talk to anybody in their early twenties, if they'll listen. And most won't because they're in the phase that you and I Lorenzo were in of just partying and going to festivals and things like that. But truly, if you just make the move sooner, then when you're Lorenzo's age or my age and Mike's age. You know, you're going to be a lot better set up. So anyway, I want to turn it back to you, Lorenzo, because I just, There's a decision that goes, okay, cool. Look, I probably need to do something. And then you do the research, which is what you did, right? The rich dad, poor dad, the simple path to wealth, going to the real estate meetup, but there's something very different about taking action after doing that research because a lot of people just get stuck in that research phase, A lot of people just actually continue to read books, continue to do the coaching programs, continue to do the online courses, but actually never pull the trigger. So I want to talk specifically about for you. Was it, was there a decision point or was it always like, look, I'm doing this. and how much research did you feel like you needed to do before you actually pull the trigger?

lorenzo 5:05

Uh, I think for me what really helped me was joining the coaching program. And so, um, before joining the coaching program, I had done a lot of, going to meetups. That's where the first, first time I met you and then reading a lot of books. Um, but I feel like joining the coaching program definitely, I knew would be something that would hold me accountable. And then I feel like everyone that was in the coaching program, I feel like the community aspect is the most important thing. And just, so just hearing people who are doing the same things, like I was doing, I was like, they're just normal people. And so I feel like that was just really eyeopening. and so, yeah, I just think taking action is the most important thing. And so I knew that I wasn't going to figure it all out by reading a book or anything like that. And just after having done my flip now, it's like, no matter what I could read a hundred books on flipping, nothing would have ever, ever prepared me for what I went through myself.

jacob 5:49

Yeah. We're going to, we're going to get to the flipping for sure. but I want to talk a little bit about the coaching program. Right. Cause I, I think I talked to a lot of people, right. And I'm also a big proponent that coaching, um, in some way, shape or form is going to be massively beneficial to you because nothing, you know, you're You know, can, can help you more than the experience of a good coach. That's been there. That's done that that's made the mistakes that can help guide you. They're not going to do it for you, but they're going to help guide you. but a lot of people say, look, I, you know, coaching specifically can be really expensive. And they can say, oh, well, like, why am I going to spend, you know, tens of thousands of dollars on a coach? If I'm, you know, I'm trying to buy my first property. guess, what do you say to that, to those folks that are like, ah, I think coaching is a waste of money.

lorenzo 6:29

mean, I definitely thought that before I joined the coaching program, I was, I had interviewed, um, a couple of different, uh, coaches, I guess, um, it had consulting with a bunch of different ones, but, I think either way, you're going to learn with time or, um, like money and you can expedite things. And so for me, I was like, I'd much rather spend however much I think for me, I think I spent like 10, 000 for the first coaching program. I was like, I'd much rather. Join that program and expedite all these lessons and time and all that stuff and kept my learning from maybe five years to like one or two years. And to me, especially now is that I get older time is the most valuable asset. Right? And so, yeah, I think that was the biggest thing for me.

jacob 7:07

No, absolutely. I love that. You said that, right. You're either going to pay with your time or you're either going to pay with your money. And so what is more valuable to you? At certain time, maybe money is more valuable than time, I earlier point in your life, or you just don't have the money, right? So you all, all you have is time. Um, but it's a nice framework to think about the cost of something, right? You're either going to pay for something with your time or with your money. And if coaching is going to get you where it needed to go, which it sounded like it did, Cause it took you from the point of inaction to action. then it's worth it. this is not, You know, a sales pitch for coaching in general. I think that there are bad coaches out there, right? That, that don't actually deliver on what they say they're going to deliver. But if you do the due diligence like Lorenzo did and interview some coaches and you find a good fit, then I say, pull the trigger on it, right? Because it's going to short circuit your journey in a positive way, and it's going to push you and hold you accountable. So Lorenzo, when you're in kind of the, the rookie space, right? There's so many different ways to skin a cat in real estate, right? You can go the rental property route, which is where I started. Um, you can go the flipping route. Obviously you can do wholesaling. Um, you can be an agent, which you also ended up doing. So for you, how did you decide upon flipping as the first? Thing that you wanted to do because to be quite transparent for me, it feels like the riskiest strategy and also one that I'm, I'm even to, to this day, afraid to do, especially in a market like ours, the Bay area, when the purchase prices are much, much higher. what drove your decision to say, okay, flipping is what I'm going to do first.

lorenzo 8:37

I think I just really wanted to focus on flipping because I knew that I really wanted to focus on. Increasing my active income. I didn't really have a lot of money, to buy rentals. And I knew that as a nurse, we make great money, like to be fully transparent, I probably make like 250 a year. And, um, for me, if I, I could probably save a good amount in a year or two and then buy rental or save enough for down payment and then do that every five or six months. Yeah, every couple of years or so. But for me, I knew that eventually I would want to replace my, uh, RN job because it's honestly something I'm not the happiest with anymore. And so, um, I knew that I had to find another way to increase my active income. And I knew that would be flipping or wholesaling or the agent thing.

jacob 9:20

yeah, yeah, absolutely. So you said a lot of really important things there, right? one, if you're getting into the rental property game and let's just talk straight, you know, long term rentals, your expectation should not be that, Oh, I'm going to, you know, replace my W 2 income in a short amount of time, that's just not going to happen. It's going to take a long time, right? By all my estimations, it's going to take a minimum of 10 years and you probably won't even fully replace it, right? You'll have more tax efficient income, So you won't pay as much. It's uncle Sam and it'll be a lot more passive, but it's going to take a long time to completely replace, you know, a Bay area salary. It's going to take a very, very long time. So Lorenzo had the realization that, look, I think rentals are great, but I don't think right now with my goal of replacing my W two, Income that I can't go the rental route right now. And he's more than capable of doing that, but he's, his goal, his vision was to replace his W2 income. And with that, it wasn't realistic to go the rental property route. And this is why, again, Mike, and I always say this, what is your goal? What is your vision? Are you happy with your job right now? And can you see yourself working that job for another 10 to 15 years? If that's, if that's fine. Then great. Then maybe the rental property strategy is good, right? Cause you just stack those rentals, you know, by one or two, every single year, keep stacking them up. And when you get to the end of your road in 10 to 15 years, you'll have a nice, healthy rental property portfolio. And that's great. So that, so that fits your vision, your goal. What if you hate your job? What if you're like, I can't stand. Another day in this job, and I need to get out in like less than three years. Okay. Then we're talking about a completely different strategy, right? So anyway, I want to commend Lorenzo again on basically looking at this and be like, I think a lot of people just want to get into the real estate game. And they're like, I just want to buy a rental property. Right. I just want to do a flip. I just want to do something To say that they're in the game. But if that doesn't match your skillset and your goals, then you're going to be in the real estate game for a very short amount of time. anyway, I, I think that's great, Lorenzo. I think that that's great awareness of what you wanted to do. So I want to dive specifically into the flip now. you're in the coaching program. You're, you're set on doing a flip. Talk to us about that first deal. How did it all go down?

lorenzo 11:27

Yeah, so the deal I did not do by myself. So I actually did it with two other partners who I found through the coaching program. And so how I found the partners was when I first joined the coaching program, they give you like a whole directory list of all the students who are pretty much in the program. And so what I did was cold call or cold text everyone who was like, pretty much an hour within where I lived. I was just like, Hey, I'm new to the program. I just want to see how everything's going for you guys. Or whatever. And of like the a hundred people I texted, I think only, honestly, it's probably like 20 responded. And one of the girls I actually like met in person. And then from there things, um, she was fairly new also. And so we hit it off pretty well. And then eventually she introduced me to another student who she met, who I had never met. he was willing to do the partnership also. And it was kind of awesome because all three of us kind of had different skill sets, like she is a data analyst at PayPal, and so she's super analytical, something I'm not the best at. And then the guy, he's a architect and he has a construction background. And so that was something that I knew I lacked also. And so I think the three of us really meshed well together. so that's how I found the partners, the deal itself I found directly off the MLS. So it was, we were looking specifically for houses that were on the market for at least like 30 days, because. As you may know, for things that are fresh on the market, usually are bidding war. And so I knew that if we could find something that was sitting there a little bit longer, we'd have a little bit more wiggle room as far as being able to like offer lower, hopefully have them pay for closing costs, whatever. And, um, this specific property was in, El Cerrito, which is pretty much like 10 minutes north of Berkeley. So in the East Bay, so it's a little bit cheaper, a bit more affordable than on the peninsula, like Palo Alto and all that stuff where things can be. 1. 5 plus. And so this property It was listed for eight 90 and when I called the agent a couple of different times to just kind of get an idea of everything that was going on

jacob 13:12

Mike Mike is shaking his head. Cause what's the average flip that you do, Mike? The purchase price.

mike 13:17

Between 100 and 150?

jacob 13:18

Yeah. to be clear, those houses probably look very similar.

mike 13:23

that's what's, that's, I mean, it's just, it's so bizarre. The numbers on the West coast. I just, I can't even fathom it. 890, 000 in my market would put us in a gated community in a six or 7, 000 square foot house on like five acres.

lorenzo 13:43

Yeah, This was the opposite. This was, are we allowed to cuss on here? Was an absolute shithole shithole Yes. so much different.

mike 13:52

yeah, I was gonna say it's probably like the last one I bought for 80 grand

lorenzo 13:55

Yeah,

mike 13:56

I just when you said it so it's so it's listed for 890 You're licensed. So then you called the agent on your guys's behalf.

lorenzo 14:03

so at the time I was not licensed, but I was still called the agent directly. Um, just, uh, kind of get a history about the property. Had they gone in and out of, uh, escrow yet or anything like that? I think they had, they had gone on, um, had gotten two offers, I should say. but they kind of fell through. And so eventually we were able to get the property for 810. So 80 grand less than the listing price.

mike 14:22

hard money, I assume

lorenzo 14:23

Yeah, so we use Kiabi. we, I used a mortgage broker and they linked us with Kiabi.

jacob 14:27

Can we, um, just just for the listeners, Lorenzo, um, can you explain what hard money is?

lorenzo 14:32

yeah, so hard money is just a kind of, uh, construction or bridge loan that they do. And so a lot of these lenders are, are, they close really fast. And so typical, I guess lenders, like say like Wells Fargo or whatever, um, they would even lend on these properties that need significant amount of work. And so these hard money lenders will essentially tie the construction costs into your total loan. Yeah. And usually it's like, say 70 percent of the total ARV or after repair value of the whole property. And then they will usually finance a hundred percent of the construction loans. Um, they can usually close in like ours was closed in 10 days, which is extremely fast compared to traditional financing.

mike 15:08

that's fast for hard money, too

lorenzo 15:09

yeah, especially for my first one. So I had a really good experience with Kiabi. So I get the property for eight, 10, and then we pretty much said the ARV is going to be around 1. 2 to 1. 3. This was in August when we bought the house of 2023. And so, yeah, we closed and then we started everything right away. yes, we did demo for about a couple months and then it was like October and then we got red tagged, which is another bad thing. I guess going back to the planning, we, we projected this would be about like six months to, to do everything and construction. We budgeted for about one 80 to 200, um, for the construction costs and yeah, we're hoping to shoot for a profit about like a hundred to 150, 000.

jacob 15:46

So I'm just going to run through some of the numbers just for some of the listeners here. Lorenzo and partners purchased it for listed at eight 90, got under contract at eight 10 ARV or after repair value was estimated to be. 1. 2 to 1. 3. how did you get that? You were just looking at, you know, recent sales comps, things like that. Um, to get that 1. 2,

lorenzo 16:06

Yeah. So I was looking at things that had sold within the neighborhood, uh, within about like half a mile, um, the last three months up to six months, if there was nothing, um, and obviously it's gotta be like for like, so it can't be a two story to a one story. Um, so this one was a specifically a two story with a detached garage. and so there wasn't a ton of comps honestly, but the few that we had found that had sold within the past three months for about like, like I said, 1. 2 to 1. 3,

jacob 16:31

Okay. Okay, cool. 1. 2 to 1. 3. and then you estimated about 200, 000 in construction costs and. Roughly a six month kind of timeline. So Mike, with those kinds of facts in the beginning, like what, what, what are your kind of thoughts on like how this project like lined up, um, just based on kind of the initial set of facts.

mike 16:49

it wouldn't have been something I would have done. And yeah, well, because so people have to look at, I mean, people are thinking people out there are thinking, Oh, 150, 000 in profit. That's great. But that's a ton of risk and exposure. For that result, because you guys spent eight, 10, right? So you, you had to put, well, how much did you guys have to put down? Lorenzo 20, 30%, 15%. Okay. So that's a hundred and 20, 000 out of pocket for you guys. And then, I mean, you're talking, I mean, your guys's monthly loan costs had to be 10, 12, 000 a month.

lorenzo 17:31

No, so our interest rate was 10. 5. And so, our interest

mike 17:37

you guys borrowed, you borrowed what? About 900.

lorenzo 17:40

we borrowed, our loan was 8 something, yeah.

mike 17:43

Yeah, yeah, yeah,

lorenzo 17:44

No, but our mortgage, our, each month was about like 6 to 7 thousand, initially, before we did our draws.

mike 17:50

yeah, interest. only. Yeah. Yeah. Yeah. Um, it's just I I don't know. I I don't know that I just that those numbers give me like You know, i'm that's some some super anxiety there

lorenzo 18:01

Yeah, I mean, definitely looking back and the margins were definitely thinner than I would like. And so that was another learning lesson,

mike 18:06

well, yeah, cause you know, it's funny, I was looking as, as you were talking, Jacob, I was like getting my calculator out and just doing some quick numbers and you know, me, I like to work off of a 30 percent margin, which I know is maybe not possible in the Bay area or in California because it's such much larger numbers, but just based off of 1. 25 million as the ARV, as soon as I hit 70%, It was only 840, 000. So that's where it's like, man, that's a really razor thin kind of a deal. Um, and then you have two partners, right? So now you're splitting that equity three ways. That's a lot of work to make 25, 30 grand if you're lucky, 40, 50 grand each.

lorenzo 18:53

I think for us initially, it was kind of just like all of us were pretty new. And I know obviously in the Bay area, there's potential to make a lot, but there's also potential to lose a lot. And I think the biggest thing for us was like, we always went in with the mindset of as long as we break even or a little bit less to us, the experience was the most important thing. looking back now, I'm like, absolutely not. I probably will not do that. Like any kind of margins that then anymore, to be honest. But I think, yeah, like I said, the experience was the most valuable thing.

mike 19:19

I have that conversation with people often that even if you break even what you will have learned through the process is invaluable.

jacob 19:26

let's keep going here. So I think at this point right now, right, we've, we've kind of unpacked like the high level numbers of the deal. Lorenzo and co are kind of waiting into this. So who's doing the construction? who's the crew on this, on this project,

lorenzo 19:37

Yeah. So like I said, my partner, Eric, he was a, or he is a architect. And so he knows a lot of general contractors. And so he had one specifically that he had worked with many times. And so his crew was the one that was doing all the work.

jacob 19:51

Okay. Awesome. And so you guys were, you know, doing demo humming along and then you got red tagged. Explain for the listener what that means. Lorenzo.

lorenzo 19:58

Yeah, so red tag is essentially, so we started the whole project without having any permits. And so that was just something we tried to take on because we knew that obviously, For flipping time is money and these permits could take several months to get approved and they cost a lot. And so we just decided to take that risk of doing it without permits initially. And so, like I said, we had done about three months of construction so far. And then finally someone tagged us and usually it's the city. So it's the city of El Cerrito that put a big old red sign on our window that said stop work. Um, you can't do anything essentially until you get all these permits approved. And so that's what happened to us. So we had to wait three months. That's how long it took to take and then it costs about 35, 000 for the permits, which is something we didn't really account for. Um, so that was the 1st issue.

jacob 20:45

Yeah. Okay. So first kind of like bump in the road on the journey, but you kind of persevere, push through, keep going. So keep, keep going with the story after, after the permits were pulled and everything.

lorenzo 20:56

Yeah, the rest of the construction also went pretty well. Um, I think there's just like 1 of the thing that came up was just like a sewer lateral that we had to replace. Um, but other than that, the rest of the construction honestly went smooth. I think the 1st real big problem was when we actually tried to list it. The 1st time and so.

jacob 21:14

Were you happy? So after it was, you know, after it was done and everything like that, like, were you happy with the finished product? Like, did you, did you look at it and be like, you know, um, this is what I envisioned it to be.

lorenzo 21:23

I would say 90 percent yes. And so at this point, we were definitely a little bit over budget because of the permits and all that issues. for the exterior portion of the house, that's where I say would be the lacking part, honestly. And so for the first time we listed the house, the house was completely white and looked pretty sterile, honestly. And then for the landscaping, we had just kind of done mulch everywhere on throughout the property. And so I think that was just, Yeah, something that didn't sit well with the sellers, which we'll talk about shortly, but Everything else for the house. I'd honestly say looked pretty awesome. So besides the exterior the interior looked great.

jacob 21:53

Okay. Cool. Cool. And so you said the first kind of real big issue came when listing the property. So let's talk a little bit about that.

lorenzo 21:59

Yeah, so On the buy side we used an agent who my partner had found on some uh, social media thing and so she was putting a new agent also and when she Listed it. she offered to list it for one and a half percent You Which is 1 percent lower than two and a half, which is the normal, um, I guess listing fee. And so that sounded awesome in theory, but I think looking back now, I think it's very important to find a full fee service agent. I think that's the most important thing because you're literally putting hundreds of thousands of dollars on the line. And so if you have someone who is not going to be putting the extra mile on like marketing, talking to people, all this different stuff, then you can obviously potentially lose lots of money. And that really showed with this discount agent that we were, uh, we had found.

jacob 22:45

so, did it, did it manifest? Cause like you, you just felt like you weren't getting the showings. You weren't getting the, she wasn't drumming up the interest that you felt the property deserve. And you just felt ultimately she just couldn't deliver on, on moving the property

lorenzo 22:58

yeah, she was not the best with communication, honestly. Um, we had the house listed for about a month, and of the one month, we had one soft verbal offer, which was,

jacob 23:06

in one month.

lorenzo 23:07

in one entire month, which is crazy for the Bay Area.

mike 23:10

so Lorenzo, let me ask you that first month, how many showings did you guys have?

lorenzo 23:13

uh, we had about, I think there was like 70 groups that had come through in the first month, and we had done pretty much an open house.

jacob 23:22

I'm sorry. What did you list it at? Okay.

lorenzo 23:23

So we listed it at, uh, I want to say 980 or something like that. So we intentionally tried to list it lower to try and get some bidding wars. but the agent, this was just another example. She, she asked us what we should list it at. And I was like, aren't you the agent? Why are you asking us what we should list it at? I mean, at this time, I still wasn't an agent yet. And so I was just kind of confused. I was like, uh, sure. And she's like, well, these numbers are kind of lucky. So we should do that. I was like, all right, whatever. yeah, so we had it listed for 980 and, uh, Like I said, we had about 70 showings and 70 guests that had come through. And so we were just shocked that we had no offers. And so eventually after that month had gone by, she's just like, it'll come, it'll come, just keep doing open houses. And then one of my other friends, he's like, why don't you just have one of your friends, just call and pretend to be buyer and just see how she talks to people. And so that was one thing that we did. Right off the bat, she was like, yeah, the sellers, they wanted to list it at this price. Um, but I don't think they're going to get it. So just put in whatever offer you want. And so I feel like for me, that was like shocking. Why would you tell people what we want? Because you're obviously giving people these pre, this preconceived notion of what we want. You're probably scaring away any, any kind of person from making any kind of offer. And so from that, I was like, nah, we've got to get rid of her. got rid of her. And then we found another agent. cause I had called a bunch of other people who are really popular in this area pretty much had like five listings at any given time. And when I called them, they're like, Oh yeah, you definitely listed way too high for the price point you're going for. And so that was just another, um, eyeopening thing. Like you got to really find a local agent because the agent that we had used also was from the South Bay. And so she didn't really know the area too well. So yeah, that was kind of the first agent stuff.

mike 24:59

I just, I feel for you. I truly do. I mean, these are all like rookie stuff, You know, should have never led you down this path. So I'm just I'm frustrated for you as you're telling the story,

lorenzo 25:08

But wait, there's more. There's

jacob 25:10

But wait, there's more, but wait, there's more. Keep going. Keep going. Lorenzo.

lorenzo 25:14

Okay. So, so I find another agent who's a top agent in this area and we ended up, meeting with her in person and she pretty much meets us at the house for the first time and she's like, Oh yeah, you got to do more. You got to paint this house because in this area, People don't like this white color. They like warm. This is like by Berkeley. And so everyone pretty much buys an El Cerrito who can't get into Berkeley. And so Berkeley, as you know, has lots of houses with character, um, very warm, earthy tones.

mike 25:39

Bunch of hippies.

jacob 25:40

Yeah,

lorenzo 25:41

exactly.

jacob 25:42

they're more eclectic.

lorenzo 25:42

Yeah. So she suggested repaying the house and doing all new landscaping. Cause the new mulch or the old mulch was not cutting it. And so she had gotten us a couple different bids from different contractors. And so I think she quoted us for another 30k. And so for us, obviously we're already very over budget. we had honestly thought we were going to lose a lot based on the no offers that we had. And so this was just like a huge, like, gamble, like, do we do it? Do we do the more or not? Whatever. And so we waited a full month because in order to get a new days on market, you have to wait a month. And so that's what we did. And we did all the new landscaping, all that stuff. And then, yeah, so we repainted the house, did all new landscaping. And then with this new agent, we had about 10 days of open house. And then from there we got 10 offers. and then we pretty much accepted one for 1. 4, which was amazing. So we were all super excited. And then eventually. We go into escrow and then in escrow, we found out that the new title company, they found a title issue. And so our property pretty much had two different lot or parcels, I should say. And the woman who sold it to us only had the rights to sell one because she was a trustee and a trust. and her mom who pretty much conveyed it to her. In the nineties had only recorded one parcel. And so now the buyer obviously backed out because they're like taking on this huge risk because they're only going to buy like half the property.

mike 27:01

so, who owns the other half? Who owns the other half?

lorenzo 27:03

uh, the mom who had passed away.

mike 27:04

Oh Lord,

lorenzo 27:06

Yeah. So it was crazy because obviously the initial title company that we use did not catch this. And so we tried to go after them or

jacob 27:13

But did you have, did you have title insurance from the transaction where you obviously purchased it?

lorenzo 27:17

Yeah. So I had title insurance, but that only covered the one parcel. And so I pretty much had to open a new title insurance claim. but they said that pretty much the best bet was to go with the buyer because the buyer would then obviously take on everything and go through the probate process. but the title company initially said that they would ensure that whole thing for the new buyer. But for us, this was August. Our hard money loan was due September. Everything was pretty much due September. And so for us, that was the best case was just to honestly take the loss that they offered because they initially offered 1. 4 and, they said they would take 1. 25 as kind of like, the offset for the risk. And so for us, I think that was the best option at that time, because I don't want it to like, try and worry about refinancing if we even could. And then who knows how the market would be, um, whenever we tried to sell this house. Because they said the process could take six to 12 months for the probate process. And my agent who was, an agent for about 20 years said this is like the second time she'd seen this in 20 years. So it's just like a very unlucky situation, honestly. But yeah, it was crazy.

jacob 28:18

man. So, so you go from one, four to one, two, five, obviously like knocking down, um, your guys profits. So you get done with the transaction at the end of the day. What is kind of like the net impact to you and your partners, uh, when everything was totaled up when you, you know, you ran all the final numbers. What, what was that kind of net at the end?

lorenzo 28:38

yeah. So we each lost 20, 000.

mike 28:40

so all in you guys ended up at 1. 31 million?

lorenzo 28:43

Yes.

mike 28:43

Wow.

jacob 28:44

but you guys would have, you guys would have been up

lorenzo 28:46

Yes.

jacob 28:46

if this went through. So it was like literally this title thing. And it could have been, you know, a more positive, obviously story. If this title fucking issue didn't screw you guys at the fricking finish line.

lorenzo 28:58

Yes.

mike 28:58

So I just want to I got a bunch of notes here So we bought it for we bought it for eight ten. Our original construction budget was two

lorenzo 29:05

Yes.

mike 29:05

did the construction budget end up?

lorenzo 29:07

Uh, and it ended up being at like 300.

mike 29:09

Okay, that makes a lot more sense. Wow, that is That's incredible. That's incredible

lorenzo 29:14

Yeah. It was definitely crazy. Um, and then, so there's just many times throughout this whole listing process is pretty much three or four months where I was just like stress the fuck out, honestly. And so the initial listing. We only got that one soft offer at a million. And at this point, obviously our breakeven was like 1. 25. And so I was like, damn, we're about to lose like a hundred thousand each. And then to go from that to like now, Oh shit, we're about to make 1. 4. And then now we're about to have to go through like litigation and all this stuff is just like a rollercoaster of emotions, honestly, but I think for everything that panned out, I was definitely happy with, I guess, my mentality at the end, because I was just like, at this point I was just. Ready to move on. And I think that some other people could have easily been like, no, let's go after the people with litigation and lawyers and all that stuff. But for me, it was like weighing the opportunity costs of this, like, it's more than just the money at this point. It was like a mental well being. It's like, if I do the litigation and stuff like that, like, I would not be able to focus on anything else, like mentally wise. And then obviously those, things. Those attorney fees would be tens of thousands, if not 100, 000. And so I think for me, it's just like knowing when to just cut your losses.

jacob 30:16

honestly, I'm blown away by this story, I'd seen you talk about it on social and everything like that. So I was familiar with this. Kind of the end results of it, but to go really in depth at the twists and the turns and the highs and the lows, I'm kind of blown away. And one, I just, again, I want to commend you on one, the transparency. Um, it's not very easy to talk about losses. No one really talks about losses in the real estate space. And if you are a real estate investor, that's been doing this for any amount of time, you have losses. You, you have taken licks and you have, gotten kicked in the gut a bunch of times, So, I mean, like the real estate space is not. It's not pretty, right? So I just want to commend you on showing the ugly side of real estate, uh, because it's not easy to do and, um, not many people do it, but I know for a fact that you talking about this so openly. Is going to reach the right person or the right people. And because of your story, people are going to be more conservative when they're running numbers for a flip that they're attempting to do, or they're going to take a little bit more precaution when they're kind of waiting into this space. And so you are doing a great service to people by being open, by talking about this, and I want to commend you on that, but I also want to commend you on one. you're never going to get anywhere in life. If all you're worried about is, you know, the downside, if you're all you're worried about is the risk, right? You can get scared into just having an incredibly passive life where you just never pulled the trigger. that's the risk that people don't talk about as well. Where it's like, oh, well, what if the flip fails or what if that rental property actually doesn't make any money? Or what if, you know, people don't fricking Airbnb anymore? And it's like, well, what if you just fricking, you know, you Don't do anything. And then I'm just at my desk for another 30 years. And I'm like, Oh, well, I wonder what, what would happen if I did that flip or if I did that Airbnb, if I did that rental property, right? No, no one talks about that. in my opinion, that's the thing that scares me the most. Right. So you didn't. Listen to that side, because that side is always there. It's always there. You have to fight that every day. it's so easy, right? The inertia of just not doing anything. It's so easy to just sit back in the chair, to be the RN, to be the data analyst, to just be like, look, I'm not gonna, I'm just not going to do anything. You know what I mean? I'm going to watch Netflix. I'm going to sit here. I'm not going to risk my money. you didn't listen to that. So I want to commend you on that as well. And it's the willingness to get in the arena. That's why you're going to be successful, It's not, it was never the first flip. It's never the first rental property. It's never the first thing that you do. Most of the time, those deals are going to be bad, My first rental property, not a great deal, Talk about all the time, like it's actually a terrible deal, but. It's because of the first property that I did the second and that I did the third. And then I did the fourth. It's like, it's, it it's because you do it. That's why you actually get the momentum. So I know it didn't go the way you wanted it, Lorenzo, but I know that with how much you've reflected and grown from this process, that this is just, one small bump. In a very, very long and prosperous journey. Um, so I want to thank you for sharing that. now that we kind of closed the chapter on that flip Lorenzo and you like reflected on that and everything, how did you gather from there? And like, I know you went to get your real estate license where was your head at after you kind of closed the chapter on all this? And, and what was the next move that you wanted to make in the real estate space?

lorenzo 33:22

So I got my real estate license because I knew that investing the real estate investing was something I wanted to do. And so obviously I just wanted to have that be just like another thing to help with the investing more so than anything. after the flip I was definitely, a lot more, I guess, cautious now of obviously all the deals that I'm looking at. I think initially for the first one, I was like, I just want to do one. And I think for now I'm like, I'm in no rush. Like I still want to do it. I'm still looking at deals all the time, but I'm a lot more conservative with my numbers. And now obviously I want to go a lot more direct to seller. And so this one that I found initially was on MLS, which is available to on Redfin and Zillow and all that stuff, all the listeners. but now I really want to try and honestly figure out wholesaling also, because as a wholesaler, obviously you could cherry pick your deals. And it's a lot less risk and it's more scalable than flipping. And so I think having the agent also is just another thing that I can use in my tool belt to help sellers. And so now I want to be deemed to just like a real estate professional and just like help people. So whether they want to list it, whether they want to sell it off market as a wholesale. so yeah, that's my kind of focus now is to kind of figure out direct to seller stuff.

jacob 34:24

Yeah. So talk to, uh, Us a little bit more about that. Um, and for the listener. Right. Tell us a little bit more about the direct to seller strategy and you know, what you're hoping to kind of gain from that and, and why you're doing that. If for, for the listener, who's not very familiar with that, with that strategy,

lorenzo 34:39

Yeah, so direct to seller wholesaling is essentially finding, um, properties, uh, it's usually distressed sellers, whether it's, uh, pre foreclosure, probate, people who just want to sell, who may not want to go through the whole, like, hassle of listing a house, like, on market. Maybe they don't, maybe they don't want to do, like, all the repairs or have all the people come into their houses, or they don't want to get rid of all their stuff that they have. And maybe they just want to close really quickly because they just had a death in the family or whatever. And so for me, I, right now my focus is just cold calling and, uh, texting people. And so I've been pulling lists. There's different softwares you can use. The one I've been using is called kind skip tracing. And so for skip tracing is essentially you pull a property and you usually pay, like, say like 10 cents to pull, uh, the contact information for this homeowners. Address phone number, all this stuff. And so I'm right now just cold calling all these different lists. I'm trying to get in hold of homeowners and seeing if they want to sell and just like solve any problem that they may have. Cause I'm trying to create a win win situation for everyone. I think there's a lot of bad wholesalers and people in general can be realtors also, who are just like looking for another paycheck. And for me coming from the nursing background that I am, I genuinely want to like help people and create a win win situation for everyone

jacob 35:50

So kind of transitioning here a little bit. Um, one very exciting development, Lorenzo, that's kind of come out, all out of all of this is you launched a podcast, which so big congrats on that. Obviously Mike and I are very familiar with the amount of work that it takes to, to launch a podcast. And again, When I first launched the financial freedom fighters with Mike, you know, Lorenzo and I have been talking. He's like, dude, that's so cool. That's awesome. you know, I really want to do that. I got a tons of messages like that. Like you always do. People like, oh, I, I, I really want to do a podcast. one person, One person actually did it of all the people that told me they wanted to do it. One person actually didn't. That's Lorenzo. And so again, I'm, I'm just sensing a theme here, Lorenzo, that you just have a bias for action that I really, really respect. And so I want, I want you to talk about the pod. I want to talk about how it's going. and yeah, just, just tell us all about it.

lorenzo 36:34

Yeah. So my podcast is called the low down. it's on Apple, Spotify, and YouTube, and it definitely focuses on the interview aspect of, meeting other investors and people in business who I think are killing it and could inspire. It's honestly kind of like, Bigger pockets. I feel like bigger pockets was a very, awesome podcast that I started. the thing I loved about bigger pockets initially was that it was very relatable because a lot of the people that were on there were kind of just like everyday people. It wasn't like these people who had multi million hundred million dollar asset or like net worth and all that stuff is kind of just like, Oh, here's Lorenzo. He's a nurse. He's doing real doing his first flip.

jacob 37:09

That's why we all, that's why we all, love bigger pockets before.

lorenzo 37:12

exactly, exactly. So I kind of want to do my own Bay Area version. and so I've done about six or seven episodes now. The first one was a solo and the rest of them have been, yeah, interviewing other guests who have done like, short term rentals, commercial real estate, other things like that. So yeah, very excited.

jacob 37:26

it, man. I love it. Well, um, I'm going to be a guest on this in a couple of weeks. And so I'll try to, I'll try to bring some value to your audience. I'm very, very excited about that. so we're kind of rounding up on Simon. I want to get you out of here. I want to be respectful of your time, but I always do like to kind of, end with a very similar question, which is, you know, if you're talking to somebody that is on the sidelines right now, They know real estate's a great idea. they know they want to kind of jump into the space, uh, but they just, you know, they just can't get over the hump there. Like, what would your advice be to that person, Lorenzo?

lorenzo 37:56

I think just, Go and try and build relationships with people who have done it, whether it's through meetups or join a coaching program. I think that having a mentor or anyone who's kind of just like even just one step ahead of you doesn't have to be like 50 steps, 100 steps, whatever. I think just having someone that you can relate to is just very invaluable because. I know initially for me, when I first got started in real estate, it felt like I was very alone because all the nurses I work with, um, none of my family members, none of them are doing the real estate stuff. And so for me, I knew that the initial conversations I'd have with them about like wanting to do real estate, some of them were like, Oh, that's kind of risky. You have a great job. Why would you want to do that? And so I think that joining a coaching program or going to, um, meetups and stuff like that, obviously it makes it a lot more relatable and not as scary because obviously you find out that all these other people are doing it outside of your, Immediate like ecosystem.

jacob 38:48

Yeah, yeah, no, I, I love that advice. if you don't have, you know, at least a handful of people that are interested in, in trying to make the same moves, then that's another thing that will keep you on the sidelines because it all feels so foreign, right? If you can't talk to anybody about it, then it's like, Oh, what, maybe I'm doing the wrong thing. But when you surround yourself, like Lorenzo saying with people that are doing this on the regular, then it doesn't seem that crazy, right? The, the moves that you're making don't seem so crazy. That's all that matters at the end of the day. Is that we're making the moves, um, and we're taking the licks and we're growing and we're evolving and we're staying in this game. Cause the only thing that is for certain, right? Like real estate is going to work. It's going to work in the longterm. Um, but you have to be in it for the longterm. You know, the people that have lost money in real estate, they're the ones that tapped out, right? They, they made one bad move. Um, they swore off real estate and then they kind of never came back to it. But, if you. Listener or, you know, willing to get in the arena, I'm and willing to understand that, Hey, there are going to be licks, there are going to be mistakes, uh, but you're willing to bounce back from those mistakes, like Lorenzo has done. Um, that you're going to do just fine, right? And find yourself and surround yourself with people like Lorenzo, uh, like myself, like Mike that are going to give you the real, Um, give you the advice, you know, point out the roadblocks and the potholes and all the mistakes that we've done. Um, and they're going to be just fine. So Lorenzo, I want to give you an opportunity. If people want to reach out to you, obviously everybody check out the lowdown on Apple, Spotify, and YouTube. But Lorenzo, if people want to get in touch with you, where can they reach out to you?

lorenzo 40:18

Instagram's probably the best. So it's at Lorenzo, L O R E N Z O period Mercado, M E R C A D O underscore.

jacob 40:26

Awesome. So Lorenzo dot Mercado underscore, hit him up at Instagram. Again, check out the low down wherever you listen to podcasts. My name is Jacob Sandoval. You can find me on all socials at cashflow saga. He is Michael Magno. You can find him on all socials at realtor, Michael Magno. We are the financial freedom fighters podcast. We'll see you in the next episode. Peace

mike 40:49

See ya.

lorenzo 40:49

Peace out guys.

Nancy 40:50

Goodbye