TOP 5 FIX FLIP MISTAKES TO AVOID IN REAL ESTATE

[Michael Corso]

It looks so easy! Buy a house, make a few cosmetic fixes, put it back on the market and make a huge profit. At any given time there are half-a-dozen shows on television where good-looking, well-dressed investors make the process look fast, fun and profitable. And plenty of homes are getting flipped. ATTOM Data Solutions reports that more than 200,000 in the United States were bought and the resold with the same 12-month period in 2017. That’s just under 6% of all the single-family homes and condominiums sold all year. Yet, the road to real-estate riches isn’t all about curb appeal and “sold” signs. Far too many would-be real estate moguls overlook the basics and end up failing. In this article, we'll look at the five biggest mistakes would-be flippers make – and how to avoid them.

Flipping (also called wholesale real estate investing) is a type of real estate investment strategy in which an investor purchases a property not to use, but with the intention of selling it for a profit.

That profit is typically derived from price appreciation resulting from a hot real estate market in which prices are rising rapidly or from capital improvements made to the property – or both. For example, an investor might purchase a fixer-upper in a "hot" neighborhood, substantially renovate it, then offer it at a price that reflects its new state-of-the-art appearance and amenities.
Investors who flip properties concentrate on the purchase and subsequent resale of one property, or a group of properties. Many investors attempt to generate a steady flow of income by engaging in frequent flips.

1. Not Enough Money

Dabbling in real estate is an expensive proposition. The first expense is the property acquisition cost. While low/no money down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Also, if you're financing the acquisition, that means you're paying interest. Although the interest on borrowed money is still tax-deductible even after the passage of the Tax Cuts and Jobs Act, it is not a 100% deduction. Every dollar spent on interest adds to the amount you'll need to earn on the sale just to break even. And if you use a mortgage or home equity line of credit (HELOC) to finance your flip-house purchase, only the interest is deductible. The principal, taxes and insurance portions of your payment are not deductible.

Research your financing options extensively to determine which mortgage type best suits your needs and find a lender that offers low interest rates. An easy way to research financing costs is by using a mortgage calculator. This tool will also allow you to compare the interest rates offered by various lenders. Of course, paying cash for the property eliminates the cost of interest, but even then there are property holding costs and opportunity costs for tying up your cash. You might want to consider a hard money lender.

2. Not Enough Time

Renovating and flipping houses is a time-consuming business venture. It can take months to find and buy the right property. Once you own the house, you'll need to invest time to fix it up. If you have a day job, time spent on demolition and construction can translate into lots of lost evening and weekends. If you pay somebody else to do the work, you’ll still spend more time that you expect supervising the activity and the costs of paying others will reduce your profit.

Once the work is done, you'll need to schedule inspections to make sure the property complies with applicable building codes before you can sell it. If it doesn't, you need to spend more time and money to bring it up to par. Next, you'll need to invest time to sell the property. If you show it to prospective buyers yourself, you'll spend plenty of time commuting to and from the property and in meetings.

3. Not Enough Skills

Professional builders and skilled professionals, such as carpenters and plumbers, often flip houses as a sideline to their regular jobs. They have the knowledge, skills and experience to find and fix a house. Some of them also have union jobs that provide unemployment checks all winter long while they work on their side projects.

The real money in house flipping comes from sweat equity. If you're handy with a hammer, enjoy laying carpet, can hang drywall, roof a house and install a kitchen sink, you've got the skills to flip a house. On the other hand, if you don’t know a Phillips-head screwdriver from a flat screwdriver, you will need to pay a professional to do all of the renovations and repairs. Accordingly, the odds of making a profit on your investment will be dramatically reduced.

4. Not Enough Knowledge

To be successful, you need to be able to pick the right property, in the right location, at the right price. In a neighborhood of $100,000 homes, do you really expect to buy at $60,000 and sell at $200,000? The market is far too efficient for that to occur on a frequent basis.

Even if you get the deal of a lifetime, snapping up a house in foreclosure for a song, say – you need to know which renovations to make and which to skip. You also need to understand the applicable tax laws and zoning laws, and know when to cut your losses and get out before your project becomes a money pit.

Keep in mind that Zillow, the real estate listing firm, is now flipping homes in select markets. The company expects to buy and flip properties within 90 days, and they’ve got the data and knowledge to offer mom-and-pop operators some fierce competition. Big-league lenders have also started to seek profits in the flip-loan marketplace, with global investment firm KKR & Co. Inc. (formerly known as Kohlberg Kravis Roberts &Co. and KKR & Co. L.P.) joining other private investment firms seeking a piece of the action.

5. Not Enough Patience

Professionals take their time and wait for the right property. Novices rush out to buy the first house that they see. Then they hire the first contractor that makes a bid to address work they can't do themselves. Professionals either do the work themselves or rely on a network of pre-arranged, reliable contractors.

Novices hire a realtor to help sell the house. Professionals rely on "for sale by owner" efforts to minimize their costs and maximize profits. Novices expect to rush through the process, slap on a coat of paint and earn a fortune. Professionals understand that buying and selling houses takes time and that the profit margins are sometimes slim.