It’s no secret that flipping properties can yield some pretty impressive profits. Perhaps you’ve seen television shows, such as the popular “Flip or Flop” on HGTV, where the investors make flipping a property and making tens of thousands of dollars in profits look easy.
Unfortunately, successfully flipping a property is much easier said than done. And if you’re thinking about throwing your hat into the house-flipping ring, there are some vital mistakes you’ll want to know how to avoid before you even get started.
Paying Too Much
One of the biggest mistakes first-time home flippers make is that of paying way too much for the property to begin with. This is where it takes a great deal of foresight, planning, and research to figure out exactly how much you’re going to spend on rehab costs, how much you can reasonably sell the home for, and how much you’ll need to purchase it for in order to make a profit.
For example, getting a $200,000 house for $150,000 on a foreclosure may sound like a great deal, but if you need to put in $30,000 of renovations, you’re probably not going to be making a profit when all is said and done. After all, you need to factor in holding and closing costs as well.
Failing to Look at Comps
Another mistake you’ll want to avoid when attempting your first real estate flip is failing to look at neighborhood comps (comparison prices). Often times, neighborhood comps can be used to give you an idea of what the scope of your renovations and your budget should be.
For instance, if the majority of the homes in the neighborhood are selling for around $200,000, you don’t want to spend too much money on top-of-the-line appliances and additions you’d find in a $500,000 home. You’re not going to get a return on those kinds of investments. Instead, keep your renovations in-line with what’s going on in the rest of the neighborhood.
Lack of Planning
If you want to make a profit on your real estate flip, lots and lots of planning is key. You can’t just make estimates and best-guesses of how much you’re going to spend on your renovations. Instead, you need keep detailed spreadsheets of your budget, including how much you planned on spending for each project and how much each project actually ended up costing you.
This way, you can keep track of your spending and avoid going over-budget, which would otherwise eat into your profits.
Not Having an Exit Plan
Never enter into a real estate flip without having at least one (and preferably two) possible exit strategies. This means that if the flip doesn’t work out, you should have at least one viable way of either getting out of the investment or, at the very least, making some money on it until you’re able to sell.
For example, if you flip a home and the real estate market tanks, your backup plan may be renting the home out until the market improves. Or, you could plan on wholesaling the property to another investor.
Trying to Do it Alone
Last but not least…never attempt a real estate flip alone. Realistically, you need a dedicated real estate team to assist you through every step of the process, including:
- real estate lawyers
- general contractors
- real estate agents or Realtors
Overall, flipping a house isn’t as simple as it looks on television. So before you get in over your head, make sure you have a plan and know what you’re doing. And if you need any assistance with financing along the way, be sure to contact us.
Center Street communications are not intended to provide business, legal, tax, investment or insurance advice. No Center Street communication should be construed as a recommendation for any business or investment strategy by Center Street or any third party. You are solely responsible for determining whether any investment, investment strategy, business strategy or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your legal or tax professional regarding your specific situation.