Flipping Newbie

[Avi Cohen]

Hello all,

I have been doing real estate for the last 10 months and have two rental properties.

I am about to close on my first foreclosure and plan on rehabbing and flipping.

Are there any basics that I should know about flipping as well as basic first-timer mistakes that I can avoid? I can give information upon request so you can understand my request better if necessary.

I am working with a contractor I have already used on previous jobs and trust. He is getting his pay as 15% of the profit on sale so he gets paid when we do, so he's motivated to do the job well and on-time and within budget. The larger the margin the larger his profit.

Thanks so much in advance!

[James Vermillion]

Avi, there is a lot to know about when it comes to rehabbing but I will cover a few of the most basic mistakes new rehabbers make, although it sounds like you have some real estate investing experience so hopefully you can avoid these:

1) Overestimating ARV (after repair value): it is human nature to be optimistic and look at the best case scenario, but you have to be realistic when analyzing the end sale price of a property. You need to know how to identify proper comparable properties and make the correct adjustments. Failing to estimate propertly can kill your profits, for example: if you estimate a house will sell for $120K and you plan on making $20K, you will be left with zero profit if the house is actually worth $100K.

2) Underestimating rehab costs: this is the one I see over and over again. The fact of the matter is it is very difficult for new rehabbers to understand how much money is going to be required to complete the rehabs. This is generally due to not knowing the true costs of materials, not accounting for all the work to be done, and surprise problems that were not expected. Make sure you understand all the costs associated and include a contingency in your estimates.

3) Underestimating time of rehab: again, inexpierence causes people to miss the mark when they estimate rehab costs. A one month estiated renovation turns into a 4 month renovation and the holding costs start adding up.

4) Not understanding holding costs: this is the part that some people totally forget. Holding a property is not free... you have to pay insurance, taxes, debt servicing (if financed), utilities, etc. These expenses add up very quickly and can eat into your margin very quickly.

Hopefully that is helpful, and good luck. Let us know how it turns out!