Five Common Mistakes that Erode Fix-and-Flip Profits

Common Mistakes Eroding Fix-and-Flip Profits

 

Being successful in the house flipping business requires preparation, attention to detail and executing on a well-thought-out plan. Even the simplest of mistakes can end up costing thousands of dollars and destroying fix-and-flip profits. Anticipating setbacks before they become major challenges greatly improves the likelihood of success. Here are five common fix-and-flip mistakes to avoid:

  1. Over-paying for a property

Regardless of whether the property’s selling price seems reasonable, if the purchase exceeds your budget or if the needed repairs are outside your comfort zone, the best advice may be to walk away. In a rising market, the damage from over-paying can sometimes be mitigated by the home’s appreciating value, but over-paying guarantees lesser profits even in a seller’s market.

If you over-paid, avoid the temptation of ratcheting up the scope of the remodel and asking price. It’s a mistake to believe increasing the list price automatically results in greater profits. A home’s selling prices must be determined by market conditions and the prices paid for similar houses in the neighborhood. Hoping to offset over-paying by over-pricing is more likely to result in no buyers and a house that sits on the market. In the end, the price must be dropped anyway to entice buyers. It’s smarter to price correctly from the get-go and minimize holding time.

  1. Under-budgeting for the renovation

Under-estimating the cost of rehabbing is a common mistake. The best way to create a realistic renovation budget is to walk through the property with a general contractor who can help you identify necessary repairs and estimate costs. The budget repair spreadsheet created during the walk through can be used to keep track of the various repair items.

Even before the walk through, if the property is an older house it’s often advisable to invest in a pre-purchase inspection. A professional home inspection more than pays for itself by uncovering hidden defects such as termite damage or a leaky foundation that can cost thousands of dollars to remedy and blow up your repair budget. If the uncovered defects are not enough to sour you on the deal, you can often use the home inspection as a bargaining chip for negotiating a lower purchase price.

A rehab budget should set aside some funds for unanticipated costs. A sudden sharp rise in material prices or a contractor who quits mid-job can quickly put your rehab project off-schedule and over-budget. Experienced rehabbers typically set aside 10% to 15% of the overall budget for unexpected problems encountered while work is underway.

  1. Not having a contingency plan

Real estate ties up large amounts of capital so you should always have a Plan B ready for properties that are slow to sell. A natural disaster or sudden downturn in the economy can make even the most appealing home temporarily unsellable. Plan B strategies may include wholesaling the property, bringing in a partner, or converting it to be a rental. If you choose the rental route, you should decide ahead of time whether you want to hire a property manager or take on the landlord responsibilities yourself.

  1. Over-improving the property

It may be tempting to turn a master bedroom into a master suite or add a screened-in deck, but the truth is that many big upgrades don’t add much to the home’s value and may actually discourage buyers by making the home too expensive for the neighborhood. Many fix-and-flip rookies aren’t sufficiently focused on Return on Investment (ROI) and don’t research which home improvements buyers are willing to pay extra for.

In deciding on upgrades to a property, the most important factors to consider are the current real estate market, the neighborhood and the features that home buyers value most. Your goal should be getting the biggest bang for your investment without over-spending. The local real estate market is evaluated since you will need to do more to make your property stand out in a buyer’s market. The neighborhood must also be considered.  If your rehab is located in an older neighborhood, you don’t want to make the property too expensive or look out-of-place when compared to surrounding homes. According to Zillow, a useful rule of thumb is to aim for a post-renovation home value that is within 10% of the average cost of other homes in the neighborhood.

  1. Not sticking to a schedule

Taking too much time on a rehab project is a sure way to erode profits. If you are like most fix-and-flippers, you borrowed money to finance the project and committed to monthly loan payments. Rehabbers wrack up extra months of interest payments when they allow projects to fall behind schedule. Interest payments are only one of the expenses that accumulate. Other costs such as insurance, real estate taxes, and utilities also begin to pile up when the property sits for too long.

Every rehab project needs a timeline, which should be determined during the walk through and at the same time the budget repair spread sheet is being created. The rehab timeline should consider every aspect of the project, from closing through repair work and the final sales contract. Once work begins, plan on re-visiting the timeline at least weekly and making the necessary adjustments to keep the project on-track.

Rehabbers increase their chances of successful flips when they stick to bargain-priced properties, stay within a budget, make only those renovations that add value and close deals quickly so that capital is continually being reinvested.

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