Fixing and flipping homes is a great money maker for realistic and savvy real estate investors who can spot opportunities when they appear.
Other investors will purchase a home to renovate and hold onto it to accumulate wealth or build out their portfolio, selling the home once market prices have reached an all-time high.
In either instance, real estate investors need access to quick cash to secure these diamonds in the rough once they go on the market.
Many experienced flippers rely on private money, or hard money loans, as a quick way to secure the cash they need, fix up their property, and sell quickly.
But even with the cash in hand to secure the property, you may run into snags finishing it up on time or under budget.
That’s why we’ve written this guide of the top six house flipping mistakes to avoid, so your next real estate investment opportunity is a profitable one.
#1 Overbidding on the House
The key to making money flipping homes is to purchase them for much less than what they’re worth — not just at a good discount, but a deep discount.
Many beginner fix and flippers are so excited and attached to their first prospective property that they will overbid just to secure it. However, at this point, there’s not much they can do to improve their overall profit, besides making the repairs and selling as quickly as possible.
This can be avoided by following the 70% rule. This rule helps investors figure out the highest acceptable price they’re willing to pay for a property while still making a great profit.
The 70% Rule to Finding the Maximum Price for a House to Flip
- Figure out the after-repair value (ARV) of the home based on local sales figures of similar homes in the area.
- Multiply that figure by 0.7 (70%)
- Subtract the cost of estimated repairs (somewhere between $15 to $60 per square foot)
- Determine whether or not you can afford the maximum buying price
#2 Overspending on Renovations (Overimproving)
Many investors think that all the money they put into renovating a property will improve the property’s value and make them more money in the long run, but this isn’t always true.
Inexperienced flippers often make the house flipping mistakes of spending too much on renovations based on their own tastes, thinking new buyers will fall in love with their design choices.
Adding a marble floor in the bathroom, building an addition, or adding a deck might make for a nicer home, but if the other homes in your neighborhood aren’t nearly as nice, you’re likely overspending on your home and losing out on a larger profit.
Remember, you must match your renovations based on the market so you can attract realistic buyers who will want to buy your house.
Even if your house renovations are exceptional, you may have a hard time getting the price you want because the neighborhood doesn’t attract the right kind of buyer or price you were hoping for.
What’s your loan scenario?
#3 Overestimating Your Skills (Not Having Enough Skills)
Remember the 70% rule from earlier? Part of what makes that equation work well is figuring out the estimated repair costs before purchasing a home.
Unfortunately, many people fail to properly estimate realistic repair costs.
For one, many people overestimate their skills and knowledge and try to do everything themselves. This creates a few problems:
- Creating substandard work that can turn prospective buyers away (bad drywalling, tiling, carpeting, etc.)
- Takes too long to finish, which takes longer to sell the house and make a profit
- Realizing they cannot do the work themselves and needing to hire contractors (resulting in a loss of profit and throwing off the 70% Rule equation)
Experienced fix and flippers often have their own team of contractors, electricians, and plumbers that they can depend on for quick work, and reliable cost estimates to ensure they’re picking the right project before purchasing.
#4 Not Having Enough Time to Finish the Project
Because many real estate investors use short-term hard money loans, it’s advantageous to fix and flip a home as soon as possible to pay off the loan and make a profit.
Many short-term loans are for 12 months, which, depending on your skills as a carpenter and renovator, might not be enough time to fix up the house, put it on the market, and sell it before paying off loan repayments becomes a challenge.
Fix and flippers must be realistic, estimating their skills, picking a project that’s not too large or challenging, and sticking to a timeline. If not, they might find themselves racing against the clock to finish an overambitious project.
#5 Not Having an Exit Plan
Before you pick your project, you should think of an exit strategy of what you want to do with the property once it’s completed. It can also help to plan a solution for if and when you make one of these other house flipping mistakes.
There are a few options many fix and flippers follow:
Leasing and Renting Out
You may choose to hold onto the property and use it as an income source by leasing or renting out the property to a family or a business that will pay monthly rent. This is referred to as “buying and holding.”
If over time the property drastically increases in value, then you can sell for an even greater profit, while making an income from a tenant in the meantime.
Selling at a Profit
This is the dream for every fix and flipper — purchasing a home in need of rehab far below the asking price, making the renovations, and selling for a large profit.
Selling at Loss
This is the least preferred option, however, there are some fix and flip projects that simply didn’t work out, whether the house purchased had unknown structural damage, spending too much purchasing the home, overspending on renovations, or picking a home that was in an undesirable neighborhood.
Sometimes your only option is to sell, learn your lesson, and start over again.
#6 Choosing the Wrong Partner or a Property Too Far Away
Renovating a house requires a lot of physical and emotional energy. It’s also incredibly stressful, even if you do know what you are doing.
This is why it’s crucial to pick an investing partner who you can trust to stick with you throughout the entire project.
Working with an investment partner helps you both share the risks and costs of the renovation, while also broadening your skill sets and resource pools. However, working with another person can lead to disagreements and losing a sense of control over the project.
Another house flipping mistake is picking a property that’s too far away from you or your partner’s house. If you’re repairing a home that’s an hour away, you have to take into account all the extra hours of transportation, the cost of gas, coordinating contractors, and the increased frustration of dealing with a property so far away.
Fund Your Next Fix and Flip Project with Marquee Funding Group
Avoid these house flipping mistakes and when you’re ready, contact Marquee.
Marquee Funding Group is a full-service mortgage banking firm specializing in hard money and private equity loans in California and Colorado.
Marquee funds loans for people when traditional lenders and banks are unable to. We work with real estate investors and borrowers who are in unique, challenging, or time-sensitive circumstances to get them the funding they need when they need it. Marquee Funding Group has no limit to the amount of loans we can issue to one borrower. We act as a partner to home flippers/investors and build relationships that help create wealth.
Are you a real estate investor looking for a loan to purchase your next fix and flip property?
Contact us today with your loan scenario to see if you’re a good match for our loan programs.
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