It was easy up to a couple of years ago, when insanely rising home prices made any “buy and sell fast” technique a winner. Often investors made money even before they closed on the purchase of the house, since many found the prices pushing insanely up, no matter what rehab or fixing needed to be done. What they didn’t know was that they were buying into bad deals only to be saved by skyrocketing prices.
In 2007 the other shoe dropped, and thousands of investors discovered the pitfalls in house flipping. Flipping houses is still an incredibly profitable investment. However, if you make mistakes, you can lose your shirt. Now, you have to know what you are doing and studiously avoid the pitfalls. Here is a list of what you must not do when house flipping:
1) BUY WRONG – Two years ago it didn’t matter what you bought a property for – appreciation would save you. Now you need to buy a property on its own merits. If you are flipping a house, you need to buy it low enough so that you can make the repairs, pay for all of your carrying costs like taxes, utilities and especially loan payments while you do the work, as well as closing costs for when you buy and sell the property. That means buying at a steep discount – 30% to 40% or less of what the property’s After Repair Value (ARV) MINUS the costs to repair.
2) DON’T BUDGET FOR ALL THE COSTS – Like I mentioned before, there are lots of costs besides those for repairs. The two biggest budget busters are loan payments and advertising/closing costs for the buying and selling. These costs quickly add up into the thousands, and will eat into your pocketbook. It can even turn your money winner into a money loser if you don’t watch it.
3) DON’T KNOW THE REPAIR COSTS BEFORE YOU BUY – Just because a house can be had cheap doesn’t mean it is a good deal. Make sure the costs to repair make sense.
4) BITE OFF MORE THAN YOU CAN CHEW – Some houses needing rehab only need a bit – carpet, paint, new appliances, some landscaping. Others need far more involved repairs like a new roof or electrical service. Some need mold remediation or foundation repair. Don’t make sure you understand what is involved and you can end up blowing your budget.
5) UNDERESTIMATE THE TIME TO REHAB – I’ve done some rehabs in two weeks. Some have taken nine months. If you think weeks and it becomes months your costs skyrocket.
6) DON’T HAVE AN ‘END STRATEGY’ – who is going to buy the house? A landlord to use as a rental? A first time homebuyer? An up-scale home owner? Each buyer is looking for different things in a house. Putting in expensive granite counters and Italian tile work is a profit-busting loser for most rental properties, but minimal items for upscale owners. If you don’t know the type of person who will buy your house, you are going down a nowhere road.
7) BE GREEDY – Many people cry that houses aren’t selling. They are, but only smart (or desperate) sellers are selling their proeprties. Most savvy flippers don’t sell their finished homes at top price right now, there is too much risk that it will languish on the market leaving you with months of money sapping mortgage payments. Smart investors sell at a discount of full price, leaving their property by far the best house at their price – guaranteeing it will be seen and sold quickly.
Flipping is still insanely profitable, but it is no longer something you can do without a good approach to avoid the pitfalls of the businees. Stay away from the holes in the road, and it will be smooth driving.