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Updated over 7 years ago, 05/04/2017
Has anyone ever flipped a house that went wrong?
Reason I ask is because I'm about to take out a HELOC to rehab a house. I am on the lists of many wholesalers. I know I have to check the numbers myself. But if they come back good and I get an inspection before I buy, WHAT COULD GO WRONG?
@Patrick Philip, "if they come back good" probably has THE biggest possibilities for error. Think about it. Why has anyone EVER lost money on a flip? Answer: Wrong assumptions!
List EVERY possible expense. Now go back and look at the list. Did it allow for TOTAL replacement of underground pipes, and foundation replacement? Did it anticipate having to replace ALL the rafters and roof, because of termite damage that was only discovered after purchase? Did it allow for the home being discovered to have previously been a meth house? Lead paint? Mould? Unpermitted addition/s? Vandalism/theft during rehab? The economy going south? Interest rates rise/s? Shoddy contracting work? Poorly chosen "improvements"? Adverse decisions by the City?
Those are just a few things that can crop up. But like you say: what could go wrong?...
Originally posted by @Brent Coombs:
@Patrick Philip, "if they come back good" probably has THE biggest possibilities for error. Think about it. Why has anyone EVER lost money on a flip? Answer: Wrong assumptions!
List EVERY possible expense. Now go back and look at the list. Did it allow for TOTAL replacement of underground pipes, and foundation replacement? Did it anticipate having to replace ALL the rafters and roof, because of termite damage that was only discovered after purchase? Did it allow for the home being discovered to have previously been a meth house? Lead paint? Mould? Unpermitted addition/s? Vandalism/theft during rehab? The economy going south? Interest rates rise/s? Shoddy contracting work? Poorly chosen "improvements"? Adverse decisions by the City?
Those are just a few things that can crop up. But like you say: what could go wrong?...
Wouldn't that stuff the caught in the inspection? And if not, is there any actual way to avoid these risks? Or is every house flip going to be a risk? I believe you named worse case scenarios, but is every flip like that? How many houses have you flipped, what percentage was successful, and what went wrong on those that weren't?
@Patrick Philip, I have zero interest in ever buying real estate specifically to flip. I've seen too many TV flips where these issues DO come up (despite prior inspections). I believe most inspection reports do come with disclaimers, to the effect: "all care taken, but no claimable responsibility"?
Many expensive problems only surface AFTER a rehab is started and layers are peeled back?...
The best way to avoid disasters in flipping is to locate and surround yourself with good professionals who know more than you do and listen to them before you leap into a property you can't walk away from easily.Before you go looking at properties,interview several contractors about their skills, education,and previous projects they have recently completed.Demand to see their licenses and insurance and verify absolutely everything they tell and show you.Demand references from previous clients and ask to see their completed work.Realize from the beginning that one guy can't and isn't gonna do it all.Most general contractors are carpenters and decoration specialists so you need to interview Plumbers,electricians,roofers,and foundation repair people too.Make sure they all know what your intentions are and that they on onboard with you asking for free inspections on a regular basis.
Patrick Philip
It's not so much about what could go wrong; it's about having multiple contingencies in place in case anything does go wrong.
Every business has its risks, but good business people plan for problems and address them when they come up.
So, something goes wrong and you spend more money than expected, do you have a backup source for extra financing? When there are lots of expected profits that's easy to do, but what happens when the overruns leave you with negative returns, will people still lend you money in that scenario? Probably not. If not, you'll have an unfinished project sitting on your hands you can't sell.
A very common problem is poor time management. Project takes longer than expected due to any number of reasons (permit delays, weather delays, parts and supply delays, man power delays) and that increases your carrying costs. That will eat your profits faster than anything. Remember time is money...
Pricing the house is the next problem. Over pricing the house will make it sit on the market a long time. The longer it sits the more carrying costs you have. By the time you lower the price to get it to sell the carrying costs have eaten your profits again. Always price the house based on the market dynamics that will get you quick offers...
Biggest problem I see lately is buying a house that wasn't a good project to begin with. An example, house near me was a shortsale that couldn't find a buyer. Needed too much work and was full of junk. Went to auction only a month later. Someone bought it, did the rehab. Looks nice inside. Looks the same on the outside. They put new vinyl siding on, but they did little else to the house. Zero curb appeal. Biggest problem is that it is only 900 square feet with a single bathroom. Most of the houses near it are 1,200 to 1,600 square feet. House has been on the market at a price that's way too high for the size. So they recently dropped it by $30,000. Its been on the market three months already. Still priced too high for the size. No one even calls to look at it. Always by the right house for your market or turn it into what your market wants...
#2 General Landlording & Rental Properties Contributor
Have you watched any of the tens of thousands of house flipping shows that have been on TV over the past 30 years. They are very popular and have pointed out all the possible hidden problems that flippers usually find that a inspection does not uncover. Inspectors do not look behind the walls.
There is a large percentage of first time flippers that go bankrupt always for the same reason, unexpected large expenses and way underestimating the costs associated with renovation work.
Novices don't know what they don't know. Primarily....Flipping is high risk.
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#4 All Forums Contributor
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Any one or company that has been actively involved in flipping has lost money on deals.. NO one is immune... so the risk for a first timer is you hit a bummer out of the gate and your now broke and in debt. Active flippers can weather a bummer and move on..
going into flipping 100% leveraged and no real reserves is very risky indeed..
- Jay Hinrichs
- Podcast Guest on Show #222
Patrick Philip I think the basic assumption should be that things WILL go wrong. That's what contingency funds are for and they are budgeted for because they are necessary. My advice would be to stress test your numbers:
1.) What if the rehab costs 30% more than expected?
2.) What if your ARV is off by 20%?
3.) What if it takes twice as long and your holding costs increase 100%?
You can come up with your own list (and more) but the important question to ask is if you lose money or end up bankruptcy. Most of the flipping stories here (and everywhere) are positive. If you haven't Googled "survivorship bias", do it and you'll then understand why.
Side note, the "What could go wrong?" fallacy isn't limited to flipping. Way too many people look at a pro-forma for a buy-and-hold and wonder how a renter could put rocks in a garbage disposal, why a water heater broke 3 days after the warranty was up, why a tenant would ruin the carpet doing drunken keg stands in the living room, etc. Real estate would be infinitely easier if those pro-forma spreadsheets always translated to reality.
as a semi new flipper myself who has a few under my belt trust me something will go wrong always. Well not necessarily go wrong but things you thought were a certain price will always be more. Add a 50% contingency on your first one, you will be lucky you did. I guarantee things will go over budget and past schedule. If you can make some money at all on the first one that's a win.
Don't get too attached to the house during the process and remember you can never outsell the market. Never trust wholesaler ARVs. Price the house exactly at the comps if you over price it will sit and even if someone makes an offer, if overpriced it won't pass appraisal and you will have to drop it anyway.
Another thing about appraisals, they do not look at fancy quartz or granite or fixtures or finishes you will get zero added value for things like that. Of course some markets call for it, But make sure you really know what the comps look like, do not waste money on unnecessary things for no reason
Good luck!
IMO, flips are the hardest thing to do in real estate. Everyone watches these flip shows on tv and say oh I can do that lol. But in reality there are so any costs that add up quickly. People forget you have bills to pay while your doing the flip. Such as the loan on thee property. The water bill and electric. Property taxes, etc.....then hopefully the flip doesn't take too long because that's more cost that your paying eating info your budget. Then you have to list the property on the MLS so you have to pay a realtor for that. If it sits awhile that's more cost that is added up lol. That's not to mention some of the things that could go wrong such as plumbing(very expensive) and under estimating a ton of cost while doing the project. Flips are nice though. They have great potential but I wouldn't recommend anyone start off or even do a flip until they have atleast two years of experience in the industry or they have someone mentoring/helping them.
We also just took out a HELOC to buy a SFR. My plan is to rehab it and get it to appraise high enough so that we can take a mortgage out on it and pay off the HELOC. We didn't even get an inspection and everything was ok-a husband/wife had lived in the house for 15 yrs, and it had been well cared for-The wife died and the husband moved out of state to be near his children. We learned this and other very valuable info by knocking on the neighbor's door. We then found a way to get into the house to check it out. There was enough value to the house that even if something was significantly wrong, we could have bulldozed it and come out even. The key is to get a good enough deal on the front end so that any of those unexpected costs can be absorbed without losing your shirt. I think you should be open to doing the BRRRR method and keeping the house- that way you too can pay off your HELOC then you can use the new house as a "bank." We just closed on the house and we haven't found any other issues than what we had already identified. If you get a house inspected, that will certainly rule out most of the terrible, costly issues-but again, make sure you got a good enough deal to cover anything that comes up.
Oh boy, what could go wrong? Not sure where to start. I don't have time to write it all out. My advice to you is to partner with a contractor or a seasoned flipper. Means you'll about half what you are thinking now - but you'll gain an MBA in experience... Think about it.
You can get the house inspected by 10 different inspectors, that does not mean that all hidden items will be detected. The extent of the rehab determines the amount of potentially hidden costs. If you do a lipstick flip (new paint, new carpet, new landscape, etc) you will likely not have anything major that was not detected (so long as the electrical, plumbing, roof, foundation, and HVAC was inspected).
When you do major rehabs where you are moving walls, taking things down to he studs, room additions, etc, you almost always run into additional costs (demo costs were more than anticipated, new plumbing and or wiring needed, longer than expected rehab timeframe, etc).
I have flipped a lot of homes in price ranges from $300k+ to $4M and I was able to flip my first 30 or so without any losses. I have since lost on 3, one of them a major $250k loss. I don't care how experienced you are, if everything goes bad (and that is possible), you are open to losses.
As for all the comments about flipping houses on tv shows, ignore them. A vast majority of that is entertainment, set up situations, and all of it dramatized. A day to day flip is boring to viewers so nobody would watch the show without the drama installed. None of these shows are proper representations of true renovation flips.
I have bought 3 REOs and walked through each with either my inspector or my GC first to get a detailed idea of rehab costs. Save up some cash reserves for the inevitable surprises or change of rehab plans once you get going. I am also very careful about location, know your local market and be confident that you can resell or rent the place out at the price you need to make a profit. There are certain school districts I will not go near. I wouldn't have thought of this years ago before I had kids, but now I understand it is sometimes the number one concern of home buyers. And don't overimprove, I had a stager come into my last property purchase before we even started the reno to give me her opinion--she shot down a few ideas I had and saved me thousands of dollars before the work even started.
Originally posted by @Will Barnard:
You can get the house inspected by 10 different inspectors, that does not mean that all hidden items will be detected. The extent of the rehab determines the amount of potentially hidden costs. If you do a lipstick flip (new paint, new carpet, new landscape, etc) you will likely not have anything major that was not detected (so long as the electrical, plumbing, roof, foundation, and HVAC was inspected).
When you do major rehabs where you are moving walls, taking things down to he studs, room additions, etc, you almost always run into additional costs (demo costs were more than anticipated, new plumbing and or wiring needed, longer than expected rehab timeframe, etc).
I have flipped a lot of homes in price ranges from $300k+ to $4M and I was able to flip my first 30 or so without any losses. I have since lost on 3, one of them a major $250k loss. I don't care how experienced you are, if everything goes bad (and that is possible), you are open to losses.
As for all the comments about flipping houses on tv shows, ignore them. A vast majority of that is entertainment, set up situations, and all of it dramatized. A day to day flip is boring to viewers so nobody would watch the show without the drama installed. None of these shows are proper representations of true renovation flips.
I've never seen the shows.
Are profits higher on more expensive flips?
Do you think it's a good idea to take out a HELOC to cover the down payment on a HML so I can get into more expensive flips?
Patrick Philip
Expect everything to go wrong, then of course try to prioritize and mitigate the risk until you're comfortable enough to move forward.
Inspectors can only give you superficial advice based on what they can see. The scary stuff is behind walls.
If you've sunk 100% of your money into it what's your plan for when your contractor needs 30% more to finish the job? How about 50% more?
What's your plan for when your appraisal comes in 10K too low?
You're never going to eliminate all of the risk, so you should be prepared to or comfortable with losing money, with the highest chance of that happening being your first time due to your knowledge risk.
Originally posted by @Patrick Philip:
Originally posted by @Will Barnard:
You can get the house inspected by 10 different inspectors, that does not mean that all hidden items will be detected. The extent of the rehab determines the amount of potentially hidden costs. If you do a lipstick flip (new paint, new carpet, new landscape, etc) you will likely not have anything major that was not detected (so long as the electrical, plumbing, roof, foundation, and HVAC was inspected).
When you do major rehabs where you are moving walls, taking things down to he studs, room additions, etc, you almost always run into additional costs (demo costs were more than anticipated, new plumbing and or wiring needed, longer than expected rehab timeframe, etc).
I have flipped a lot of homes in price ranges from $300k+ to $4M and I was able to flip my first 30 or so without any losses. I have since lost on 3, one of them a major $250k loss. I don't care how experienced you are, if everything goes bad (and that is possible), you are open to losses.
As for all the comments about flipping houses on tv shows, ignore them. A vast majority of that is entertainment, set up situations, and all of it dramatized. A day to day flip is boring to viewers so nobody would watch the show without the drama installed. None of these shows are proper representations of true renovation flips.
I've never seen the shows.
Are profits higher on more expensive flips?
Do you think it's a good idea to take out a HELOC to cover the down payment on a HML so I can get into more expensive flips?
Are profits higher, of course, but so are the risks of higher losses, so are the risks of longer hold times, so are the risks of lower sold prices and higher rehab costs.
No, I do not think it is a good idea to take out a HELOC to cover the down payment for a HML on more expensive flips. You are adding more leverage and exposing yourself to extreme risk being overleveraged and underexperienced in higher end flips.
Originally posted by @Will Barnard:
Originally posted by @Patrick Philip:
Originally posted by @Will Barnard:
You can get the house inspected by 10 different inspectors, that does not mean that all hidden items will be detected. The extent of the rehab determines the amount of potentially hidden costs. If you do a lipstick flip (new paint, new carpet, new landscape, etc) you will likely not have anything major that was not detected (so long as the electrical, plumbing, roof, foundation, and HVAC was inspected).
When you do major rehabs where you are moving walls, taking things down to he studs, room additions, etc, you almost always run into additional costs (demo costs were more than anticipated, new plumbing and or wiring needed, longer than expected rehab timeframe, etc).
I have flipped a lot of homes in price ranges from $300k+ to $4M and I was able to flip my first 30 or so without any losses. I have since lost on 3, one of them a major $250k loss. I don't care how experienced you are, if everything goes bad (and that is possible), you are open to losses.
As for all the comments about flipping houses on tv shows, ignore them. A vast majority of that is entertainment, set up situations, and all of it dramatized. A day to day flip is boring to viewers so nobody would watch the show without the drama installed. None of these shows are proper representations of true renovation flips.
I've never seen the shows.
Are profits higher on more expensive flips?
Do you think it's a good idea to take out a HELOC to cover the down payment on a HML so I can get into more expensive flips?
Are profits higher, of course, but so are the risks of higher losses, so are the risks of longer hold times, so are the risks of lower sold prices and higher rehab costs.
No, I do not think it is a good idea to take out a HELOC to cover the down payment for a HML on more expensive flips. You are adding more leverage and exposing yourself to extreme risk being overleveraged and underexperienced in higher end flips.
Okay. I haven't gotten an appraisal by the bank yet, but I expect to have about $160,000 in home equity. I'll just stick to the cheaper flips then.
I'm not saying you should not consider using the HELOC to invest, just not in the scenario you previously mentioned. Keep you risknlevel as low as possible and mitigate as many risks as you can through proper planning, good strategies, and good business practices.
Originally posted by @Will Barnard:
You can get the house inspected by 10 different inspectors, that does not mean that all hidden items will be detected. The extent of the rehab determines the amount of potentially hidden costs. If you do a lipstick flip (new paint, new carpet, new landscape, etc) you will likely not have anything major that was not detected (so long as the electrical, plumbing, roof, foundation, and HVAC was inspected).
When you do major rehabs where you are moving walls, taking things down to he studs, room additions, etc, you almost always run into additional costs (demo costs were more than anticipated, new plumbing and or wiring needed, longer than expected rehab timeframe, etc).
I have flipped a lot of homes in price ranges from $300k+ to $4M and I was able to flip my first 30 or so without any losses. I have since lost on 3, one of them a major $250k loss. I don't care how experienced you are, if everything goes bad (and that is possible), you are open to losses.
As for all the comments about flipping houses on tv shows, ignore them. A vast majority of that is entertainment, set up situations, and all of it dramatized. A day to day flip is boring to viewers so nobody would watch the show without the drama installed. None of these shows are proper representations of true renovation flips.
What exactly went wrong on the 3 that you lost money on? Specifically the $250k loss?
One was a minor small loss in which I underestimated the negative factor of 55 steps from street level to front door. I thought my awesome rehab plus the 180 degree city light views would overcome that. In the end, I had to take a lower offer amount.
In the most recent (last year), I had a property in Beverly Hills where thecrehab came out fantastic (one of my best jobs) and the expected sale price was $2.9M. Over 7 months were wasted because the agent that was hired failed to get the job done, a few months extra time in rehab delays, and lot line issue that was not discovered until the very end, and all told, about 10-12 months of added hold time at about $30k a month going out was the main factor in the loss. It also sold for $300k less so I lost all the potential profit plus the $250k. These are the risks when flipping multi million dollar homes, you can hit it big or you can strike out with bases loaded!