Property Flipping Pitfalls to Avoid

Flipping properties is less about doing it right than not doing it wrong.

For example, you can buy a house at the right price, keep repair costs down, and eventually find a great buyer. But failing to inspect that sewer pipe cost you $20,000.

Here are common property flipping pitfalls that you need to avoid.

Paying too much for the property

This is probably the single biggest – and most costly – mistake that new property flippers make. A property flip is largely a numbers game. If the numbers make sense, the deal can be done profitably. But if they don’t, a flip can actually end up costing you money.

Know what a property will sell for before you even make an offer. Then, have a good idea of repair costs.

According to experts, you should buy the home at 70% of after-repair value (ARV), less repair costs.

That means you should pay only $110,000 for a property that will sell for $200,000 after $30,000 in repair costs.

$200,000 X 0.7 = $140,000 – $30,000 = $110,000

Taking into account the cost of renovations, carrying costs on the property, and any transaction costs on both the purchase and the sale, the offer that you make on the property should be low enough to accommodate all of those costs, and provide you with a reasonable profit.

Not getting everything inspected

The best kinds of properties to purchase for a flip are distressed properties. Those almost always have needed repairs, or at least significant maintenance upgrades. Distressed properties are put up for sale by people who lack the financial means to maintain them. It’s likely that the house has a variety of repairs that are not obvious.

For that reason, you need to be fully prepared to spend a few hundred dollars to bring a licensed home inspector to the property. Skip this step, and you could be exposed to repair expenses that you never anticipated.

But don’t just get a standard property inspection. Other specialty inspections may be needed.

• Radon inspection
• Sewer scope
• Roof inspection
• Pest inspection
• Well and septic inspection

Unless you know all the flaws, you have no idea what you’re up against and will face the possibility of losing money on the flip.

Underestimating the cost of repairs

There are two ways to do this. The first is by assuming that you can do a lot of the work yourself when you really can’t. This can be a deal breaker. Inflation is taking off and labor costs are absolutely skyrocketing.

Materials prices are also at all-time highs.

But it’s not enough to factor in general repairs like new flooring, a bathroom remodel, or paint. You should have contractors bid on major repairs in particular.

A new roof can run $10,000-$20,000. Typically, flipping a home that needs a major repair that doesn’t add to the final sale price should be avoided.

Not having enough cash

And how can you be prepared for the worst? By having plenty of extra cash. Working a flip profitably is not something that you are likely to be able to do on a shoestring. You’ll have to have extra cash available in order to complete repairs in a timely fashion, and also to be prepared for unexpected expenses.

You can get a loan to fix and flip the property, but it won’t cover 100% of your project — not even close.

It’s hard to estimate exactly how much cash you should have on any one flip since each property is different. But whatever property you purchase, the extra cash will be an absolute necessity. It’s your best defense against the unexpected.

Not fixing and selling the property fast enough

When it comes to flips, time really is money. The longer that you own a flip, the more it will cost you to keep it. You’ll interest costs, extra points to extend the loan, real estate taxes, insurance, and utilities for as long as you own the property. There’ll also be costs associated with maintenance, such as landscaping, snow removal, security and even perhaps advertising the property for sale.

In addition, if you are hoping to make flipping an ongoing venture, you will need to get in and out of deals quickly. That’s because any house that you buy has the potential to be a capital trap. For as long as you own it, your down payment and other expenses are tied up in the property. That means they will not be available for your next flip. And the more properties you can flip, the more money you can make.

Have your contractors lined up and ready to go to work immediately. The sooner you can complete any necessary renovations on the property, the more quickly that you can sell it. That will enable you to make more money – due to the fact that you won’t have to pay the carrying costs as long – as well is to free up your money for your next deal.

Working a flip profitably involves two factors – advance preparation, and swift execution of those plans. Get both in good working order, and you can make money flips.