5 Things To Avoid When Flipping Houses
By JD Esajian on December 21, 2016
Flipping real estate is not as easy as it looks. For all of the success that is available there is another side of the coin. One out of every ten deals will end up being far less profitable than you anticipate. If the problems in the deal are dramatic enough there is a chance that you can even end up taking a loss. As rare as this may be you need to accept that the possibility does exist if you are not careful. All it takes is one negative deal to throw your business completely for a loop and wipe away any positive gains you may have made. Here are five things that can go wrong flipping houses.
- Underestimate Repairs. Flipping houses is all about numbers. The numbers will dictate almost every decision you make in the transaction. It is when you don’t follow the numbers and let your emotions take over that you begin to run into trouble. The most basic formula with house flipping is to add the estimated repairs & carrying costs plus the purchase price and subtract that from your after repair value. The number you are left with is your projected profit. Where many investors go wrong is underestimating the cost of repairs. They either don’t know or accept the scope of the work that is necessary. Every dollar that you are over your estimated repair budget reduces your projected bottom line. This causes you to make uncomfortable decisions that can put you in an even larger hole. You are better off being conservative in your estimates to get a full idea of what the property really is. If the numbers don’t work you should walk away. You can bend these numbers to fit your vision but by doing this you are simply setting yourself up for trouble down the road.
- Overestimate ARV. The other side of the transaction is the estimated after repair value (ARV). This is the number that you anticipate that the property will be worth when you are finished with your repairs and updates. Much like estimating property repairs this number is very subjective. If you look at the high end of the market you may think your home is in line with those prices. If you are on the buying side you may be inclined to look at the other side of the price spectrum. Another issue is not looking at where the market may be headed rather than where it is right now. Things may be different sixty to ninety days down the road when you are finished with the property. You also need to understand that not all repairs hold as much value as you may anticipate. Throwing money at the property does not necessarily give you the return you may expect. You need to do the right work for the property based on the market. If not you may be spending money that you will never recoup.
- Unexpected Issues. In a perfect world everything with the property will go just as you plan. As any rehabber can tell you this rarely ever happens. Even with proper due diligence it is possible that something slips through the cracks. Issues with the foundation and roof are costly and time consuming fixes that will throw the budget out of whack. There may also be unexpected issues with the title, zoning, insurance or other problems with the town. Depending on how quickly you act when they are thrown at you often determines just how crippling they are. There are times when you have to choose between only bad options. Instead of trying to secure a profit you simply have to minimize your losses and move on.
- Listing Too High. It is human nature as a rehabber to try to list for the highest possible price. Sometimes this works out great and you maximize your return. Other times listing too high can put the process to a grinding halt. By listing too high you can reduce most of the initial buzz that is often generated. Without a strong initial buzz for the property the demand is reduced which eliminates the number of interested buyers. The longer the property sits on the market the less valuable it is in the eyes of buyers and real estate agents. You will start to see a greater number of lowball offers. Eventually you will have to consider a price reduction which will net you a lower amount than if you listed the property at the right price to begin with.
- Lengthy Timeframe. Every day that you own the property costs you money. Most rehab projects are purchased using high interest rate hard or private money loans. While the interest payments aren’t crippling they do add up over time. In addition to loan repayments you also need to account for insurance, property taxes and utilities. Holding the property for an extra month or two can have a dramatic impact on the bottom line. You also need to think about opportunity lost. By holding the property longer you may miss out on other deals that come your way. Instead of being able to act you need to sell the property you are currently working on first. Missing out on the next deal can hurt greater than anything you lose on this one.
You need to constantly be on your toes with every rehab property you get involved with. The minute you let your guard down bad things can happen.