Rookie mistakes when flipping a home.
- photo credit: Jeremy Levine Design via photopin cc
With mortgage rates still at all-time lows and lots of homes available at prices below market, many people are turning to real estate investment for the first time. In order to be safe, new investors often start out with flipping homes instead of holding a property for its rental value. Here are some of the top mistakes rookies make in home flipping and how to avoid them.
Not Allowing Enough for Repair Work
This is usually the biggest mistake made by new investors. People who have never renovated a home often underprice the repairs needed to make the home attractive enough to sell. This is why seasoned investors recommend that new investors talk to a contractor BEFORE placing a bid on a home. Getting a good price upfront will help determine if the house is worth the purchase. It is also wise to add a bit of cushion for Murphy's Law for things that just go wrong for no reason.
Allowing Emotion to Let You Pay Too Much
Some investors find the “perfect” home and go full steam ahead with the purchase. They find a home with a discount in a hot area and they just KNOW that they can sell it for a quick profit. This is where cold, hard facts should take the lead, not emotion.
An investor should never, ever buy a home for anything more than 70% of the home's repaired value. This is a rule of thumb that has been used by many investors for years and it has served them well. Paying more than the 70% will lead to smaller profits or even a loss.
Trying to Do Too Much
Many new investors envision themselves remodeling the bathroom, adding new paint and then finishing up the front lawn in a few weeks and then, voila, the home will sell. However, it is best to let the pro's handle the tough work. Repairing or remodeling a home can require some or all of the basic contracting skills such as carpentry, plumbing, masonry, painting and electrical. It is simply too much of a daunting task to try and do all of this on your own unless you have considerable experience in these areas. Even if you can do it all, wouldn't it be better to hire someone to do this type of hourly work while you search for the next deal?
Taking Too Long for the Repairs
Each month that you own a property is another month of expenses for items like utility bills, insurance and property taxes. This can eat in to your future profits and may even cause yourself a loss. Before buying the property sit down with your contractor and discuss the estimated time needed to repair the home. If necessary, ask the contractor to break the job down into rooms and develop a timeline. This will help you and the contractor stay on pace to finish the work and get it back on the market.
Your goal as a home flipper is to find a home at the right price that you can turn around and sell for a profit. Don't fall in to the trap of these mistakes and don't get too attached to any home. Always be ready to simply walk away from a potential deal and look for a new one.
Comments
Thanks Patrick. Yes, you have to market the home to the most home buyers to be successful. Add common items most people want, not luxury items few people need.
Great article Michael, I'd like to add over improving. I listed a couple properties several years ago for a guy that worked for years for a couple of local custom home builders. He decided to get into doing rehabs for himself to built up some retirement money. He bought a couple of REO tract homes in an older neighborhood and spent too much time and money adding features that he'd seen in the higher end custom homes and then he over priced them and tried to sell them FSBO. He called me in a panic because the notes on his hard money loans were coming due. I sold them both pretty quickly but he lost money on both.
Thanks Eva. Couldn't agree more. Feel free to check out the other flipping articles I've posted recently.
love your article, I have been investing in buy fix and selling homes for home buyers for 25 years.
I find look past the cosmetic and look at the structure, after that unexpected events do happen , although if you buy right you should have enough for those unexpected events