The best way to flip a house and avoid losing money, is to identify a potential bad house flip deal before it happens. Â Here are 7 early warning signs that the deal on the table is one to walk away from.
1) Â The ARV (after repair value) of the house was determined solely through online research
I call this type of scenario aÂ Â DEARÂ - also known as Drop Everything and Run! Â Honestly, trying to gauge the after repair value of a home solely through using online tools and websitesÂ is Â a sure fire way to set yourself up for disaster.
Now don't get me wrong, sites such as Movoto and ZillowÂ are fantastic places to start your research - but not the right place to end it. Â To really get a good grasp on how much a house will be worth after it has been renovated, you need to meet and speak with a local expert real estate agent. Â At the end of the day, a real estate agent who really knows your area will be your best bet at determining an accurate ARV.
2) Â Using "eraser math" when figuring your 70% Rule
The 70% Rule can help you make a lot of money, unless you start using the eraser on your pencil.
What gets some people into trouble is that they get excited about a house flip, and then try to make the numbers work by adjusting one number here and another number there. Â You can use the 70% Â Rule to determine how much you can spend on renovations and to figure out the maximum allowed offer on a property.
However you will get yourself into a bad deal if you try flexing the 70% Rule, so that the numbers "look good" on paper. Â Said another way, trust the formula instead of overly ambitious emotions. Â This is especially true for house flipping beginners.
3) Â You enter a deal without an exit strategy
Investing in real estate can be a fickle venture. Â If you purchase homes to flip without formulating at least one or two exit strategies, it will come back to nip you in the butt.
Typical exit strategies I use when a deal is not proceeding according to plan include:
- The lease option
- Wholesale to another investor
If you cannot create an exit strategy for a potential house flip, then I recommend not moving forward with the deal.
4) Â Entering a deal without a house flipping TEAM
In my experience, flipping a house is a team effort. Â Sure it is possible to go it alone, but in my opinion going it alone is really not the best way to flip a house. Â Not having a team on your side may increase your odds of failure - especially if you are brand new in the industry.
I recommend spending at least 6 months intentionally networking and establishing mutually beneficial relationships with key house flip team members. Â Get to know, like and trust:
- Real estate attorneys
- Certified public accountants
- General contractors
- Real estate agents
5) Â You've put your life savings on the line
There are plenty of stories about folks who have risked it all and come out on top-but do you really want to do that to yourself? Â Can you handle the stress? Â I know I can't...
That's why I invest in properties using OPM - short for "other people's money." Â What I recommend you do is talk to people at REIA meetings, go to networking groups and ultimately form relationships with people who are looking to invest. Â Don't expect people to simply hand over their hard earned money, but if you can present a good deal it can be a win-win for all involved.
This way you don't put your retirement or your child's education on the line.
6) Â Managing the rehab on your own, when you have no clue what you are doing
This goes back to #4 - establishing a house flipping TEAM.
Just because you may live in a house, doesn't mean that you know how to renovate one. Â If you are not proficient in construction, then you not only risk losing lots of money during the rehab process, you also risk not renovating the home properly. Â This can cause major issues down the line for the future homeowner.
Fixing and flipping does not mean slapping a fresh coat of paint on the house and then selling it for profit. Â If you do not know how to renovate an entire home up to code, then find someone who does. Â There are plenty of talented contractors out there who will work with you - just have to find and meet them.
7) Â Don't move forward if you are overwhelmed with FEAR
I talk a lot about overcoming fear in real estate investing. Â However if you are about to purchase a house to flip and you feel sick to your stomach fearful, then something is not right.
There is a difference between overcoming fear and simply ignoring it.
Overcoming fear is done during the months prior to purchasing a house to flip. Â You work on your mental game by reading books like Think and Grow Rich, and then acting upon theÂ fear conqueringÂ advice you are reading. Â This way you instinctively know when the time is right for you to make the leap and purchase a home. Â Butterflies are good - trembling knees are not.
If your knees are trembling and you feel like you are about to throw up, then simply acknowledge theÂ possibilityÂ that you are in over your head. Â Back away from the deal and spend a little time working on your inner game.
You will know when the time is right for you.
See you at the top!