House flipping has become an increasingly popular means of making a profit in the US and it’s easy to see why. On the surface, flipping a house is simple; buy a property, make some fixes, profit! But before you start seeing dollar signs roll by, it’s important to consider the hard work this type of investment takes. After all, no one thinks buying a house is an easy process, no one thinks making large-scale improvements on a house is an easy process, and no one thinks selling a house is an easy process… With flipping you’re taking on all three challenges in the time that it takes some people to complete just one. However, it’s not all doom and gloom! If you’re prepared to take on the task and you stick to the rules, you can find yourself sitting on a pretty profit and may even find the process fun! The important thing is to learn from the mistakes of others, instead of making them yourself. Be aware of these 3 classic blunders and be careful not to let them affect your profits.
Not Sticking to the Numbers
So you hired a real estate professional to evaluate your home. They gave you an “ARV” or “After Repair Value” on your property, meaning that once you make certain improvements, that will be the value of your now “flipped” house. Surely if you make more than these planned repairs, that value will increase, right? Wrong! Often, those new to the flipping business think that “extra” repairs automatically add to the overall value of the home. This is a common misconception. Some repairs are worth more than others. Some repairs are more expensive than others. Unfortunately, sometimes certain very costly repairs do very little for the overall value of your property! With house flipping, you’ll want to abide by the 70% rule to avoid a possible loss after repairs are complete.
Not planning for delays
There’s a common joke amongst those in the renovation business. There’s Cheap, Fast, and High Quality work—now pick two. What they mean is, often times high quality, inexpensive work comes at the price of the calendar. Now, that’s not to say every project you tackle for your property must fall into one of these three categories and often times you can find a happy medium. However, as with any endeavor patience is a virtue. Qualified contractors can take longer than expected in some cases. Deliveries can be re-routed. Mold can be found in unexpected places, hiding from even the best inspector. When making your renovation schedule, be sure to allow ample time for every step of the process. It’s better to finish earlier than expected than to try to rush to meet a deadline.
Choosing the wrong financing option
If you’re purchasing a property with cash outright, you can easily avoid this mistake. However, most people in the home flipping business are working with a line of credit or a loan that finances their flip. Home loans with a mortgage are common enough that most people know how they work, but a typical mortgage with a 25-year repayment doesn’t fit the flipping schedule of buy, fix, and sell within a year. This leaves home equity loans, equity credit, and hard money loans. Home equity and credit financing are good options but often leave you to work with a big bank and underwriters for a long, drawn out approval and lending process. With hard money brokers, the process is much faster and relies on the value of your property, rather than your credit score. Borrowers usually receive funding within 7-14 days, don’t need to run their credit to apply, and often they can build a relationship with a smaller hard money lender that makes the experience easier and can provide an overall sense of trust.
Overall, many in the home flipping business find it much different than rental property ownership or property management. Home flipping is a complex process that is constricted by a short amount of time. Patience, real estate smarts, and good connections are essential to your success. By being aware of common blunders, you’ll know what to expect when they inevitably occur. Staying calm, cool, and collected throughout the process will set you up to make a profit in the end.