Flipping properties successfully is as much about avoiding pitfalls as it is about getting all of the basics right. In fact, you can get a lot of things right and still lose money on a flip, if you get caught in one of those pitfalls. For that reason, pitfall avoidance needs to be a priority. Here are common property flipping pitfalls that you need to avoid.
Paying Too Much for the Property
This is probably the single biggest – and most costly – mistake that new property flippers make. A property flip is largely a numbers game. If the numbers make sense, the deal can be done profitably. But if they don’t, a flip can actually end up costing you money.
For this reason, you have to be certain of what a property’s actual market value will be before you even make an offer on it. Chances are, the property will be in need of significant renovations. You should have a good idea as to what the value of the property will be once those renovations have been completed.
Once you know what the final sale price is likely to be, you’ll have a better idea as to what you can offer. Taking into account the cost of renovations, carrying costs on the property, and any transaction costs on both the purchase and the sale, the offer that you make on the property should be low enough to accommodate all of those costs, as well is provide you with a reasonable profit.
Example: Let’s say that you expect that a fully renovated home will sell for $200,000. You expect to pay $20,000 for renovations, $10,000 for transaction costs, and $5,000 for carrying costs for the property between the time you purchase it and sell it. You also expect to make a $20,000 profit on the flip.
Taking the profit and all of the costs associated with the flip into consideration, the highest price that you can purchase the property at will be $145,000. That will cover all of the costs associated with the flip, as well as your $20,000 profit.
This means that you will need to get the property for at least $55,000 under its expected fully renovated final sale price. That also means that if the best the seller will do is $175,000, then you don’t have a deal. The negotiations should end at that point.
Not Getting a Home Inspection
The best kinds of properties to purchase for a flip are distressed properties. Those almost always have needed repairs, or at least significant maintenance upgrades. Since distressed properties are usually put up for sale by people who lack the financial means to properly maintain the property, it’s likely that the house has a variety of repairs that are not obvious. The untrained eye can miss these repairs very easily.
For that reason, you need to be fully prepared to spend a few hundred dollars to bring a licensed home inspector to the property. Skip this step, and you could be exposed to repair expenses that you never anticipated.
Whenever you’re going into a flip, it’s critically important to know every flaw in the property before you close on the purchase. Unless you do, you have no idea what you’re up against and will face the possibility of losing money on the flip.
Underestimating the Cost of the Repairs
There are two ways to do this. The first is by assuming that you can do a lot of the work yourself when you really can’t. The second is assuming optimistic (meaning low) prices for the repair work from contractors. Either assumption will cost you money, and perhaps a lot of it.
Your home inspection should also include the inspector’s estimate of what it will cost to perform the repairs. But you should also have contractors on call, who can give you estimates on major repairs in particular.
You need to know what the repairs are likely to cost, and not assume an optimistic outcome. If anything, the repair costs are likely to be higher than you expect, even with the best of preparation. Be prepared for the worst!
Not Having Enough Cash
And how can you be prepared for the worst? By having plenty of extra cash. Working a flip profitably is not something that you are likely to be able to do on a shoestring. You’ll have to have extra cash available in order to complete repairs in a timely fashion, and also to be prepared for unexpected expenses.
It’s hard to estimate exactly how much cash you should have on any one flip since each property is different. But whatever property you purchase, the extra cash will be an absolute necessity. It’s your best defense against the unexpected.
Not Preparing to Complete the Flip Quickly
When it comes to flips, time really is money. The longer that you own a flip, the more it will cost you to keep it. That’s because you’ll have to pay debt service, real estate taxes, insurance, and utilities for as long as you own the property. There’ll also be costs associated with maintenance, such as landscaping, snow removal, security and even perhaps advertising the property for sale.
In addition, if you are hoping to make flipping an ongoing venture, you will need to get in and out of deals quickly. That’s because any house that you buy has the potential to be a capital trap. For as long as you own it, your down payment and other expenses are tied up in the property. That means they will not be available for your next flip. And the more properties you can flip, the more money you can make.
This means having your contractors lined up and ready to go to work immediately. The sooner that you can complete any necessary renovations on the property, the more quickly that you can sell it. That will enable you to make more money – due to the fact that you won’t have to pay the carrying costs as long – as well is to free up your money for your next deal.
Working a flip profitably involves two factors – advance preparation, and swift execution of those plans. Get both in good working order, and you can make money flips.