5 Mistakes That Will Torpedo Your Fix-and-Flip
The popularity of reality TV shows like Flip or Flop has fueled a growing trend of people interested in flipping houses. But while there are huge profits to be made, pulling it off is not as easy as it appears. There are a number of things that can go wrong during a flip and an aspiring investor should know how to avoid making mistakes that can turn a potential win into a flop.
If you want to turn a good profit on your next flip, make sure you avoid these 5 mistakes!
Overpaying for a property can bring down your profits even before you start. The thing to remember here is to never get emotionally attached to a house right from the start. Always treat it as a business decision. Do your homework and compare the sale price with other homes in the neighborhood so that you have sufficient data to back you up when you start negotiating. Experienced house flippers hunt for properties that they can snap up at 75 to 80 percent of market value.
Also, have your contractor look over the property and give you an estimate for the repairs and remodeling. This would help you calculate your gross profits and decide if the deal is actually worth all the hard work you will have to put in.
2. Lack of real estate knowledge
If you want to make a career out of house flipping, the importance of having a solid background in real estate goes without saying. At the very least, you need to know the following.
- What kind of houses are buyers in the current market looking for? For example, do you want to invest in a large, five-bedroom house that would be tougher to sell when the market is huge for starter, two-bedroom houses?
- What are the upgrades that are needed to turn a good profit? For some properties, you can get away with the bare minimum like adding a fresh coat of paint or redoing the carpets. Others may need more expensive upgrades like new kitchen appliances or updated bathrooms to bring in more buyers.
- Do buyers find the neighborhood desirable? You may be getting the house for a good price, but you will find it difficult to resell if it is not located in a desirable neighborhood.
- Do you have the required permits for construction? Each city has different permits and licenses for construction. Make sure you are familiar with all the required paperwork before you bid on a home.
3. Buying without seeing the property
A lot of investors buy houses unseen in an attempt to score great deals. They use listing descriptions, photos, and virtual tours as a substitute for an actual walkthrough and home inspection.
While this might help you turn a nice profit on some occasions, it might not always be the case. Photos and videos need not always show you the true picture. Strategically placed furniture and camera angles can hide many property defects like water damage, mold, and structural damage. You may end up having to make extensive, time-consuming repairs in order to turn the property into something that would give you good returns on your investment. And the longer you hold the property, the lesser the profit you make.
4. Going with the lowest bid contractor
Many novice house flippers make the mistake of going with the first contractor who offers the lowest bid. And then end up losing time and money while the guy does a piecemeal job, asks for more money than originally estimated, or worse, bails midway through the project.
In real estate, you are successful only when you have a good team to support you. Don’t try to cut costs when it comes to hiring contractors, real estate agents or other professionals who are vital to turning around the project within time and budget.
5. Underestimating flipping costs
Underestimating flipping costs can quickly send a house flipper into deep financial trouble. Unfortunately, that happens more often than you think and many first-time flippers end up running out of money just weeks before the completion of the project, stretching deadlines and reducing final profits.
To avoid making that mistake, make sure you have done your homework beforehand. Will you have enough money set aside for contingencies once you start work? Have you taken into account the cost of insurance, taxes, and utilities while the house is being remodeled? Have you planned for the costs of selling while doing your feasibility study?
Some projects can also end up being endless money pits where the final sale price can never justify the remodeling and holding expenses. It’s always a good idea to make sure that you know what you are getting into.
Enjoyed these tips? There are 5 more over at our article 5 More Mistakes That Will Torpedo Your Fix-and-Flip!