16 rookie mistakes to avoid when flipping houses
Mistakes are part of any learning process. The problem is that they might cost money, especially in the real estate business. But according to Martin Chera, they are unavoidable simply because they’re part of the success. Nonetheless, you might take some actions towards their minimization.
That was the real estate investor and experienced lender’s goal when he hosted his last webinar at Real Estate IQ. We recapped the first part here, “Fix and flip strategy: 5 easy steps to begin.” And now it’s time for the second part, a juicy list with 16 first-time mistakes investors often make when they start flipping houses.
Find out why it’s critical to avoid them – and if you like, let us know in the comments how many you made!
Mistake 1: Forgetting about building permits
An insignificant unlicensed construction might not seem like a big deal. What is an extra wall to create a dressing room here, or transform a deck into a sitting room over there? Yes, they could look harmless, but don’t be fooled: permit problems can lead to lawsuits if potential buyers – or their potential lenders – discover defects late in the process of a sale.
So, if you’re working on your home’s structure, plumbing, gas, or electrical systems, keep in mind that you’ll probably need the city’s stamp of approval.
Mistake 2: Skipping a conversation with a local real estate expert
The internet is a vast source of market information. You’re one click away from an unbelievable amount of data. However, it shouldn’t be your only resource. Verifying your findings with a local professional is a clever move to avoid misinformation and misinterpretation.
A local professional can help you with everything from finding a property to flip to puzzling out its ARV. And if you give that realtor the business on the sale, they’ll have your back during the whole process! Plus, eventually, you’ll be able to negotiate a different rate since you’re bringing them volume.
Mistake 3: Going overboard with fancy finishes
We’ve already talked about this mistake here. Overdoing it is not the smartest move when flipping houses. According to Chera, high-end flips come with high stakes: if buyers don’t love your big-ticket design decisions as much as you do, they may balk at your property altogether.
If you’re eager to put in some extra money, you should definitely run comps first to see if they’re worthy.
Mistake 4: Neglecting easy fixes
On the other side of going overboard with fancy finishes (or maybe not so far off from it?) lays the opposite mistake: being a bit cheap and neglecting easy fixes. “Sure, a good renovation that gives an old home an open floor plan delivers more ‘wow’ than swapping out beat-up old doorknobs and light switches. But a discerning buyer notices these things,” warned the lender.
Thus, the lesson here is to pay attention to those details that show you care for the place and the end buyer – and that are very light on your budget!
Mistake 5: Jumping into a do-or-die flip
Since flipping houses takes some time, you could be suddenly involved in a situation that severely affects your plans. In this case, Chera suggested always having a backup strategy. “If the real estate market in your region takes a sudden turn and you find the need to change your strategy – say, by offering your project as a rental property until prices recover – you’ll need to be prepared to hold tight until its eventual sale. Flips might feel like sprints, but they can be marathons,” he observed.
Mistake 6: Staging without a specialist
The selling part of flipping houses is as relevant as the rehab itself. When selling to homeowners, you’re not showing just a house; you’re offering a home, an experience, a place with good memories to be made.
“Hiring a home stager to prep your first flip for open houses is a spend that will serve you well in the long run,” the speaker assured. Instead of selling an empty house, they create an ambiance; they put in furniture, hang paintings, and even fill the cabinets with plates. Why? To trigger an emotion in the buyer. To make it like someone is already living there, and it’s the coziest place in the neighborhood.
One more thing: pay close attention to how stagers show your property (and ask many questions!). These tricks will come in handy to prep your future projects!
Mistake 7: Racing the clock
“What’s even worse than making mortgage payment after mortgage payment on a home that isn’t supposed to be yours for long? Falling short of the profit you should have made because you prioritized speed over a job well done,” defied Chera.
No, no matter how in a hurry you are, speed is not always good. Contractors can miss things if you’re rushing them, buyers (and the inspectors they’ll call in) will notice it, and it will end up affecting your ARV.
Mistake 8: Starting a dozen projects at once
Multitasking is trending, we know. And we also know that it’s undeniably satisfying to step away from a frustrating bit of renovation and turn to another task. But it’s also a surefire way to end up in the middle of a half-finished mess. “The only way to make sure you’ve dotted your I’s and crossed your T’s is to follow projects through to completion, no matter how mind-numbingly tedious they might be,” the lender admitted.
Mistake 9: Ignoring the 70% rule
There’s a reason why people call some things “a rule of thumb,” and the 70% rule applied when flipping houses is just that. It’s a tried-and-true formula in the real estate investment business: take your ARV, multiply it by 0.7, and subtract your repair cost estimate.
“That’s the maximum amount you should pay for a property. The rule is sacred because it keeps you safe. After financing, carrying costs, and out-of-the-blue expenses, you’ll most likely still profit from your flip,” Chera observed.
Mistake 10: Venturing into “eraser math”
And when it comes to bids, the speaker also noted there’s a temptation to overestimate the potential property’s ARV to justify a higher maximum allowable offer (MAO). “This urge can be strong, particularly for first-time flippers who find themselves asked to pay slightly more than they expected – but it’s just not worth it,” he said.
To substantiate this, Chera cited some experts who point out that factors beyond the investors’ control have the potential to lower the ARV by up to 20% by the time they’re ready to sell. So, if you already overshot your original estimates, the math will be even uglier.
Mistake 11: Neglecting the landscaping
In addition to consider easy finishes and avoid going overboard with fancy finishes, you shouldn’t forget about the landscaping, as well. “Overhauling an entire lot’s worth of greenery isn’t cheap – particularly if it’s been neglected for a long time. But it’ll increase a property’s curb appeal, and it can add up to 10 percent to your ARV!” Chera guaranteed.
But once again, don’t overdo it. You don’t need to plant a forest and build a water feature. Nevertheless, a thorough cleanup, repairs, and a bit of diligent gardening can go a long way.
Mistake 12: OD’ing on DIY
A beloved TV series character always said, “I can walk that far.” Well, a similar attitude could quickly be adopted when flipping a house, and let us tell you that you might want to take a moment and reconsider it. “The wise first-time flipper knows that he or she must not try to remodel an entire kitchen alone,” Chera warned.
But don’t get us wrong: this doesn’t mean that you can’t do anything. The best approach would be to ask yourself some questions before taking on the task. Do you really have the time to fix it alone? Moreover, is this the most valuable thing to put your time and effort into? While you might have the skill set to do a particular job by yourself, delegating it to focus on another duty can end up being much more profitable for your business.
Mistake 13: Waiving a professional inspection
Flipping houses is not cheap, and there are some things where you can’t restrain. One of them is a professional inspection. “A thorough inspection of a prospective property will cost hundreds of dollars, yes. But it can save you thousands more,” the lender promised.
And he’s right about that! A professional inspector can help you spot foundational issues that will cost you so much more than an average repair that they turn to be deal killers. Plus, they will help you come up with your own checklist for flips to come! Hence, don’t look at this step as an extra spend but as money well saved.
Mistake 14: Ignoring the neighbors
Buying the underpriced, ugliest house on the block is a flipper’s favorite trick. Still, it’s easy to forget that though your place will be rehabbed and lovely by the time you list it, other eyesores in the same neighborhood can impact its desirability – “oh, no, there’s a second-ugliest house out there, too!”
You should always look for a diamond in the rough. Just make sure it’s not too harsh.
Mistake 15: Cutting corners in the bathroom
If your floor plan and budget can accommodate a complete, modern bath, Chera encouraged attendees to go for it. Many real estate experts argue that bathroom renovations provide returns on investment that are comparable to kitchen renovations, while a woefully outdated water closet, by contrast, can sink a sale.
Mistake 16: Demolishing cabinets that can be refaced
Smashing everything you encounter without a second thought doesn’t help you to save up some bucks in crucial places. Yes, it looks awesome on TV, but this is your budget we’re taking care of.
“Before you obliterate a kitchen that’s seen better days, consider stripping and refinishing lackluster surfaces and upgrading fixtures. A cleverly executed face-lift could be enough to distinguish your property from comparable listings in the neighborhood,” the investor suggested.
Flipping houses is no piece of cake. It takes time, planning, dedication, and money. It could be hard at first, but once you gain some experience, everything will run smoothly. And you’ll make lots of mistakes along the way, as well. But don’t let that discourage you! To make it all worth it, it’s crucial to learn from every experience, and ask many questions to all the experts you’ll work with. It’s the only way to improve progressively, flip by flip.
Lastly, there’s one more mistake we’d like to add. Let’s call it a zero mistake since it’s at the very beginning of the process. And it consists of not having a reliable source of properties coming at you periodically. To thrive as a real estate investor, you need a pipeline of deals.
It’s not enough to find a property once in a while: consistency is the key to making money. And you can quickly achieve that with Real Estate IQ’s Off Market Leads! Receive daily listings with up to 10 types of off market properties. And if you subscribe to the premium version, they come already skip traced! Get them today, and start making wise investments.
Disclaimer: The blog articles are intended for educational and informational purposes only. Nothing in the content is designed to be legal or financial advice.