Flipping houses could look quite simple from the outside: you buy a home, update it with a few cosmetic improvements, and resell it for a substantial profit. After all, they do it on TV all the time! Well, we’re sorry to tell you that this is not a reality, at least in most cases. Sure, you can find a place that only needs a bit of painting and some staging, but that’s not the rule.
Flipping houses require a lot of planning, money, experience, a valuable team, and a pinch of resilience. For that reason, we’ve done some research and listed five common mistakes to avoid when choosing fix and flip as an exit strategy.
1. Not abiding by the 70% rule
The first mistake when flipping houses is right at the beginning of the process. It’s crucial to run comps reliably and assess the property right. Remember when we told you that the ARV has to be correct for you to make money? Well, this is an example of that.
On the one hand, you need to make a trustworthy calculation of the after repair value. On the other hand, you also have to estimate the repair costs after a thorough inspection – and don’t forget to take into account unforeseen issues! Once you have the ARV and a realistic budget, it’s time to apply the 70% rule to evaluate if the deal is worth it and what your profit will be.
According to this golden rule, your maximum allowable offer (MAO) should be 70% of the property’s ARV minus the repair costs. Thus, it leaves you with a cushion of 30%: about half of that would be your profit, while the other half goes towards the costs incurred until the sale (closing costs, taxes, maintenance, and financing).
2. Not having enough skills and knowledge
We already mentioned that one of the keys when flipping houses is having a valuable team. And this is the reason why. Especially when you begin with this strategy, you need to surround yourself with people who know each task. But don’t get us wrong: that doesn’t mean you can’t do the job, only that you should hire experts for the areas you don’t feel confident enough (yet).
If you lack experience in these areas, consider hiring professional builders and contractors, plumbers, electricians, insurance agents, lenders, real estate agents, and more! You can hire an interior designer, as well. He or she will be able to give you insights on which materials are best to buy and how to use your money as effectively as possible. Also, it wouldn’t hurt to have a mentor during your first flips to consult on if you need guidance.
3. Not having enough time (or taking too much!)
Time is the third issue you might face when flipping houses. Typically, it’s time-consuming. Hence, you can either estimate to end the flip earlier or delay it too much. The first thing here is – again – to be realistic. When evaluating the rehab budget, you should also reflect on the time it will take. This is essential for your return on investment since each day you take to work on the house costs you money (on property taxes, insurance, and other fees associated with homeownership).
And once the plan is in motion, try to stick to it! Of course, unexpected issues can happen, and they could delay your schedule. But if you calculated your budget correctly and took time to build the best network available, you’d have everything you need at reach to solve it quickly.
4. Over-improving the property
Another fundamental aspect of flipping houses is avoiding over-improving the place. And this is one of the reasons why it’s necessary to know the market. Take some time to research the area’s maximum value and check out how other fixed properties look like. After all, when fixing and flipping, the goal is to maximize your return on investment. And that doesn’t depend only on the cost of materials you use or the amenities you include.
If you overdo your flip and its ARV ends up surpassing the price area, you will have a hard time selling the place, and – as we mentioned before – that means more costs for you. Not only because of the days that the home stays on the market but also for the amount of money you put on things that couldn’t be transferred to the property’s value. So, bottom line, when flipping houses, you want the end product to align with comparable properties in the area. Yes, you should include a “wow” factor that makes your home stand out, but we recommend that it just slightly exceed the market’s expectations so people are willing to pay for it.
5. Lacking an exit plan beforehand
The last item on the list is related to the end of the process. Although fix and flip is an investing strategy with a clear exit plan in itself, things don’t always work as they should. Therefore, it’s vital to plan different outcomes to avoid losing too much money. On the one hand, it’s important to keep in mind your ARV because overpricing the property might make it hard to sell.
On the other hand, you may have trouble selling the place, despite how well the flip turned out. In this scenario, it’s helpful to have a backup plan so your return on investment isn’t (entirely) affected. One option could be including a lease option or wholesaling the property to another investor. And you could rent the property, as well. Depending on the area, you might be able to choose between long-term rentals and short-term rentals – if you go for the latter, we’d recommend you these insights from Jamie Bounds to earn two or three times the income we’d receive for a long-term rental.
Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice.