9 Mistakes to Avoid Flipping Houses
Flipping houses is one strategy of real estate investing that is increasingly gaining popularity. The entire process just looks simple. What is little known to new real estate investors is that flipping a house successfully is much more complicated.
House flipping is not just about buying a house below the market value, rehabilitating it, and selling it at a profit.
The business goes all the way from creating a business plan, registering your business, hiring the right professionals, sourcing for financing, searching for properties to skillfully negotiating for the best deals.
The process is involving and mistakes can happen right from buying a property to selling it. Just like any other business, things don’t always go as planned. The biggest challenge is that one mistake can have a substantial impact on your profits or even on your business in general.
The good thing is that these mistakes can easily be avoided or reduced to a minimum. As a real estate investor, before risking your money and time in flipping houses, ensure you have done enough research. You can get the right information by reading the best books on house flipping.
Alternatively, search the internet and learn what other investors have gone through. With the right information and knowledge, you are cushioned from simple mistakes. Here are the mistakes you should avoid when flipping houses…
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Avoid These 9 House Flipping Mistakes
#1: Starting operations without a business plan
This is like building a house without an architectural design. You don’t have a clue how it will look like until it’s done. Starting a house flipping business without a plan is investing blindly and it can be catastrophic.
A business plan is a guide. It outlines all aspects of the investment you are about to make. It details the risks involved, the rewards of the project, and the expected return on investment. A working business plan has the estimated potential costs that will be incurred and the timeline within which the project will run.
Without a good business plan, you are likely to overspend or take long to finish a project. These will increase your expenses, leading to minimum profits. Therefore, before getting into any house flipping investment create a well-detailed business plan to give you a clear view of your goals, estimated costs, and projected returns.
#2: Overpaying the acquisition price
This is a common mistake by new investors. You are eager to start flipping. You end up buying a property for a price that will yield, small profit margins. This is beginning your house flipping project on a thorny foundation.
Before making any purchase, you should first understand the area you are flipping in. Find from a real estate agent the range of house prices in that area.
Then apply the 70% rule. Take the estimated after repair value (ARV) of the house you are about to buy, multiply by 0.7 and then take away the expected repair costs. The value should be your purchase price.
This formula is a general recommendation that does not have to be adhered to strictly. However, it ensures you have some money to pay other costs and remain with a reasonable profit.
#3: Failure to plan your finances
Money is the most crucial factor in house flipping. Without a proper financial plan, you are likely to run into a deficit before completing your project. The project must be completed for you to enjoy your fruits. If not, it will be a wasted investment without any returns.
Learn to assess your financial capability. Create a detailed budget of all the costs you are likely to incur. It is crucial to stick to your budget. Begin from the buying costs, repair costs, marketing costs, and selling costs. It is advisable to ensure you have the funds you need to finish the project and additional buffer funds for unexpected costs.
In a case where you don’t have all the money you, need you can source for financing. Research the available financing options and choose the one that can suit your needs but with the lowest interest rates. Be careful not to borrow more than you need.
#4: Lack of knowledge
Most novice investors get into flipping houses without prior knowledge. They end up making many mistakes which lead to losses. Real estate investment knowledge is everything. It is the pillar that holds your success as an investor.
To succeed in flipping houses, you need information and knowledge on; the best places to find houses and flip in, negotiating the right offers, working with a professional team, available financing options, estimating your costs, and finding highly profitable deals.
You also need to be aware of the laws that might affect the property to avoid lawsuits. Knowing when to quit when a project is not going well to avoid huge losses, is knowledge at its best.
#5: Cost underestimation
Underrating your expenses can be expensive in the long run. This happens mostly when you have either overspent on your rehabilitation costs or you dint budget for other hidden costs like holding costs, taxes, and other fees. This will, minimize your profits.
As a house flipping investor, this is one section you should be detail-oriented. When budgeting for your expenses, ensure all possible costs are included with additional funds for unforeseen expenses. This will aid you to accurately determine the profitability of the deal before investing in it.
A professional inspection is necessary to estimate the major repairs you will have to do. Research on the latest trends and technology you need to give your house an appealing finish. Be careful not to over rehabilitate. Apart from remaining in line with your budget consider your target market and the neighborhood you are flipping in.
#6: Working without a professional team
It is common to find many disorganized house flippers. This is because they don’t have a team to walk with them through the flipping process. Without the necessary professional help, many things can go wrong. For instance, you might forget to acquire the required permits, which can lead to laws suits.
It is, therefore, crucial to hire a professional team to work with. You can begin with those you need most like a contractor, a real estate agent, and an attorney. As the business grows you can hire the rest. To get the right team it is advisable to use referrals and get multiple bids to choose the best.
#7: Poor Market Analysis
If you don’t understand your market in terms of pricing, what your targeted buyers are looking for, and the existing market trends, your house will stay in the market for long. Apart from having to put up with increasing carrying costs, your reputation will also be at stake.
Time management in house flipping is very crucial. Ensure you sell your house quickly to reduce costs and increase your profit margins. You can achieve this by engaging a real estate agent to market your house. Moreover, learn to build a network of potential buyers early enough and ensure you do the right pricing.
#8: Engaging in big projects
It is good to be ambitious but taking up a big project as a new investor is too risky and costly. A big project is starting to flip big homes or even multiple houses at the same time.
Start at a slow pace with properties that don’t require a lot of repairs while aiming at increasing your profits with time. Grow gradually and advance to little complicated projects as you establish your house flipping business.
#9: Lacking an exit strategy
It is advisable to have a backup plan when investing in house flipping. Without an exit plan, you may have limited options when your profit margins start narrowing. Always have an exit strategy. You can lease the property, wholesale it to another investor or rent it.
The strategy depends on the price at which you have listed your home. Get the advice of a real estate agent to determine the best price for it to sell quickly and at a profit.
It takes time to excel in house flipping. Equip yourself with relevant knowledge and skills before investing. Follow the right procedures of legally establishing your business. Prepare your finances and get a good team. Have a marketing strategy that will yield good returns. In case things don’t go as planned, always have a profitable exit plan.
Be great today,
Nick Foy, Founder | Under30wealth.com
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