Common Mistakes When Fixing and Flipping a Houe
Fixing and flipping a house can be a profitable venture. Our guide will help you avoid common mistakes that many people make.
The real estate market is booming. Even better, experts predict that it will stay strong in the foreseeable future. For investors with an interest in fixing and flipping homes, the news couldn’t be better.
Even in the best of markets, however, poor management of a fix and flip project can lead to headaches, loss of money, and terrible returns on investment. Here are five of the most common mistakes flippers make and how you can avoid them.
1. Not Starting With an Exit Strategy
One of the biggest secrets to a successful fix and flip project is to start with the end in mind. This means that before you begin shopping for property, you should:
- Understand the local market
- Determine whether you’re flipping to sell or to create a rental property
- Have a clear timeline for the project
- Have a clear target for the final sale value of the property based on average local property values
Why This Information Matters
No property exists in a vacuum. Potential buyers and renters will know what local properties are worth and they’ll be looking to get the biggest bang for their buck.
Their realtors will help them compare and contrast local options, so buyers will want a home with a certain level of standard amenities. At the same time, they’re likely to be skittish about buying the most expensive home in the neighborhood.
This means that when you flip a property, you need to hit the sweet spot where:
- The property is competitive on all the points that matter in that specific market
- The property isn’t too expensive or too over-done for the local market
- The final property design is tailored to the target audience, be it renters or buyers
Nailing down these details in advance enables you to strategically invest in the renovations that will give you the biggest return on your investment without wasting money on upgrades that don’t matter and might even hurt your cause. It also creates a foundation on which to base other decisions you’ll make along the way.
If you start without an exit plan, you’re shooting in the dark and can’t make the best choices.
2. Not Doing the Math
Some house problems are notoriously pricey to fix. At least 35 percent of homeowners report that they would rather sell their homes and move than deal with a big budget project such as a new roof, repairing a cracked foundation, or mold remediation.
While these types of problems can make it easy to pick up a property for cheap, they can also lead you to lose money if you underestimate how much they will cost to fix and overestimate how much you’ll be able to get for the home post-flip.
To complicate matters, the cost of standard construction materials is skyrocketing in many areas of the country. Over the last year or so:
- The cost of insulation has gone up by five percent
- The cost of hardwood lumber has gone up by 27 percent
- The cost of plywood has gone up by 54 percent
- The cost of softwood lumber has gone up by 83 percent
- Demand for skilled construction workers has increased
Given that competition among buyers has also driven up the average sale price of homes, this isn’t necessarily a budget breaker. But to fix and flip homes profitably, you need to do some hard math on:
- How much a house costs
- What kind of work the home needs
- What that work will likely cost given current labor and material prices
- How much you can expect to sell the home for after renovation
Don’t take the risk of eye-balling a project. When necessary, invest in having the home inspected by one or more experts familiar with the issues at hand. This will give you solid projections from which to work.
If the estimates come in decidedly too high, it’s critical that you pass on the property, however appealing it might otherwise be. The profit simply won’t be there.
3. Not Ensuring You Have Enough Money and Time for Fixing and Flipping
Few investors have the cash on hand to buy, fix, and flip a property without any fix and flip loans. There’s nothing wrong with this, of course. Most businesses use loans to get started and then to grow.
But problems can arise when investors take out loans that:
- Are too small to cover all of the costs they will face from purchase to resale
- Require repayment before the renovation and resale are complete
- Leave no room for mid-renovation surprises or construction delays
The simple truth is that while budgets and schedules are critical, real life happens. Walls come down to reveal ugly surprises. Construction materials, appliances, and fixtures fail to arrive on time or arrive damaged and must be returned and replaced.
If your budget or your loan terms do not allow for these unavoidable hiccups, you can find yourself in a bind. If you haven’t completed your project and cannot make payments when your loan comes due:
- You may incur fees and fines
- You may not have the money you need to finish the project and sell the home
- You may lose clout with fix and flip lenders, compromising your ability to get good loan terms in the future
Avoid this problem by adding a small “emergency” percentage, such as 10 percent, to the amount you expect to need when you take out a loan. Choose a loan duration that is longer than you think you’ll need, as well. This ensures that when the unexpected happens, it doesn’t ruin your plans.
4. Not Sticking to Scope
Another fatal mistake investors make when it comes to fix and flip properties is not sticking to scope. The profitability of any given investment property lies with:
- Buying it for an affordable price
- Putting a set amount of money into renovations
- Reselling it for an amount larger than the total amount one spent on purchase and renovation
When you establish your exit plan, you estimate these numbers within fairly narrow ranges. As long as you stay within those ranges, you can count on turning a profit.
But once you begin working on a home, it can be tempting to push the envelope. Often, these temptations start out small.
You see a great deal on a small kitchen upgrade and decide to throw it into the plan last minute. The bathroom renovation feels lackluster so you tack on an extra splurge or two to punch it up. Or perhaps the yard just has so much potential that you feel as though you have to add a deck instead of just the patio you outlined in your initial plans.
Whatever the breach of scope, the result tends to be the same: you spend more than you planned but the expanded project doesn’t carry a high enough return on investment to make up for it. Ultimately, you see less profit than you’d budgeted for when the home sells.
Avoid this mistake by working with realtors or other local professionals to identify and prioritize what really matters before you begin. Then stick to the plan.
5. Not Hiring the Right Professionals
It’s not uncommon for property flippers to pride themselves on their DIY skills, and with good reason. The ability to do work yourself can play a key role in keeping costs down and maximizing profit. But not every job should be done by flippers.
Some jobs, such as electrical work and plumbing, are best left to the professionals. There are many reasons for this.
- Simple and common plumbing mistakes can lead to damaging leaks and costly repairs
- Performing work yourself can limit your homeowner’s insurance coverage should anything go wrong
- Building codes can vary by municipality and if your building isn’t done to code, you may have trouble selling it
- Doing work yourself places all the liability on you while hiring a third party provides additional insurance and guarantees should something go wrong
- No one can be an expert in everything and trying to do it all yourself can lead to delays and extra costs
- Specialty equipment needed to do a job right can be more expensive than it’s worth
When flipping a home, it’s important to make the distinction between jobs you can and should do yourself and jobs best left to certified and insured professionals. When in doubt, hire a professional and give yourself the security that comes with that.
Trying to do too much on your own almost always ends up costing more in the long run.
Fix and Flip With Flair
Fixing and flipping homes can be profitable and rewarding, especially when you avoid the pitfalls and get reliable returns on your investment. Learn more about finding the perfect funding for your projects by exploring our dedicated fix and flip loans today.