Flipping Real Estate | 4 Rookie Mistakes You Should ALWAYS Avoid
Flipping Real Estate can be a profitable venture, but mistakes can wind up being costly.
An exciting field that many young professionals are joining is process of flipping real estate. While house flipping can certainly be profitable, if done without the right know-how and guidance, you could end up in a heap of trouble, and debt, with no way out.
To avoid making these beginner’s mistakes, you must learn about the problems that others have faced. Below are four of the most common mistakes that rookies in flipping real estate make.
Getting Your Heart Set On One Property
A large part of your job as a house flipper is choosing the right house for your project. The house might be in the right area, carry no major problems and has a lot of potential. These are all great aspects, but if the seller isn’t willing to negotiate down so that the property is within your price range, you need to be willing to move on.
The 70% Rule
The mistake that many beginners make, is that they let emotion get in the way and end up bending to the seller’s will. While you might not always get the property for quite as low as you had originally hoped, you must make sure to not exceed 70% of the ARV, or “after repair value” of the property. If you spend more than this amount, you will most likely not profit at all from the house, and could even wind up in the red.
If you do the math and determine in advance what 70% of the ARV will be, you will be able to set a MAO, or “maximum allowable offer”, that you cannot surpass.
Just make sure you have an accurate ARV projection. While using online sources can be a good start, you’ll want to make sure you get a final ARV estimate from a reputable real estate broker before making any decisions.
Moreover, don’t be afraid to forget about a particular property and to move on. There are always more fish in the sea. Don’t blow your time and money haggling for a house that won’t make you a profit in the long run.
Underestimating The Cost Of Renovations
In many reality shows about flipping real estate, the stars will walk through a property, determining how much each room will cost with no more than a quick glance. The renovations will end up costing them exactly what they had originally expected and everything works out perfectly.
Unfortunately, that’s not how it works in the real world. For the average house flipper, and even more so for a beginner, getting estimates from a professional contractor is essential before starting a project. If at all possible, you might even want to consider getting it checked out before you purchase the property.
Even after these estimates, the unpredictable happens and unforeseen expenses arise. Always leave a little room in your budget just incase something unexpected occurs. If everything goes smoothly, this padding would just simply turn into some extra profit. It’s better to be safe than sorry when house flipping.
Doing Everything Yourself When Flipping Real Estate
When many up-and-comers fail to realize is that house flipping is an incredibly intricate and daunting task to do alone. They often have an image of themselves taking a sledgehammer, knocking down some walls, getting rid of some plaster, slapping on a fresh coat of paint, and selling the property, all to the sound of some 80’s montage music.
However, real house flipping isn’t that easy. Unless you are a professional, you’ll want to hire contractors to do most of the rehab for you. The list of different skills needed to rehab may include, but are not limited to: plumbing, electrical, engineering, architecture, masonry and carpentry.
In addition to the base rehab, you also might want to consult an interior decorator to help you design—especially for the kitchen and bathrooms. If you plan to stage your property, then this rule applies twofold.
In addition to the team you’ll want to build when renovating, you are going to want to have a reliable real estate agent under your belt. Not only can they help you find and sell your property, they can provide you will essential guidance along the way.
If you don’t build a team, you could find yourself over budget, holding onto a half-gutted house that is worth less what you bought it for.
Holding Onto The Property For Too Long
While renovations do take time, they can often be costly. Each month you will be responsible for paying for things like homeowner’s insurance, utility bills, and maintenance, like lawn upkeep, or snow removal in the winter.
Essentially what this means is, for each month you hold onto a property, the less profit you will make. You might even reach a point where you wind up losing money on the entire house flip.
An easy way to avoid this is by creating a timeline. You should meet with the general contractor and make a schedule outlining when each individual renovation should be finished by. Then, check up with him frequently to make sure everything is moving along as planned. Don’t be afraid to remind contractors of their contractual obligations to complete their assignments on time. Remember, they are working for you and not the other way around.
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