At any given time, you can turn on the television and probably catch at least a few shows that feature a sharp, good-looking investor who makes house flipping look very easy.
Whether they sell a house fast, or it sits on the market for a few weeks, they usually make a sizable profit. While plenty of homes are getting flipped each year, they only account for 6.2% of all homes sold in the U.S. in 2019. However, the road to making money from real estate can sometimes be harder than it appears.
Flipping houses is just like any other business. It requires careful planning, knowledge, and savvy for it to be successful and profitable. Many people dive into flipping houses headfirst without really testing the waters. There is a ton of things you need to know when becoming a real estate investor.
That being said, here are 7 common mistakes that many real estate investors make when trying to flip a house.
Buying Real Estate Too High
The first thing new investors do when they want to start flipping is turn to the market, which is filled with properties listed by real estate agents on the Multiple Listing Service (MLS). In 2020, many investors would consider their local MLS to be ‘saturated.’ Harder to find good deals, along with more competition.
Most of them end up becoming frustrated by the sheer lack of inventory for on-market properties. Some end up making an impulsive purchase, hoping that the numbers will work themselves out. Not to mention, there is no shortage of competition from larger we buy houses companies, along with smaller investor groups.
It is not impossible to find good deals on the MLS; it is just harder than it was several years ago. While there are ways to make a profit with a retail-priced property, it can be difficult to make smaller margins work after accounting for things like closing costs, holding costs, unexpected repairs, etc.
For the majority of the past decade, investors have at least had a thriving economy that has helped investors make money buying and selling real estate. Fixing and flipping properties can be a lucrative and sustainable business but only when done correctly.
Cheaper Houses Are Better Deals
Properties that are in bad condition and usually more inexpensive to buy. However, they can also be the properties that require the most renovations. It can require more repairs than originally expected to get a property into a livable, rent-able, or sell-able condition.
For example, older houses usually need internal repairs, such as electrical updates or plumbing updates. Without intentionally looking for these items, they can be easily missed on an initial walk-through.
New investors sometimes see low house prices but don’t realize that the property needs more than just cosmetic repairs. As a result, you can end up with a cascading effect of new, unexpected repairs that arise. This alters the completion timeline of the house flip, which can lead to disastrous effects on the project budget.
That being said, not every cheap property is a good deal. Walking through the property with someone experienced can help you analyze renovation costs accurately.
I Don’t Need a Real Estate Team?
House flipping involves a lot of risks that aren’t shown on the house flipping TV shows. Being prepared to mitigate those risks is key to avoiding losing money on your first few flips.
One way of doing that is by forming a solid real estate team around you. More minds and opinions are better than one. Especially if you plan to scale. Real estate is one of those industries where new situations and scenarios come up nearly every day. Having a strong team around you is key to your success, regardless of your exact investing or flipping strategy.
A reliable general contractor is important on any major house flip. You also need to consider how to find future deals and how to fund those deals. Surrounding yourself with an experienced realtor and lender can increase the odds that you will be successful in flipping houses.
Overpaying For Help
Going off of mistake number three, if you have a reliable team around you, you can usually avoid overpaying for certain real estate services. A big one that many first-time house flippers fail victim to is overpaying contractors. Especially if you are in a smaller market, it can be challenging to shop around and get multiple, reliable bids. It is certainly a significant pitfall when hiring the wrong contractor for a flip.
Do your best to shop around, and try getting referrals from other house flippers. If you are a newer flipper and do not have a connection with a general contractor yet, make sure that the contract you compose with the contractor you plan to work with is tight. That contract is one of the only things protecting you.
Overpaying For Materials
As a new house flipper, it is difficult to know which materials to spend more on than others. For example, when renovating a kitchen, how do you know which countertop to select? Most look decent. Certain ones look incredible. What does your particular flip call for?
A good tip for specific household items, like a kitchen countertop, is to look at nearby sold homes that were successful flips. Check out the photos of that kitchen, and see if the overall style of their flip is what you are going for. Outside of the kitchen, there are many other items that first-time house flippers may be unsure about.
Bathrooms are another good example. Deciding on which materials to use for items like a vanity or type of tile can be thousands of dollars of difference. Do your best to choose materials that are similar to other flips in the area.
Avoid shiny object syndrome as best you can when selecting materials for your first house flip. Making your home attractive to buyers without breaking the bank is key.
Completing Unnecessary House Flipping Repairs
For many people, the most fun part of rehabbing a home is turning something ugly into something beautiful. It’s easy to get carried away and add more and more into the property than is actually needed.
If no other houses in the area have a roof deck and a roof deck wouldn’t add much value to the house, it is smart to avoid adding one. The whole idea behind flipping a house is to create something that enough people will want at a reasonable price. New flippers have a hard time gauging the level of improvement needed to flip a house successfully. This skill comes with time and with analyzing your market.
Underestimating The Timeline of Your Flip
Similar to many things in life, renovations often take more time than originally expected. Repairs arise that you didn’t initially think you needed to complete. You can uncover broken and damaged items in the house during the middle of the flip as you go.
Although you may save time on certain parts of the renovation, miscellaneous items usually still come up and negatively affect your timeline. Unfortunately, there are holding costs that come along with owning real estate.
Time is not the only thing that you lose out on if your timeline shifts. Especially if you used leverage to pay for the property, such as borrowing money from a hard money lender, there are financial consequences if you cannot pay them back by the date agreed upon. Budget for unexpected things to happen during the renovation process, and adjust your initial timeline accordingly.
By considering these 7 common mistakes that often happen to house flippers, you can avoid pitfalls and increase your chances of generating a profit. From the initial buying process to the final details of your renovation, it is vital that you plan as much as possible in advance.
Complete your due diligence upfront, surround yourself with a strong real estate team and execute your plan to flip a house successfully.
Final Thoughts on Flipping a House
If you are a first-time real estate investor, it is easy to make mistakes. Unfortunately, these blunders can cost you a significant amount of money. Nobody wants to do their first flip, thinking they will make tens of thousands of dollars only to be paying that out of their pocket instead!
Can you imagine buying a home to flip and make a profit only to be digging into your pocket instead? It happens all the time. Don't be the next in a long line of failed investors. Take the time to learn the business. Here are some great questions to ask before investing in real estate. Use them wisely, so you make the best investment decisions possible.
Hopefully, you have found these tips on house flipping to be useful.
About the author: The above article on mistakes to avoid when flipping houses was written by Alex Capozzolo. Alex is the owner of the Brotherly Love Real Estate blog and a content writer for the real estate industry.
He co-founded Brotherly Love Real Estate, an investing company in Philadelphia. His focus is on helping people through one of the most important investment decisions of their lifetime by seamlessly providing fast, honest, and professional real estate services.