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How To Avoid The Pitfalls Associated With Fix & Flip Deals

Published on Wednesday - December 10, 2014

Of all the ways to make money investing in real estate, the fix and flip method is perhaps the most popular. The last couple of years, in particular, have seen a number of investors make a name for themselves rehabbing and selling properties. With the influx of short sale and foreclosed homes, there has been a steady supply of distressed properties to choose from – making the process that much more appealing. However, while the returns can be great, they are not without obstacles. Let it be known: there are risks to flipping properties. Fortunately, there is a way to mitigate those risks and have the deal work in your favor. The key to maximizing profits, as you may have already guessed, is a sturdy educational foundation. Knowing, and expecting, everything that can possibly come your way is a great first step. However, you need to be able to react in an appropriate manner when things inevitably go awry.

Most rehabbers, old and new, encounter problems with budgeting – regardless of whether it is making one or sticking to it. It is easy to get caught up in the excitement of a new deal. However, this is a slippery slope. Some investors will manipulate the numbers and try to make them work in their favor. If they need the repair costs to equal a certain number, they may bend them to make the property look more attractive than it really is. The true cost will eventually reflect itself in the bottom line – there is no escaping it. From that point on, you are chasing profits that may have never been there. To make up for lost ground, you will have to cut corners elsewhere and compromise your entire rehab.

It is also common for new investors to omit items from a budget. On your first few deals it is wise to follow a strict expense sheet or walk the property with your contractor. It is always far better to walk away from a deal that you would need everything to go right on to make a profit than to buy the property and try to figure it out from there. Do yourself a favor and budget accordingly. Refrain from bending the numbers to your liking and you will be thankful in the end.

Taxes, interest and utilities are often overlooked in rehabbing a property. Additionally, there are always expenses that are unaccounted for that can add up quickly. An unexpected dumpster or replacing an appliance are to be expected, not the exception. When doing your expenses, you need to account for these items. There is often a slim margin for error on flips. If you are working on a strict budget, it is even more of a reason expect the unexpected. Adding a buffer or overestimating your budget isn’t only a good idea, but it is also the key to making money on most flips.

We have all heard the expression “time is money.” It is important to take it seriously. You are paying interest on your money every day that you property goes unsold. One day can lead to a week, which can lead to a month or longer than you wanted to have the house for. You need to maintain a delicate balance between work flow and being too demanding. Timetables and schedules are particularly important. Before you start any project, you and your contractor should have a schedule and plan in place. Things can always change, and you need to be somewhat flexible. However, you should also demand that workers be held accountable for their actions. You never want to cut corners, but every day the house isn’t ready to be sold, you are losing money.

There is some debate as to when you should start promoting your property, but the sooner the better. Use your discretion when showing a full gut rehab, but even if there is still work to bedone, you can always start advertising. Social media is a very powerful tool that you can leverage without your realtor. It can generate buzz about a property with minimal effort. Between periodic posts on social media and using your personal network, you should have some interest before the house is actually listed. It is very rare in this market that you can list a property and have it sold at the first open house. You need time to attract buyers. The sooner you can get the jump on this the better.

Pricing right is the final, and possibly the most important step in the flip process. If you post too high or have unrealistic expectations for what you can sell for, the house will sit on the market for months – essentially costing you more money. You should have a very good idea of what you can sell for before you even purchase the property, but you can’t let budget overages or a lengthy process change your mind. By listing at the right price, you can attract multiple buyers, and maybe even generate a bidding war. By pricing low, you could end up with more than you would have at a higher price point. Buyers will appreciate the work you put in, but they will still compare your property with every other comparable one on the market. Listing high with the idea that you will get a low ball offer and then negotiate will not work in this market. If you want to sell quickly, you need to list for the right price.

There is certainly plenty of money to be made with fix and flip deals, but you should know what you are getting into. If you simply mind due diligence, you will find the investing industry to be much more accommodating.

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