10 Mistakes You Need to Avoid When Flipping Houses
House flipping offers huge payoffs. However, it also presents a high level of risk. There may be “lemons” that can provide a lot of juice, but there may also be mistakes that can turn sweet profits quite sour. This can mean suffering a large cut on your profits or worse, get you in heavy debt.
Here are some mistakes that can wreak havoc on your fix and flip payoff:
– Failing to check on the project’s overall cost. House flipping is not all fun and payoffs. You need to do your due diligence. Take a closer look at what the cost of buying and flipping a property entail. Aside from the purchase prize of the property, you will need to cover:
- Related closing costs. This is generally 2 to 5% of the purchase price. This includes appraisal and inspection fees, legal fees, escrow fees, insurance covers (title insurance, homeowner’s insurance) and taxes that are overdue for the property.
- Carrying costs. For each month that the property remains in your hands, you will be paying out interest on your loans. Aside from the growing interest, you will also have to cover other monthly expenses such as utilities, homeowner’s association dues, insurance coverage and real estate taxes.
- Selling costs. This includes the agent’s fee, legal fees, transfer taxes and other costs that the seller covers when the house is sold.
– Not acting quickly enough. With fix and flips, time is of the essence. You may need to quickly decide whether to close on a particular property and be ready to put in the necessary payments. You may need to look at quick funding sources such as a hard money loan or a bridge loan to get the funding you need. Otherwise, you may end up losing the property you had your eye on.
– Paying too much. This can apply for the payment made on the property upon purchase, as well as going over budget for the renovation. Be careful that you do not fall into the trap of signing in a property just because you are frustrated that you are not getting the property based on the computations you have made. You should know the value of the piece of property. You can consult a local real estate agent and get a comparison of prices for a similar house in the neighborhood. Make careful computations so that you minimize the risk of biting off more than you can chew.
– Not knowing what to DIY and what to contract to others. Are you able to do remodeling work? What can you do well? There is the temptation to try to do everything yourself. However, if you botch a certain job, you will end up spending more than if you had hired an expert to do it. Set a price on your time and ask if you are willing to “pay” yourself for the time you spend on a DIY project.
– Getting the wrong contractors. Your choice of a contractor has a considerable bearing on the outcome of the project, as well as the costs you incur during the renovation. When choosing a contractor, get everything on paper (deadlines, costs, commitments on manpower). You should also have a hands-on approach, where you keep regular tabs on the progress of the project and whether this is being done on a budget.
– Getting the timeline wrong. Never underestimate the time it takes to complete the fix and flip process. From the time you buy the house, have it fixed, listed and sold, it could take as little as 3 months, but it could take more. Be prepared to cover the costs in case the house does not sell as quickly as expected.
– Failing to define the roles when partnering for a project. If you are getting a partner in a project, it is important to set everything on paper and clearly write down what is expected of each of the partners. The partners should also agree on how the project should go. Remember, the lowest bid is not always the best deal. Go for a contractor that has built a solid reputation for being dependable.
– Underpricing the property asking price. The costs stated above will add some 10 to 20% to the purchase price. You also need to consider the expenses you incurred in renovating the property, as well as the labor you personally poured out on the project. The aim is to make a profit so make sure that all your expenses (as well as labor charges) are included.
– Overpricing the property asking price. Conversely, you can have an overly high asking price. This can mean having the property sit on the market for longer. The key is to know the real estate market and understand how you can have the ideal asking price.
– Falling in love with the property. If you can afford to get that property yourself – that will be great. However, if you fall in love with the property, you may tend to delay putting it up on the market. Also, you may fall into the trap of making too many improvements on the property. It can be tempting to really fix the property up with a lot of add-ons, but you need to achieve the balance of having an eye-catching property that has enough qualities to make it a good find but where you do not exceed your budget.