1. You Pay Too Much
When it comes to finding a property to invest in, you want a property that offers some type of “fix and flip” possibility. While it sounds easy enough, the reality is that finding the perfect property is much like finding a needle in a haystack. Of all the worst things you can do when buying property to repair and re-sell is to overpay.
When you find a property to purchase, you want to make a lower offer than offer more until a deal is reached (if any). Most investors will find these possible flippers through short sales and foreclosures. This may sound like a great deal, but not in every case.
To get the best deal, you want properties that are priced at below market value. Short sales and foreclosure are not always good deals. Therefore, you need to know a good deal about the after-repair market to ensure you’re not paying too much for a property.
There is so much uncertainty surrounding the fix-and-flip market, which is why you need to exercise patience when looking for a property to invest in. When you research the market thoroughly, you’ll know what a reasonable price is and come away with more of a profit after you flip the property.
Of all the mistakes investors need to avoid, this is number one! How much you profit off the flip will determine how much you initially pay to buy the property.
2. Purchase of a Non-Viable Flip
There are several categories that fix-and-flip properties can fall into. The value of necessary repairs and the after-repair value is tied to each one. Another common mistake rookie investors make is the purchase of a non-viable flipper property.
What does this mean? It means there are no real positive advantages of buying them home to flip. There are two ways in which a property can be listed:
A home needs only some exterior work done to approve curb appeal. Unless the house comes from a short sale or foreclosure, the seller is unlikely to offer the property at a deep discount. Any profit is lost through the brokerage commissions.
A home that must have a lot of work done, going beyond minor issues such as replacing plumbing, wiring, roof, foundation, etc.
The best properties to fix-and-flip are ones that don’t have a lot of curb appeal to them, have very little landscaping, very few structural issues and some potentially upgrading issues. These issues can be fixed, and tend to offer the chance for upgrading the property. A rundown property may be the best investment for flippers.
3. Overvaluing The Property’s After-Repair Price
A colossal mistake all investors tend to make is overvaluing a property that’s been fixed up. The process of finding the best fix-and-flip properties can be tedious. When an investor finds a great property to buy in, it’s not hard to get too excited about the profits it can bring in after renovations have been made.
It’s not uncommon for investors to think a home is worth more than it actually is, but even worse when they don’t take into consideration the cost of making the repairs. Overvaluing and underestimating is a double-edged sword, which will impact the investor’s bottom profit line.
There may be much that must be done to the property, such as system upgrades like plumbing or wiring. There could be some serious issues with the home, which cuts down on the possibility of a high profit. Then, you may need to re-landscape the yard and add in some little quirks that will catch would-be buyers’ attention.
What you spend money on could quickly dwarf the profit the home can make you. On top of that, you need to look at the other mitigating factors that influence a home’s value:
- Crime rate
- Neighbors
- School district
Experienced investors will do thorough research before they buy any property. However, they still need to think of how much money they’ll put into the home and if it’s really adding any value to it to generate a profit.
4. Lack of An Accurate Budget
It’s going to cost you money to invest in a fix-and-flip property, and a big mistake you can make is not to have a realistic idea of your budget. You need to consider all the ancillary costs that come with the purchase, such as interest payments, acquisition costs, insurance, taxes, etc. However, you also need to be mindful of the repair costs, making sure to keep your spending under control. Then, you need to consider what your costs will be with marketing the property for resale.
Real estate investors are project managers. There’s so much that goes into fixing and flipping properties. Put together a detailed plan of action covering every facet of the flip. Be sure to include timeframes and costs.
To control the costs, investors will need to convey their ideas clearly to contractors, using pictures if necessary. It’s always a good idea to create an in-depth To-Do list to keep your organized and on track. Have contractors provide you with line-item bids, so you see the breakdown of each project. This provides you with a better understanding of where the money is going and what items you can cross off the list.
5. Failure to Stick to Timeline and Budget
After you have hired your contractors and tradespeople, you may think you can rest and relax and allow them to take over. Don’t do this. This often leads to costly delays. When you hire someone, you need to oversee the work to ensure the timeline and budget stays on track. You also want them to do quality work.
Remember, this is your renovation vision, so you should be ready and available in case there are any questions. If you’re unavailable to answer these questions, then the work becomes stalled, and this could thwart your timeline.
There are a lot of people involved in a fix-and-flip process, and a successful investor will need to be the leader to ensure all the tasks come together in a timely fashion. As a leader, you know everyone is working full-tilt and getting things done quickly and efficiently.
One of the things that can help investors ensure contractors adhere to the timelines is to use incentives and mention possible consequences when that timeline isn’t met. Of course, you must be lenient when things are beyond their control, such as weather. Still, one such incentive you can offer are bonuses, such as giving bonuses to contractors that complete the work before the deadline given.
6. Failure to Have A Backup Plan
After a property has been fixed, it’s time to flip it. However, this may sound easy, but you need to have a contingency plan (or two). After all, the market could turn sour, and the buyers may not be there right now, even if the home is competitively priced. Many novice investors make the mistake of not having a Plan B or Plan C in the event this happens.
If you want to get out from underneath a home that you have repaired but the market isn’t there right now, there are several exit strategies that you can consider such as
- Lease with option to purchase
- Reduced price to sell it quick
- Renting
- Wholesaling it to another investor
It’s important not to get ahead of yourself when it comes to making a profit. Fix-and-flip investors who assume they will have money for another flip may find themselves financially squeezed. Do not buy another property unless you already have enough money to pay for another property or have sold the first property.
7. Not Making the Most of Financing Opportunities
When it comes to buying a property, there are all kinds of financing options out there. However, too often, an investor’s frame of mind is limited to only one or two choices, which limits themselves. The thing to remember as a fixer-and flipper is to flip properties quickly and efficiently. The best financing sources for flippers is fast money.
When it comes to fast cash, you want a process that’s quick and easy. When filling out applications, be sure to include the property’s location, purchase price, repair budget, your net worth, etc. With this information, you’ll be provided with a loan quote that allows you to buy the home and start the renovation process.
It’s certainly no easy feat to flip homes, but knowing what mistakes you need to avoid, the process can be a little less painful and far more profitable.