Understanding and Avoiding House Flipping Mistakes
It looks so easy on TV. Purchase a house with a few problems for a good price, add a lick of paint, fit a new kitchen and sell it for a huge profit. Simple, right? The reality of house flipping isn’t as easy as the shows on TV would make you think. Many people that embark on this journey end up taking a loss, after months of hard work on the project.
Let’s take a look at some of the major problems people encounter when flipping a house and how you can avoid their mistakes.
Understand The Real Estate Contracts
When you get into real estate investing and have never done it before there is much to learn. When you’re ready to make an offer, you’ll be signing a contract. Veteran real estate investors usually know what to look for in a contract. It becomes second nature. That is not necessarily the case with an unseasoned investor.
It becomes vital to have a local real estate attorney in your corner to guide you and protect your interests. Many investors may wonder what does a real estate attorney do for you. The answer is a significant amount of work to protect your interests. Maximum Real Estate Exposure has an excellent article for that covers in depth what role a lawyer for real estate plays in a transaction.
Never under estimate the importance of someone who will be your fiduciary at all times. The same can be said for having an excellent local real estate agent. Both your real estate agent and attorney will likely become valuable members of your investing team.
Maximize Your Return on Investment
If you purchase a house for too much money, you could have ruined your chances of success before you’ve really begun. You need to understand how much the house will be worth when you’ve renovated, and how much this will cost. With this information, you can work out the maximum price you can pay.
You should look to spend no more than 70 percent of what you expect to sell the house for. The cost of renovations needs to be included in this as well. Deduct the cost of repairs from the 70 percent figure to find the maximum purchase price. If the house can’t be bought for this price or less, walk away.
The bulk of the properties you’ll be purchasing will be sold as-is, so it becomes crucial to figure out if there are any financial landmines lurking.
Know Your Financing
It’s not a surprise to say that real estate is an expensive business. If you have the cash to fund the project, all well and good, but if you will need to know your renovation loan options.
Have you really accounted for all of the expenses you will face when flipping a house and will your finances cover it? There isn’t just the cost of renovations, what about taxes and utilities. There could be unexpected costs added to the renovations, do you have a reserve to cover such situations?
Time Management Skills
Doing the work necessary to renovate a property can be very time-consuming. This is something which many first-time property flippers don’t fully recognize.
How much time will you have to spend on the project every day? How far do you need to travel to the site? Can you work on this full time or will a job make your time limited? These are questions which all need to be considered because the longer your renovation project takes the more money it is going to cost you.
Even if you are paying someone else to do most of the work, they need to be supervised. There are also the inspections to make sure the work on the house is up to the building code.
Your time will be needed even when the job is complete. Will you show the house to buyers yourself? The time you spend traveling to and from your property could add up. With all this in mind, is house flipping really going to be worth it for you?
Your Skills as a Real Estate Investor
Will you be doing most of the building work yourself or will you need the services of professionals? If you are going to employ people to do most of the work, this will eat into your profits. The more of the renovation you can do yourself, the greater the prospects of a good profit at the end of it.
Even if you have some experience in fixing things around your home, a renovation is a bigger task which could end up taking a lot longer than anticipated. This will lead to increased costs and reduced profits.
For your house flipping venture to be a success, you need to know about the market you are entering. Do you know what the upper limit for the value of properties is in the area? If you don’t, it could mean you won’t realize the sale price you expect.
This is where a good local real estate agent comes in. For your flipping business to take off, it helps to have an agent who has many years in the business. Someone who knows real estate market values inside and out is so valuable.
Having an agent who understands comparable sales and can put together an accurate comparative market analysis is crucial to your success.
Taking Your Time to Get it Right
You need to be very selective with your property purchase. If you make the mistake of purchasing a house which costs more than 70 percent of the eventual sale price, minus renovation expenses, you could find yourself in trouble.
Don’t jump at the first property you see, if it doesn’t completely fit your criteria, wait for something better. If you aren’t careful, after many months of hard work you could find yourself with a loss on your hands.
You may find that a property works out better as a rental than a flip. This is often the case when a property is in or around a vacation area where there are other ways to make money.
You may come to the realization that the property works out better as a profitable rental property. Trying to force a flip will likely end in financial discourse.
Final Thoughts House Flipping Mistakes
Flipping a house might appear to be a way to get rich quick. But if you don’t have the knowledge, skills and money for the project, it could become a costly mistake. Don’t fall into the trap many others have followed and make sure you know what you are doing before you commit to purchasing a house.
House flipping mistakes can be financial killers. Don’t let it happen to you!