For the past ten to fifteen years, house flipping has become more attractive to skilled investors as an option to other types of financial growth. Profitability is quite possible in house flipping, particularly if the investment team is willing to support renovations with some sweat equity.
HomeVestors of America, Inc. has been flipping houses since the 1980’s and franchises operations throughout the United States based upon their formula for success. Some of the lessons learned early by experts at HomeVestors include common mistakes made by independent house flippers everywhere.
Five of the top house flipping mistakes that savvy investors do not make are below:
Not Respecting the Dollars and Cents
Real estate is costly. Whether buying just a family home or going into the business of flipping houses as livelihood, the risk of real estate is always inherent.
Flipping properties is simple math based upon the cost of acquisition, plus renovations expense, plus interest and taxes, plus profit, which together should equal a marketable sales price. This sounds as simple as numbers put together on paper. But, when you have risked your life savings or indebted yourself in other ways, you are gambling with high risk stakes. Nobody needs that much financial stress added to the high labor stress of property renovations for profit.
To alleviate stress and risk, either invest using money that will not affect your standard of living if lost, use money from investors, or take the time to look for the right property at the right price that will keep you within a strict budget. Getting in over your head can cost too much and that is a risk not worth taking.
When estimating costs, double your expense expectations. This will allow cushion within your budget for those inevitable problems associated with property renovations.
Build your house flipping empire slowly, cautiously and intelligently. A slow build is always better than a quick downward spiral.
Not Respecting Father Time
Particularly when new to flipping houses, investors tend to have high expectations for the timing of return on investment. Once finding the right house to renovate and turn over, investors become both excited and blinded by financial potential. The end goal tends to become urgently pursued as a dreamed of windfall can be seen on the horizon.
It can be difficult to keep one’s eyes on the project at hand and all associated needs of the renovation and sale process. Outside parties, such as contractors, real estate agents, inspectors and materials providers, are not on your timeline. They have their own priorities and work accordingly. House flipping is a process wherein you want to control all parameters, but you actually have very little control.
A good rule of thumb is to double your time expectation, just as you double your expense budgeting. Prepare for and expect a lengthier return on your flip and you will be less stressed and more gratified when things do fall into place.
Overestimating Skill Sets
Sweat equity is the name of the game, when it comes to house flipping. This is where the most profit is gained and savings experienced, by an investor who can roll up shirtsleeves and do much of the work. If you intend to flip houses and jump in without the talent for painting, drywalling, roofing, wiring, flooring and plumbing, you will have to pay people like Precision Roofing Inc to do these things for you. If you pay the wrong people, you may even have to pay more to fix what was mismanaged or incorrectly done in the first place. Not enough can be said for factoring in for labor where it is needed and ensuring the investment team can get as much of the work done as possible on the sweat of their own brows, versus cash from pockets.
Not Knowing the Business
In order to gain optimum return on your investment in house flipping, and to not lose your shirt, you simply must know what the business of flipping entails. The right property in the right location must be selected based upon many market factors. The house must have real profit potential based upon price, needs, attributes and the real estate climate. You must know what to renovate and what to leave alone, as well as where to upgrade and where to pinch pennies.
Beyond the physical structure and market, there are inspections, permits, taxes and other red tape through which to navigate. In order to most successfully and profitably flip real estate, form a team behind you of experts you can trust for the right advice with discerning eyes. If you do not know how to do something or what an answer may be, ask the right people and do not risk speculation. Speculation is expensive.
Not Considering Exit Options
Most new investors enter the house flipping world thinking they will clean up financially on a quick sale. Unfortunately, the world of real estate is not so reliable. Smart investors always have a Plan B.
Renting your finished renovation is often a great option for a property that does not sell. Consider refinancing any original loan to a better mortgage term and find a great tenant to pay down the note. This buys time until the real estate market improves or can build wealth over the long term as an option to quick return from a sale.
Regardless of how many properties you intend to flip over time as part of your own financial growth strategy, knowing how to avoid these common mistakes will ensure greater potential for success. After all, learning from the expense and headaches of others is much easier than paying for the same experiences, yourself.