A large segment of today’s housing market is fueled by real estate investors seeking to turn a fixer upper into a nice, tidy profit. If you manage to avoid the common rehab pitfalls, you can turn a profit too! But know, mistakes are not made by properties. Mistakes, most often, are made by novice investors and the assumptions they employ on their way to becoming a seasoned investor.
The good news is that the most common mistakes investors make are entirely preventable…if you do these seven things:
Underestimating the time, hard costs and the amount of work involved is one of the surest ways to drain the profitability of your flip. You estimate four months of work – it takes six. You estimate for some new shingles – you need a new roof. You estimate your property will sell in four weeks – it sits unsold for three months. In short, each inaccurate estimate makes a direct impact on your bottom line.
Drywall, flooring, windows and landscaping aren’t the only costs that will go into your flip. To turn a profit, you will need to anticipate all the other “soft” costs you’ll incur including: appraisals, closing costs, building permits, inspection fees, realtor costs, property taxes and utilities, as well as interest from the real estate investment loan.
It’s easy to fall into the trap of thinking: “those will be covered when I sell”. But that’s just another way of saying: “it’ll come out of my profits.” Wise investors anticipate those costs up front and build them into their overall budget.
Unusual as it may seem, some flippers try to save money by not calling in an appraiser or inspector for a “second eyes” analysis. But the truth is that avoiding a $200 inspection could cost you thousands in undetected problems.
Others take on tasks like drywall, tiling, or even selling on their own. While this might seem like a sound idea, it could be a huge, costly mistake. Why? A deadline-driven contractor, might finish a job in two weeks; meanwhile you might let it linger for two months if you take on the task yourself. Furthermore, if you are trying to avoid using a realtor in order to cut out commission costs, first consider how a good realtor might help you sell faster, for more money, and with fewer headaches.
The dream of every flipper is to buy the worst house in a great neighborhood, and increase its value by rehabbing it.
For novices, flippers on tight budgets, and flippers in tight markets, there’s a temptation to go with the cheapest house available. Unfortunately, these homes are usually surrounded by eyesores, abandoned properties, or sub-standard housing. Taking on a flip just because it’s cheap could make you the owner of the nicest home in a terrible neighborhood…that never sells.
A moment ago, we talked about calling in pros when needed. It’s helpful to have a seasoned realtor you can tap for advice — especially when it comes to estimating what your property will go for.
For example, you might estimate that selling price of $495K, when its real market value is $450K. You’ve only overestimated it by 10% — but that $45K might represent a third to a half of your anticipated profit.
There are tons of TV shows that portray flipping homes in a misleading light. Sure, in some episodes things go wrong and the flipper loses money. But the most misleading image they convey is that it’s all wrapped up and done in just one hour. That’s the equivalent of watching Sylvester Stallone from the “Rocky” movie series, prepare for a championship fight by working out for just three minutes! In real life, it just doesn’t happen that way.
Novice flippers may not truly appreciate the fact that a typical flip involves months of work, coordination, scheduling — and headaches. Enthusiasm fades. Stress builds. And if you’re not prepared mentally, it can quickly sour you on the business of flipping forever.
This goes hand-in-hand with underestimating the scope of your project. When you underestimate, you not only impact your profits; you also run the risk of running out of money. In that case, your home could sit half-finished until you find or scrape together the funds you need to proceed.
Typically, you should count on your total costs (including repairs) being up to 70% of the ARV (After-Repair Value) of your home. If you pay more than that, your margins shrink while your risks increase.
Avoiding the mistakes discussed above is not possible without first owning a rehab property. With inventory across the U.S. at all time lows, we’re happy to help you find your next investment property. Use this free, downloadable guide with tips and tricks we’ve learned from our combined experience flipping over 2,500 properties ourselves.
We hope you’ll benefit from hearing about others’ missteps. Residential Capital Partners is here to help you succeed. And as experts, we want to share our knowledge and help you realize a maximum return on your hard work and investment.