Podcast Summary: Lessons From Failed Flips with Tedman Chang | Episode 36

Podcast Information:

• Title: The David Greene Show
• Host: David Greene
• Episode Title: Lessons From Failed Flips with Tedman Chang
• Release Date: February 6, 2025
• Description: In this episode of Real Talk Real Estate, David Greene invites Tedman Chang, a real estate flipper, to discuss two of his challenging flip projects. Tedman shares unfiltered stories about what went wrong, the lessons learned, and offers valuable insights for both novice and seasoned real estate investors.

Introduction to the Episode

David Greene kicks off the episode by introducing the theme of "nightmare deals"—real estate investments that went awry. The goal is to help listeners recognize red flags and avoid similar pitfalls. Tedman Chang joins as the guest to share his firsthand experiences with failed flips in the competitive Austin, Texas market.

Guest Background: Tedman Chang

Tedman Chang hails from the San Francisco Bay Area and works in the finance department of a tech company. He ventured into real estate investing a year or two ago, successfully completing three flips and managing a duplex in Indianapolis as a long-term rental.

Notable Quote:

“I started investing in real estate a year or two ago... currently have three flips under my belt with one duplex in Indianapolis that's going pretty well as a long-term rental.” [01:00]

First Flip: An Austin Opportunity Gone Wrong

Initial Excitement and Purchase

Tedman discusses his first flip project initiated in early December, sourced through a reliable wholesaler connected via his Austin-based team. The property, located in the rapidly gentrifying Domain area of North Austin, was attractive due to its proximity to popular bars, restaurants, and a large park.

• Purchase Price: $350,000
• Rehab Budget: Approximately $100,000 (finalized at $106,000)
• Expected Sale Price: $625,000 based on comparable sales (comps)

Notable Quote:

“The neighborhood and the vicinity to the Domain were sort of attractive to me, and that's sort of why we bought it.” [03:02]

Rehabilitation Process

The rehab was extensive, involving:

• Roof replacement
• Installing new HVAC systems
• Redoing floors and smoothing out walls
• Removing and rebuilding narrow hallways
• Remodeling kitchens and bathrooms without relocating plumbing
• Enhancing the fireplace

Notable Quote:

“Everything was pretty extensive. Kitchens and bathrooms needed to be done... we just changed everything out.” [04:27]

Market Challenges and Price Drops

Despite meticulous planning, the property struggled on the market:

• Initial Listing: $639,000 in March
• Final Sale Price: $532,000 after multiple price cuts
• Duration on Market: Five months with zero offers initially

Tedman attributes the downfall to several factors:

• Persistent high interest rates
• A shift from remote work, leading to reduced demand
• An influx of other flippers saturating the Austin market
• Increased competition from new listings in the same area

Notable Quote:

“We listed it in March for $639,000... had to keep cutting the price, and it just kept going down and down.” [06:05]

Outcome and Lessons Learned

The flip ultimately broke even, with Tedman and his partner not making a profit but avoiding a loss. Tedman reflects on the importance of timely price adjustments and the impact of external market forces.

Notable Quote:

“We’re basically even with, you know, depending on the random closing costs and everything, we're basically even.” [14:03]

Key Takeaways:

• Market Sensitivity: Understand that market conditions can change rapidly due to external factors.
• Price Strategy: Be prepared to adjust pricing more aggressively if necessary.
• Risk Management: Maintaining a low purchase price can safeguard against unforeseen downturns.

Second Flip: Contractor Issues and Permitting Delays

Initial Optimism and Purchase

Encouraged by the first project, Tedman embarked on a second flip:

• Purchase Price: $450,000
• Rehab Budget: $60,000 (later increased to $70,000)
• Expected Sale Price: $625,000
• Expected Rehab Duration: 2-3 months

Notable Quote:

“That's exactly what my mindset was... I totally understand that.” [17:40]

Project Setbacks

The second flip faced significant hurdles:

1. Contractor Abandonment: The initially hired contractor left the project two and a half months in, leaving the property 90% complete with unfinished kitchens and bathrooms.

   • Quote: “He kind of started falling apart a little bit, and he left the project around two and a half months in.” [19:03]

2. Permitting Issues: Tedman encountered unexpected permitting complications with the city of Austin, which delayed the project by months.

   • Quote: “I applied for an express permit, but it somehow added plumbing and electrical, like, permitting on there... I could have removed those two permits from my express permit, and it would have just been smooth.” [20:41]

3. Rehabbing with a New Contractor: Finding a replacement contractor took additional time, further extending the rehab timeline.

Key Challenges:

• Reliability of Contractors: Tedman's experience underscores the importance of vetting contractors thoroughly and having contingency plans.
• Navigating Local Permits: Understanding the permitting process is crucial to avoid costly delays.

Financial and Emotional Impact

The delays led to increased costs and heightened stress, especially as Tedman balanced his full-time job with the demanding rehab projects.

Notable Quote:

“It was stressful... If we lose money on this, it's not going to be good for me, not going to be good for my partner.” [16:12]

Outcome and Future Plans

As of the episode's recording, the second flip was nearing completion with hopes to list it by the end of October for a break-even sale. Tedman expressed intentions to possibly explore markets outside Austin, such as the Bay Area, to mitigate similar risks in the future.

Key Takeaways:

• Flexibility: Be prepared to adapt strategies when unforeseen issues arise.
• Local Market Expertise: Investing locally can provide better control over the project but requires deep market understanding.

Balancing Real Estate with a Full-Time Job

Tedman and David delve into the stresses of managing real estate investments alongside a stable W2 job. The discussion highlights the importance of maintaining a steady income to cushion against investment setbacks.

Notable Quote:

“I think people should keep their W2 as long as possible and try to invest on the side... having that stability and having that income coming in to keep you afloat, if things do go wrong, is very important.” [25:32]

Insights:

• Risk Mitigation: Keeping a primary income source reduces financial pressure during investment failures.
• Scalability: Expanding real estate ventures without sufficient experience can amplify risks.

Market Dynamics and Investment Strategies

David and Tedman explore how market conditions, especially in high-demand cities like Austin, can be volatile and highly sensitive to external factors such as economic shifts or geopolitical events.

Notable Insights:

• High-Stakes Markets: Investing in booming cities offers substantial profits but comes with heightened risks during market corrections.
• Diversification: Exploring emerging markets can spread risk and uncover new opportunities.

Notable Quote:

“It's something that if you're investing in those specific markets, they are the most sensitive to the corrections because they were at the front of the race.” [28:24]

Encouragement and Final Thoughts

Despite the setbacks, Tedman remains optimistic. He emphasizes the cyclical nature of real estate markets and encourages investors to persevere through difficult times.

Notable Quote:

“Anyone who's stuck in this sort of position should know that it'll get better.” [33:51]

David reinforces this message, acknowledging the emotional toll of investment failures and the importance of resilience.

Conclusion

In this candid episode, Tedman Chang provides a transparent look into the challenges of real estate flipping. From contractor unreliability to market unpredictability, his experiences serve as valuable lessons for investors. The discussion underscores the importance of thorough planning, risk management, and maintaining financial stability through diversified income streams.

Final Takeaways:

• Due Diligence: Rigorous vetting of partners and contractors is essential.
• Adaptability: Being flexible and responsive to market changes can mitigate losses.
• Financial Security: Maintaining a primary income source can provide a safety net during investment downturns.

Connect with Tedman Chang:

• Instagram: @tedmanchang

This episode serves as a comprehensive guide for real estate investors, highlighting that even well-planned deals can encounter unforeseen obstacles. Tedman's story is a testament to the resilience required in the dynamic world of real estate investing.