House flipping has become a popular way to leverage the hot real estate market and make some extra money. In fact, many people are doing it full-time as it is so lucrative. The concept is very simple. Take an old house, fix it up and sell it for a profit.
It’s easier said than done, of course. There are some people that have it down to a science and can replicate their success over and over again. The thing is that they have made mistakes in the past and then learned from them. This is how they have a system that consistently works.
In this article, we will go over what many of those mistakes are so you can avoid them yourself.
1 – Only doing cosmetic changes
Some house flippers are only concerned with how the house looks. They put the minimum amount of work and money into the project to get the house where it looks like it is modern and updated.
This is a big mistake, however, as buyers that bring a competent home inspector will quickly realize that they are dealing with faulty plumbing and outdated electrical systems. They will either not buy the house or will insist on a lower price to compensate for the expense they will have to pay to update these major things.
This is why it is going to make you more money later to just fix these issues from the beginning. Start with replacing old fuse boxes or even old circuit breakers with Federal Pacific breakers that can handle the demands of a modern household.
Then, make sure the plumbing actually works and that the old lead pipes are converted into wider PVC pipes that are less likely to drain slowly or get clogged.
2 – Underestimating the costs
The key to flipping houses for a profit is to keep the expenses low while also making sure that you are doing the upgrades necessary. The biggest barrier to that is not understanding the costs you are about to face. You’ll need to make sure that you’re able to secure funding from your bank to recoup the costs that it took to fix the house plus all the other expenses. When you underestimate the costs, then it becomes very difficult to sell for a profit.
There will be repairs that will have to be outsourced either because the time it would take for you to do it yourself would prevent you from selling it quickly or because of your lack of skill. Have some solid numbers handy when making your calculations so you know what you are going to actually spend.
The other issue is that you may also be getting the wrong type of mortgage or bank loan which has limited deductions. If you use a Home Equity Line of Credit, the interest is deductible, but the principle, taxes, and insurance are not.
You may be tempted to pay cash since you aren’t dealing with interest, however, if you get the numbers wrong, you may not recoup your cash.
3 – Underestimating the time
Timing is everything when it comes to house flipping successfully. You will need to have a lot of time to be able to fix and sell the house quickly. If you are paying interest on a loan for the mortgage and renovations then the faster the house sells the more profit you’ll make.
Make sure to understand how much work it is going to take and how long it will take to do it. If you have the skills then the more you do yourself will save lots of money, but it might cancel out if you can only work a few hours a week due to work and family constraints.
Make sure to also factor in the time it will take to get inspections done and permits pulled for the work that needs to be completed. This can take at least a few weeks but in some towns and counties, it can take months.
Then, there is the time it takes to list the house and actually go through the process of selling it. It can take a while for the first offer to get made and then longer once the offer is accepted and papers get passed.
4 – You got impatient
Of course, you want to be able to get things moving quickly so you can make money and move on to the next project. However, you also can’t rush things. When you rush things, mistakes get made and they can be quite costly.
How patient you are will help determine if you’re an actual professional or a novice that is going to make a costly mistake. Being impatient could cause you to hire the wrong contractor simply because you don’t want to waste time vetting one. Or, you could skip some essential upgrades to get the house on the market sooner to then have lower than expected offers since the house isn’t up to snuff.
Being patient allows you to do things the right way the first time and make sure that it progresses on the proper timetable and not in a rush.
5 – You misunderstood the market
The biggest mistake you can make is misjudging the market. It takes a keen eye to spot opportunities where you can actually buy low and sell high. Most of the time you are going to be working on tight margins. This means that knowing how much you can actually get for the property is essential to be able to make money.
Put the time in for proper research and talk to a few realtors before you make any kind of decision. You can pay for a market analysis that will help you determine where the best opportunities are or if what you thought was a good one is actually a mistake. It is an expense that can end up saving you a lot more money further down the line and prevent a big mistake from happening.