When it comes to making some money with a fix and flip, every dollar spent counts. There just isn’t any room to make big mistakes or else your profits will quickly fizzle. But just like anything else in life, experience can teach you a great deal, including when it comes to fixing and flipping. The most successful house flippers in the world made their own mistakes that cost them thousands of dollars when they were just starting out.
Learn from their mistakes and be sure to avoid the following newbie home-flipping blunders.
1. Paying Too Much For the Home
When it comes to being successful as a house flipper, the first component that can determine your level of success is the amount that you pay for the property. Before you even consider buying a property to flip, you’ll need to crunch some numbers first. In fact, you should work backwards when determining the maximum you should pay for a property.
Ideally, you should identify how much you can realistically sell a property for once it’s been rehabbed. Once you’ve got that number, deduct the costs required to renovate the place, as well as closing costs and expenses related to selling the home. After making these calculations, you’ll arrive at a break-even point which you’ll use to factor in your profit potential and determine how much you should pay for the property.
Unfortunately, many novice flippers allow their emotions to affect the buying process. It’s not hard to look at a home, visualize its potential, and forget about the deal altogether. Just about every experienced flipper will admit that they’ve done this when they just started out and how it impacted their bottom line.
2. Buying a Home With the Wrong Traits
You might come across a home that’s listed at a great price and looks like it only requires cosmetic updates. This can seem like it’s got great potential to help you make a decent profit with minimal work. But it’s imperative to take into account the characteristics of the property to make sure it will be easy to sell after you’re done with it. That’s why you will need to find out what the average home in the area is like and what prospective buyers in the neighborhood are looking for.
For instance, is the area predominantly made up of 3-bedroom, 2-bathroom, 2-story homes? If so, you might be shooting yourself in the foot if you buy a tiny 2-bedroom bungalow if that’s not what buyers in the area are looking for. What about the lot? Is it much larger or smaller than what buyers in the neighborhood expect? And how about garages – are they typically double, single, attached, or detached?
Identifying what the buyers in your area want to buy is crucial. Luckily, your real estate agent will be able to provide you with that essential information.
3. Underestimating the Total Cost
Another common mistake that newbie house flippers make is grossly underestimating how much the renovation will cost, the carrying costs, and the expenses related to selling. All of these fees need to be factored into the equation to determine if a sizeable profit is possible. After all, there is a lot of time and work involved in a rehab, so you want to be sure that the project is worth it.
There are tons of factors that need to be considered when determining the true cost of flipping a home. A reliable and experienced contractor should visit the property to help provide you with an estimate of what needs to be done to bring the home up to par and how much it will cost. In addition to the actual renovations themselves, there are a ton of other costs that need to be factored in, including:
- Building permit fees
- Local, state, and federal capital gains taxes on profits
- Land transfer taxes
- Real estate commissions
- Title searches
- Inspection fees
- Appraisal fees
- Carrying costs (including property taxes, mortgage interest, and utilities)
This list is by no means exhaustive, as each transaction is unique and can bring about a variety of other costs that may not be anticipated at the forefront. You’d be well advised to meticulously research what the entire cost of your project will be, then be sure to add at least a 10% cushion to cover for unforeseen expenses, which brings us to our next point.
4. Not Budgeting For Potential Problems
In a perfect world, every detail that you budget for would be the extent of what your finances would need to cover. Unfortunately, we don’t live in a perfect world, and when it comes to renovating an older home, unexpected issues are bound to creep up. There are simply too many variables involved in a fix and flip project to predict them all. Unfortunately, many inexperienced flippers cut things really close with their budgets, only to have them blown out of the water when an unpleasant surprise springs on them.
While it’s absolutely imperative to budget accurately, it’s just as important to add a cushion on top of that to cover any problems that may pop up, and they probably will. Whether it’s termites under the floor boards, mold in the insulation, or water damage in the attic, the issues can mount and can wind up costing a pretty penny.
Of course, it’s possible that no major issues are met, which just means that the extra 10% you set aside for surprises goes right back into your pocket. But it’s better to be safe than sorry.
5. Doing All the Work Yourself
When it comes to fixing and flipping for a profit, the more money you can save on the job, the better. That may entail doing a lot of the work yourself, such as the demolition, cleaning, painting, and other minor jobs that don’t require much experience.
However, when it comes to larger, more intricate jobs, they’re better left to the professionals. While you’re trying to save a few bucks doing the job yourself, you could end up costing yourself more money if the job you do needs to be redone by the experts. Many novice flippers suddenly believe they can do all the plumbing, electrical work, drywall installations, and fine carpentry, only to find out that the shoddy job they did is a flop.
The best option is to consult with a contractor before tackling any major project in the home rather than assuming the task yourself if it’s way out of your scope.
6. Over-Improving the Property
Novice flippers often don’t know where to draw the line as far as upgrading goes, and that can lead to an over-improved house. While there are certain improvements that can provide that highly coveted “wow” factor that can attract buyers, it’s not always necessary to install certain extravagant components if the neighborhood doesn’t call for it.
Many of those opulent features tend to cost a pretty penny and can eat into your profits. If these finishes don’t increase the overall value of the property very much, there’s a good chance that you won’t recoup the money spent on these improvements.
Find out exactly what buyers in the area are looking for and use that as a guide as to what you should and shouldn’t install. Your real estate agent or appraiser should be able to help with this.
The Bottom Line
Nobody is born knowing exactly how to ensure an air-tight fix and flip. It takes a lot of homework, and even some trial and error to get right. However, rather than learning from your own mistakes, take the time to find out the common types of mistakes that novice flippers tend to make, and do your best to steer clear of them.