10 Common Pitfalls to Avoid in the Fix & Flip Process

[Isidora-Izzy Sadzakov]

Fix-and-Flip projects are generally seen as promising business opportunities that can generate quick cash profit and good return-on-investment (ROI). An entrepreneur may need to completely transform a property or simply do some tender renovations before the building is listed back on the market at a higher price.

Broadly, the process of a given Fix-and-Flip project from beginning to end can be divided into three main phases: Buy, Fix and Re-sell. Each step of the process carries certain risks therefore entrepreneurs shall execute a careful evaluation of the project’s potential pitfalls.

STEP 1: BUY A DISCOUNTED/NEGLECTED BUILDING

The purchasing process refers to finding a neglected building at a discounted price, getting it appraised, and receiving financing. Firstly, you will need to find the right property for your venture. Start with connecting to local real estate agents and let them know what your criterion/budget is. It is highly recommended that you keep your eyes wide open for ad classifieds posted directly by property owners as usually, this is where the hottest deals come from. A subject property should be appraised by an expert who will also determine the estimated After Repair Value of the building. Additionally, all project expenses/costs for materials, labor, taxes, insurance, interest, others have to be calculated well in advance. If you need financing, obtaining a business loan is the next thing on the agenda. Connecting with a reliable loan broker will ensure quick approval of your loan application and smooth closing of the deal. The following mistakes should be avoided during the first step of the project:

• Overpricing the After Repair Value (APR) of the property. Always ask for the opinion of the experts or else you may not earn the anticipated profit;
• Under-estimate the number of construction works that need to be done. The operating expenses of the project may increase significantly if additional repairs are realized at a later point of the project;
• Over-estimate your resources/skills. If you are handy enough to fix things around your home, you may consider rehabbing a subject property yourself; however, if the building condition requires serious construction work it may be wiser to use licensed contractors;
• Let the deal go and give up. Maybe a few banks had denied your loan application and you cannot proceed further with the deal because of the lack of funds. There are alternative financial solutions and private lenders are pleased to collaborate with Fix-and-Flip entrepreneurs. The loan is secured by the subject property and the term is generally 12 months.

STEP 2: CONSTRUCTION WORKS

• Failure to obtain city permits. Construction-related permits need to be issued prior to the beginning of the rehabilitation of the building. If you are doing just cosmetic works as painting interior, carpeting, etc. on a residential property you may not need to apply for a permit. On the other side, all construction projects on commercial locations in California require city-issued building permits. If you are using a construction company to do the job, you will not need to worry about the permits; the licensed contractor is responsible for obtaining all mandatory documents. Starting the project without sufficient paperwork can result in monetary fines and cause serious construction delays which can further jeopardize the entire project.
• Taking too much time. The quicker the building is renovated and re-sold the higher profit is anticipated to be generated. Carrying expenses of the project (interest rate payments, insurance, others) will be significantly reduced if you manage to do a quick, yet quality fix of the property. Therefore, do not fall too much into details but rather focus on following closely the deadlines established in the master plan. Yet, do not forget to do the landscape!
• Failure to insure the property. If you are paying cash for the building, it is vital to have it insured or else you are taking the chance of losing it all. If you are financing the lender will require there is a property insurance policy issued under the Lender’s name before the loan is funded. Your loan broker team will take care of all of the details of the underwriting process so you will not need to do anything but simply include the cost of the policy in the project’s expenses.
• Hiring Non- licensed/Uninsured Contractors Hiring a small local crew doing the works will most likely reduce the labor costs, yet not having a signed agreement can put your venture at risk.

STEP 3: RE-SELL THE PROPERTY

• Overprice the Fixed Property. Do not forget your ultimate goal is to flip the property quickly and move on. The longer the property stays on the market the higher the carrying expenses of the project are. List the fixed building at a reasonable price;
• Poor record keeping. It is recommended to keep a good record for all paid invoices/ business expenditures so deductions can be verified if needed. Generally, IRS can ask for records for the last 7 years.

Finding the balance between doing a quality job and implementing cost-efficient/time-effective ways of renovating or completely transforming the building can be challenging thus proper planning and good organization of the process is critical for the success of a venture of a kind.