5 House Flipping Mistakes Newbies Must Avoid
Not every rehab and flip deal you get involved in will be successful. With poor planning and unrealistic numbers you can and sometimes will lose money. As much as investors don’t want to hear this they need to recognize the possibility. All it takes is a few small mistakes to turn a profitable looking property on paper to one you struggle breaking even on. In a perfect world the mistakes you make will be small enough in nature that you can use them as a learning experience. However the bigger the mistake the more costly it will be. Instead of making mistakes on your own it is best to learn from the mistakes of others. Here are five house flipping mistakes you need to avoid.
- Planning As You Go. Once you make your plan you need to be committed to it. It is ok to make minor tweaks as you go but you have to avoid wholesale changes. The middle of the project is not the time to decide that you want to switch up the layout of the property. Not only does this add days to the process but money to your budget. Adding amenities does not always improve your bottom line. It can be easy getting influenced by what your contractor or someone else says you should do with the property. These are simply suggestions and should not be taken to heart. If something does not work out you are the one that will feel the repercussions. Adapting to an unexpected item is different than scrapping your original plan and starting from scratch. If you spent time planning for the property you need to trust your gut and stick with your plan.
- Unrealistic Budget. Your budget can be anything you want it to be. It is not uncommon for novice rehabbers to fudge the budget to make the deal appear more attractive. By doing this all they are doing is creating a bigger problem down the road. There is nothing wrong with passing on a deal if the numbers don’t make sense. Getting into a deal is not the goal. The goal of any rehabber is to make a profit on the end sale. If you are over budget your bottom line won’t be as high as you anticipated and you will regret getting into the property. Your time could have been better spent on another property with much higher upside potential. On your budget you should always go with the worst case scenario. If things work in your favor you will be pleasantly surprised but at least you protect yourself from the downside. The budget and numbers should guide every decision you make with the rehab. Only use numbers you are confident in.
- Overinflated ARV. Your budget and after repair value (ARV) typically go hand in hand. Getting a good deal and staying under budget only helps if you can sell the property the price you anticipate. A common mistake rehabbers make is thinking that the work they do will have a greater impact on the value than the market suggests. When estimating value you need to look at the property from potential buyers prospective. Giving the property a complete makeover will give your value a boost but maybe not as much as you think. Doing work just for work sake does not make sense in every market. If there are no substantial comparable sales or listings you could be throwing money away. Buyers do not care about the condition you bought the property in or all the great work you may have done. All they look at is the finished property and how it stacks up to other homes in the area. Having an overinflated value will cause the home to stay on the market longer than it needs to ultimately sell for much lower than you thought.
- Holding Costs. There is more to your bottom line than simply the purchase and end sales price. On every rehab deal there is the time from acquisition to the end sale. The hidden fees during this time can greatly impact the profitability of the property. In addition to the interest repayment of the loan there are also payments for the insurance, property taxes, licenses and utilities. You are on the hook for these every day you own the property. Some of these will be more costly than others but over a few months these can easily equal thousands of dollars. It is important that you fully know and understand all of the potential expenses prior to making an offer.
- Lost Work Days. As we mentioned time really is money in the rehab world. It is critical that you keep things moving throughout the process. Before you take ownership you and your contractor should sit down and make a work list and schedule. Reach out to everyone you plan to work on the project and confirm the dates you are requesting. Reiterate the importance of sticking to these dates and ask if they anticipate any conflicts. It is up to you and your contractor to keep things going so you hit the dates on your end. Waiting a week for materials may not seem like much but pushes everything back accordingly. One lost week can turn to two and before you know it you are 30 days past your projecting finish date.
Flipping a house means staying on top of the little and not so little things. Whatever you do avoid these five common mistakes at all cost.