The Top 5 Ways I See New Investors Lose Money On Their First Flip or BRRRR

[Jonathan Greene]

Flipping or renovating as part of the BRRRR strategy is much harder than people think. There are so many posts every day about being stuck mid-renovation, out of money, or at a standstill because of decisions made that could have been avoided. Here are the top 5 mistakes I see by new renovators, but would love to get more added to the list as we go:

1. Paying a contractor in full before they start the job. Don't do this. For smaller jobs, half makes sense. For larger jobs, in quarterly draws. But I never understand why someone hands over 10k before a job even starts. They do it because the contractor asks and they don't know that it's not regular. It's like accepting a full year or rent in advance as a landlord. You aren't getting the tenant out no matter what. Once you have paid the contractor, that does not incentivize them to complete the job quickly. They have all of their money.

2. Doing DIY on plumbing, electrical, or structural. Welcome to the world of re-opening the walls to show your plumbing and electric work. If you aren't a licensed contractor, plumber, or electrician, you should not be touching those things, much less doing repairs or upgrades on those items. If you want to lay some tile, give it a try, but keep your hands out these areas.

3. Not getting permits for something because you probably won't get caught. I know they told you that you can sneak in a basement bathroom, but you can't. Even if they don't catch you now, they will catch you later when you try to sell a 2.5 bath that is only a 1.5 bath and the lower bath needs to be removed and capped. Get too many permits, not too few. If you get a red card, you can not proceed. If you have unpermitted renovations and have it under contract to a buyer, they are going to drop the deal.

4. Not going by to do progress checks as often as possible (or sending someone you trust to do it). You can not just trust a crew to show up every day and do your job on time. That's actually a comedy routine to an experience investor. You have to have eyes on your project every day to stay up-to-date and worst case, weekly. If you are out-of-state, your contractor is not your eyes, you need a local unbiased friend.

5. Underestimating repair costs and overestimating ARV (this is really just what most people call wholesaling). This is where it all goes wrong. It's about how you are getting your information and who you trust. Of course, you can't know repair costs right away on your first flip, but you should have more than no knowledge. You need to know other investors so you can ask them what everything costs, not contractors. They have a stake in the outcome of your job.

@Bruce Woodruff, I want your extras added to this list first please.

Anyone else have some good ones to add so we can help those who are in the middle of their first reno from losing more money?

[Bruce Woodruff]

@Jonathan Greene Thanks for including me! You have complied a pretty good list of what not to do...I would add the following:

1) Do not even pay 25%. And I'm speaking as a Contractor.... I always make sure that the draws are commensurate with the amount of work (and specifically the trade) performed to date. For example - you're starting a $100,000 remodel on a propoerty that you have acquired, the Scope Of Work includes basic lipstick stuff like a kitchen remodel, a bath remodel, and new flooring and paint.

I would start with a draw of no more than $10k, that is more than enough to get anyone going and it shows your good faith. To be honest, any Contractor that asks for larger amounts of money is showing that they do not have any reserves and/or they are 'robbing Peter to pay Paul'.

After the initial draw, I would advise paying as the project proceeds - after demo is completely done (and you know that for sure if you are out-of-town), then pay for demo....only. Then, give the GC or (Tile Contractor), enough to buy the tile only...after they are completely finished, then pay them the balance due on the tile ....only. If any inspections are requirted, make sure that they are done and signed off before paying. Ask to see the permit card.

2) SOW - Make sure that you have an ironclad and bulletproof Scope Of Work! This is where most projects go south....If you and your Contractor are not on the same exact page regarding what you are expecting to receive and they are expected to provide, then you are doomed to fail. I include every single thing, however small it may seem...

3) Do not try and save by buying materials yourself. This is not how it works...well not with good Contractors anyway. You will not actually save money, and you will irritate the Contractor by penny-pinching and micro management. Any decent Contractor can generally buy products for much less than you anyway, and even if you find a special deal on, let's say, Doors and Windows...who is going to take charge of delivery, unloading, storage, security, warranty and all that? They will and they will need to be paid for it.

That's all for now, Mr Greene.....Good topic!