Key Takeaways
- You can avoid some of the most common house flipping mistakes with our simple tips.
- Building your team, being realistic about your skills, knowledge and expectations, and always having an exit strategy can help you invest like a pro.
- House flipping mistakes will happen, but our tips will help minimize their impact and help you move on to other deals more quickly.
House flipping mistakes can eat away at a deal’s profitability. When flipping houses, however, common mistakes are easily avoidable, especially if you keep your expectations in check. To that end, entering into a deal with unrealistic expectations is a recipe for failure. It is those that mind due diligence, build a reliable team and plan ahead that will set themselves up for success.
4 Common Flipping Mistakes (And How To Avoid Them)
We’ve found that there are four common house flipping mistakes that investors, new and advanced, tend make. Fortunately, these mistakes are easily overcome, especially when you are prepared ahead of time. In order to help you avoid these common house flipping mistakes, we’ve compiled some tips and tricks so that you can complete your rehab on time and on-budget, and move on to completing more deals. In no particular order, here are some of the most common flipping mistakes investors will come across:
- Having an incomplete picture of your costs and expenses
- Overestimating your rehabbing knowledge and skills
- Trying to do everything yourself
- Entering a deal without a viable exit strategy
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Underestimating Costs
Underestimating expenses can cost you a lot over a prolonged period of time––whether you run over your renovation budget or you forget to calculate in expenses like holding costs, taxes, or other fees––excess spending can really add up. When determining whether a deal is profitable or not, you will want to factor in a comprehensive checklist of expenses and always build in a buffer for unexpected costs.
How To Avoid This Mistake
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Don’t skip the inspection before buying a property. There are items on a home inspection that you likely won’t care about––a leaky faucet or a cabinet door that is askew––but it’s better to know about bigger problems ahead of time.
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Set aside a rainy day fund. Once you have factored in all labor and materials costs, taxes, fees, mortgage payment and interest, you should add a 10-15 percent buffer to your budget to help cover any unexpected expenses that may pop up.
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Getting someone else to fund your deal offers several benefits. First, you aren’t risking your life savings on a deal. Second, you will have to prove that you have a sound deal on your hands, forcing you to mind due diligence. Third, knowing that you are using someone else’s money may help you make smarter, more conservative decisions over the course of your flip, since you will be held accountable by your lender.
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Do not make emotional decisions to try to fudge the numbers on your budget. House flipping can be an exciting and emotional experience, especially for your first couple of deals. Don’t let the excitement cause you to make financial mistakes flipping houses. Stick to the plan and always have someone you can turn to for a trusted second opinion.
Overconfidence
A lot of novice flippers tend to think they are equipped to complete a rehab without hiring a team. That said, most new investors will be better off working with a team in place, regardless of what they think they know. While there are those that can flip a house by themselves, a great team is unequivocally better than going about it alone––real estate is a people business, after all.
How To Avoid This Mistake
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Hire a licensed contractor. A good contractor can help keep your project on track and on budget. Ask around for recommendations for a contractor and check reviews on sites like Angie’s List before hiring someone.
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Hire skilled professionals to do the work. This may seem like a no-brainer, but when it comes to house flipping mistakes, labor is often the first place investors will try to cut expenses. Just because you own a framing hammer does not mean you know how to frame out a load-bearing wall, or that you know current building codes.
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Carefully run all your numbers and diligently stick to your budget. Don’t make the mistake of thinking you can somehow sell your property at a higher value than every other home in the neighborhood, or that you can find cheaper than market labor rates to cut your costs. Listen to the numbers, and let them be your guide.
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Don’t try to do everything yourself. If delegation doesn’t come naturally to you, now is a good time to practice learning a new skill.
Fear Of Delegating
You are probably a highly skilled perfectionist. You likely have extremely high standards. However, few people––if any–– are capable of doing everything by themselves even on a basic rehab. In fact, trying to do everything yourself can be detrimental to your project’s timeline, and may end up costing you money. You are better off learning to delegate by building a team of trusted professionals.
How To Avoid This Mistake
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When you are rehabbing a home as a fix-and-flip, the longer a project takes, the more it costs you. Using a team will expedite the rehab, meaning that you minimize the time your investment is at risk.
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Spend time building your network. The key to being comfortable with delegation is building a strong team who you can really trust. Network with local professionals online and at REIA events. Meet with contractors, Realtors, attorneys and lenders to feel out their professional style and see whether they would be a good fit for your needs.
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Be realistic about your time, skills, and knowledge. Be honest with yourself about what would best be left to a professional. Maybe you think you can complete a project for less money, but should you?
Lack Of Exit Strategy
If you don’t have at least one or two exit strategies, you may be at greater risk than you realize. Your exit strategies may include a lease option, wholesaling the property to another investor, renting the property, or a number of other methods. The trick, however, is having not only a plan, but also a few backup plans.
How To Avoid This Mistake
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Consider your possible exit strategies before you buy a property. Before you even buy a property to flip, you should already be thinking about your exit strategies. If you can’t think of a good exit strategy, you may want to move on to another, less risky deal.
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Know that planning your exit strategy is not the same as planning to fail. Shift your mindset about exit strategies. Having an exit strategy is a responsible, professional approach to investing.
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Set benchmarks for yourself to know when it’s time to implement your exit strategy. At any stage of the rehab and sale process, you should know what your financial limits are before your margins become too narrow to make a meaningful profit.
Real estate investing––especially rehabbing––coincides with plenty of risks. However, if you are aware of the most common house flipping mistakes and you mind due diligence, you can build a successful investing business.
What tips would you add to avoid house flipping mistakes? Let us know in the comments below.
