The real estate business in general and flipping houses, in particular, is certainly on a boom for a few years now. Investors are continuously looking for properties to flip for a profit. However, Flipping houses for profit isn’t as easy as so-called gurus and reality shows make it look. There are numerous mistakes that newbie investors make. To help you maximize your chances of turning a profit, we have compiled this Guide to Flipping Houses with a list of 7 most common mistakes to avoid in house flipping.
However, before we talk about these mistakes and how to avoid them; let’s discuss what house flipping is and why is it a good idea to start investing in house flipping.
Guide to Flipping Houses: Definition
House flipping is a type of real estate investment, where investors buy homes for a price less than their market value, renovate them accordingly and sell them at the market price for a profit. Sounds easy, right? Honestly speaking its way harder than it looks. Like every business, you will face a lot of competition.
It’s hard to find a house that you can buy for about 20 to 30 percent less than its market value but even if you do, there are many more challenges such as arranging cash for financing your purchase, finding contractors for the renovation of the house, and finally finding a buyer to sell it.
Nonetheless, as a newbie, you are prone to make mistakes during this process. Our Guide to Flipping Houses will help you overcome those mistakes to increase chances of profit.
Mistakes to Avoid in Flipping Houses
1. Thinking House Flipping is Easy
The First mistake that deserves to be included in our guide to flipping houses, thinking house flipping is easy, is certainly the most common mistakes that newbies make while starting their career.
The problem is reality TV shows, and so-called gurus make house flipping look like a get-rich-quick scheme. What they fail to mention is the many costs associated with the process such as buying and selling costs, maintenance cost and most importantly the financing costs. These costs, when calculated correctly, add up to 15% of the selling price to the budget.
Furthermore, unlike reality TV shows where flippers renovate houses themselves, people hire contractors for the renovation of the house (The reason behind this mentioned in #5). Moreover, the whole flipping process takes much longer than they show in these shows.
2. Over Paying for the Property
The second most common mistake that needs to be included in our guide to flipping houses is over paying for the houses. Almost everyone makes this mistake when they step into the real estate business.
Letting your emotional control you during the firm deal might be okay if you are purchasing a home for yourself. It’s too easy to be imaginative about how good the profits would be just because you like the house. However, when you are buying a house to flip, you need to think logically, do the math to estimate profits and negotiate accordingly.
Although it’s hard to find a house at 30% less than its market value, try to negotiate down the price as much as you can. It’s hard to get a good deal to start unless you are lucky but you will eventually harness your negotiation skills to get good deals.
Another mistake that newbie investors make is they underestimate their budget for renovation of the house. Even after logical thinking and math to estimate the budget, there is a high probability you will require much more than your estimation. Why? Because unexpected things happen that add up quickly.
A simple way to deal with this problem is to allocate double the cost for the project than your estimated budget. The rule also applies to the time line of the project.
4. Not Considering Location
Next mistake that we have included in our guide to flipping houses that new investors make is they don’t find the location of property. They either stick to few blocks from their home for easy access or buy a property in entirely another part of the city.
When purchasing an investment property, one needs to consider its location correctly. Make sure it’s not too far away from your house. However, don’t limit yourself to your area only. Furthermore, the neighborhood needs to be good, talk to neighbors, look for schools in the community, how far it is from the market, etc.
You can sell a house, in a good area, easily and that too at a higher price.
5. Doing Renovation Your Self
The most common misconception among newbie investors is that they think they will save money if they worked themselves on the renovation of the house. However, working yourself will take you more time which will increase maintenance and carry costs.
Choose a contractor to do the renovation for you. However, before you choose someone, make a list of repairs you might need. Try to go for visible and significant improvements (exterior, for example) and leave the rest to save money.
Make sure your contractor works within your budget and timeline. Time is the most critical factor in house flipping business.
6. Partnering with Wrong People
Even though I will suggest doing invest alone in all of your businesses, not everyone is well of to do that. People partner up all the time with their friends and relatives to start a business. Have contracts signed and always do the paperwork even if you trust your friends?
Partnering up with right people is critical to your success in any business including house flipping.
7. Not Having a Backup Plan
The last mistake included in our guide to flipping houses is “not having a backup plan”. Although house flipping is a great way to earn money, it is not the only way to do so. Remember, it’s business, and every business has risks associated with it.
Along with flipping houses, consider investing in rental properties as well. You can also invest in different companies in other domains as well. Type of business is not necessary, having a backup plan is important.