16 Common Mistakes That First-Time House-Flippers Make
When you binge-watch a little too much HGTV, it's easy to come to some crazy conclusions. Conclusions like, "House flipping looks easy! I should try it!"
Well, maybe you should -- we sure won't stop you! -- but before you jump into your very first home flip, make sure you know what common mistakes first-time flippers are in danger of making so that you can avoid the same fate.
Not having the finances
Before you flip a house, you have to buy it. Depending on whether you're paying all-cash or getting a mortgage loan (and whether you already own a primary residence or not), you will have to secure a down payment for the home, plan on paying mortgage interest for the months that you carry the mortgage, pay for utilities, and pay for the expenses of actually fixing up the home.
You might be tempted to assume that this will be a quick and easy project, but similar assumptions have taken down more experienced house-flippers than you. It's much better to overestimate how long it will take then to underestimate -- that way you can make sure you have enough money to cover the flip.
One money-saving tactic could be to move into the house while you renovate it (then you won't be paying rent elsewhere). Be warned, though, that unless you live in the home for two years, you will still have to pay capital gains tax on any profit made from the flip.
Buying the wrong property
Like Goldilocks, you want a home that's "just right" -- not too expensive, or you won't make any money, and not in too bad of shape, or you'll spend more than you planned to fix it.
Paying too much for a home is one of the worst things you can do as a house flipper, so it might help to secure some real estate expertise from a local professional who can give you a good idea of what fair-market prices look like and help you ascertain if your offer looks good or if you want to seek out a better deal.
Additionally, a professional can help you understand how much profit you could potentially make, which is also easy to overestimate as a first-timer. And they can make sure you're following the 70% rule. What's that? Well ...
Not following the 70% rule
Most fix-and-flip investors who have been doing the job for a while know and adhere to this rule. It's not very complicated, but you may be tempted to indulge in some creative math to make the numbers work -- resist! That's a form of rule-breaking.
You do not want to pay more for a property than 70% of its fixed-up fair-market value.
So in other words, if you're eyeing a home, and you have it on good authority from several people that after you fix it, you could sell it for $200,000 -- do not offer more than $140,000 for that home. That is your 70% threshhold.
This will give you wiggle room to pay for the repairs and upgrades and to still make a profit.
Forgetting to make the budget
Are you getting the idea yet that flipping a home is a big exercise in math? Well, if you haven't started laying all these costs out in a spreadsheet and figuring out what you can spend where, then start.
You'll want to consider both the cost of the home (either paying for it outright or paying the monthly mortgage plus insurance, taxes, and any other expenses), the costs of the upgrades, the amount of time those upgrades will take, and the time on market once it's ready to sell.
Again, a real estate professional (or another experienced house flipper) can give you a solid ballpark for all of these metrics if you don't even know where to start.
Not getting an inspection
When you're paying cash and you're in a hurry -- and you already know there's a lot to fix in the home -- then it can be tempting to skip the pre-sale inspection. Why bother?
Because that inspector might find a serious problem that's going to cost you more to fix than you can afford. Foundation or structural issues are usually not cheap to solve and can eat up most (if not all) of your budget if they emerge unexpectedly.
Plus, when the time comes to sell the home, you'll know that everything was done to get it into perfect condition if you bothered with an inspection!
Not securing the right permits
Before you start pulling out the sledgehammers for demolition, it's a good idea to ascertain which permits you're going to need for your upgrades. You don't want to do all the work on a project only to discover that you needed a permit and might need to redo some or all of it.
Again, a real estate professional or someone who's flipped houses before can help you here. They will have an idea of what permits are needed and can help you start the application process before you need them (not after).
When it's time to actually get started on the work, you may be tempted to flit from project to project so that you can feel like you're accomplishing something. Why continue working on that item that's going to take a week to finish when you can just run over and finish two or three things really quickly?
If you've read anything about research on multitasking, then you already know the answer: It makes you much less efficient than if you focused on one thing and saw it through to the end.
Make a list of things that need to be done, and if you want to feel that sense of accomplishment, then plan to spend your morning working on major projects, and your afternoon on little items that help you feel like you've finished at least one thing.
Overestimating what you can do yourself
With the existence of YouTube, it's pretty tempting to think that you can do anything with the right tools and a video.
But this is a major investment, and you are probably not qualified to do most of it. Putting a wall up or refinishing a floor? Sure, maybe. Any plumbing and electrical help will definitely require a professional, though, and you might want to consider finding a general contractor who's willing to pitch in where you need.
If you have direct experience making a specific type of home repair, and you liked your results, then go ahead and assume you could do it again. If not, then for your first flip, hire a pro and watch them work so you decide if DIY might be an option -- next time.
Not playing well with others
No flipper is an island, and that is especially true for first-time flippers, who haven't yet discovered their core crew of people who can help them get the fixes in, and in quickly. You'll need to rely on strangers to help you finish the job, and some people are better at doing that than others.
If you don't deal with feedback well, don't manage relationships well, or just generally don't like working with people, then you should perhaps reconsider this method of money-making. You're going to need to work with others, and work well with them; if that's beyond your scope of ability, then maybe funding a flip and collecting some of the profit is a better choice.
The good news is that if your first flip goes well, you'll be on your way toward building a crew for future flips.
Running out of time
You're almost to your sales deadline, but the house is only half-finished. This is a real nightmare for a flipper, but it's a common one when it's your first flip and you have no real idea how long the fixes are going to take.
Overestimate how long you'll need to finish the job, especially if you're working by yourself. Leave yourself time to undo and redo some work (because you'll probably mess something up), and don't create a timeline that's going to squeeze you beyond your abilities.
Don't know how long it's going to take? Bring in a general contractor and ask for time estimates. Add 50% or double the time on any jobs you plan to do yourself if you've never done it before.
Remodeling according to your personal taste
Many first-time flippers forget that they aren't renovating the house for themselves -- they're doing it for a future buyer. And those flippers end up getting less for the sale than they could have because they insist on revamping the house according to their own personal taste instead of what sells best on the market.
A real estate agent can help give you a reality-check here and tell you that your preference for a separate kitchen, dining room, and living room is going to hurt the sale, or help you understand whether there's really a demand in the area for a garage with a rock-climbing wall installed.
Neglecting the little fixes
There's a lot to do in any flip, and it can be tempting to focus on the big items -- floors, walls, windows, doors, and so on -- and ignore the little ones.
But if you think that buyer isn't going to notice that the kitchen drawers all stick, you're delusional. Change the light bulbs, oil the hinges, and make sure everything (everything!) works and works well before you call it a day.
Upgrading too much
Depending on the neighborhood, a five-burner gas-range stove might be exactly what the house demands ... but maybe not. First-time flippers often don't know where to stop with the upgrades and do too much, creating a beautiful house that's over-finished for the neighborhood, and installing features that buyers who are interested don't really want.
That doesn't mean you need to go for the cheapest option, but at least look at other listings in the neighborhood to see what the standard or "average" finishes and fixtures look like, then aim for that look. (This is another area where a real estate professional can be worth his or her weight in gold.)
Ignoring the outside
Well, the inside of this soon-to-be-flipped home looks amazing! Time to list?
Not quite. Have you paid attention to the landscaping? Put in new sod? Added flowerbeds to the garden, or otherwise improved the curb appeal of the home at all?
It's a big mistake to focus only on the inside of the home and ignore the outside. A green lawn, fresh coat of paint, and some artfully placed flowers can work wonders on that final sales price.
Listing the house before it's finished
You may think that you can show buyers what you've done and they'll be able to imagine what the home will look like when it's finished -- but this truly isn't the case. If you try to start showing the home before it's actually ready, then all buyers are going to see is a half-finished project.
They don't have access to the vision in your head. Don't try to force them to create one, or the house will linger on the market for longer than necessary ... and you'll have missed your first, best chance to make an amazing impression with your flip.
Counting on the market to pull the price up
When the market is hot, it can be really tempting to hope that it will have escalated enough in the months that your flip was being renovated to bump up the sales price. We all hear the stories about how prices are rising, so why shouldn't you expect them to rise while you work?
Because housing markets, like all markets, are subject to outside forces beyond your control that you cannot predict. If you're counting on the market to grow, and that doesn't happen -- what's your Plan B? Will you still make money on the sale, or will you lose your shirt?
Don't risk it. Make sure that you can still make a profit even if the market doesn't jump while you're working on the house. (And if it does? Consider that a pleasant surprise.)
Staging without a pro
Many flippers are also great at staging homes, and this could well be you in the future. But for your first home, do yourself a big favor and budget for a stager from the beginning.
A professional stager will tell a story with the home, tying rooms together with color and texture, and helping buyers envision their lives in your flip. Watch and learn from the pro, and then maybe you can try staging on your second (or third, or eighth) flip.
Contact us if you have any questions - we're here to help make you the most money possible!