How to Lose Your Shirt Flipping Properties

Have you seen any of those Flipping shows or the commercials about Flipping seminars, workshops or boot camps? I was told as a child, “Do not believe anything you hear, and only have what you see.”, and I think that might apply in this case. The shows or commercials make it look soooooo easy! Like there is nothing to it.

Simple – you buy if for less, rehab it (very fast, or so it seems on the shows) and then sell it for much more than you bought it/rehabbed it for, and make a ton of profit! Just like that! No issues, no contractor delays, no rehab budget overruns, no headaches. Truth be told, in the real world (not TV show land), the projects are NOT that simple!

Here are how somethings can go wrong (mistakes) and totally screw up your project and your chance of any profit:

Mistake #1) You can get caught up in the purchase negotiating and end up overpaying for the property. Believe me when I tell you that this is very easy to do and is a very common mistake made by real estate investors when they buy, regardless of the plans for the property (flipping or holding). It can be especially easy to mess up here when there are realtors involved as they sometimes try to get bidding wars going between prospective purchasers. If you make this mistake, you can totally screw up the numbers on the deal and either end up under-rehabbing to get back on track (NOT GOOD!) or you let it play out and make less money (hopefully not a total loss).

Mistake #2) You either forget to bring a flashlight with you to look at all parts of the basement (or crawl space) OR choose to avoid that area of the property during the initial inspection/viewing of the property you are thinking of buying. The basement is a crucial area as typically if there are issues in the property the basement area highlights those issues (plumbing leaks, electrical issues, foundation concerns, water intrusion, etc.).

Mistake #3) You do not know anything, or enough, about contracting/home improvements and either choose NOT to hire a respectable general contractor (GC) to help you assemble the rehab budget and scope of work, or you end up choosing the wrong GC to help you accomplish this. The scope of work (SOW) and rehab budget are the road map to get you to the finished product to be sold. These are very important items in the flip as if there are shortcuts or screw ups on these the finished product will not be the expected result and may have to be sold under the targeted ARV in order to get the property to move on the market. Sold under the ARV = less revenue, which means less profit.

Mistake #4) You think that just because the contractors chosen are licensed, insured and permits were pulled that you never have to check up on them or worry about them not being on schedule as planned. Rehab projects almost ALWAYS have issues. Maybe timing delays (waiting on materials, permits, inspections, etc.), maybe costs overruns when things are discovered during the rehab that were NOT on the original plan (on the SOW), maybe contractors that are easily distracted by other things in their lives (business or personal) that pop up and take their time, energy and focus away from your project. You must schedule regular visits to the project to keep your pulse on the progress and keep everyone involved motivated and in check.

Mistake #5) You neglected to calculate in your original numbers for things such as: closing costs at the property purchase, title insurance costs, carrying costs for utilities, insurance, interest costs on any borrowed money for the project, penalties from the local municipalities in case you are caught without a permit on the site, or performed work outside the scope of the permit issued, any oops costs (contingency figure in the SOW) for unforeseen rehab items discovered. Yes, it is difficult to plan for everything, but these costs are often part of every project.

Mistake #6) You didn’t do the homework to see where the greatest number of homes to homeowners are being sold in your market and purchased the property in a neighborhood that isn’t as attractive to homeowners. This mistake happens way too often, especially with newer flippers. When you are searching for the right property for the flip project, you have to place yourself in the potential buyer’s shoes. Where do they want to live? What neighborhoods have the greatest number of home sales within the last 6 months? Chances are the neighborhoods that do are attractively priced to first time homebuyers, and offer amenities that are attractive as well (yards, basements, garages, closets, shopping, good schools, etc.) and have equally as many, if not more homeowners in them than renters. This mistake should be avoided at all costs, as you do not want to get stuck with a finished product that either can’t be sold to a homeowner or has to be severely discounted in order to move it.

Mistake #7) You chose poorly when selecting a realtor to market the finished product. Not all realtors are the same. Some specialize in marketing to first time homebuyers, others specialize in listing properties (not necessarily showing properties), while still others focus on selling REO’s and properties in need of improvements to real estate investors. You should interview realtors as intensely as you do contractors and pair them to your property accordingly. Make certain that the one that you choose understands that the goal is to sell it for as close to the targeted sale price as quickly as possible. Flippers hate finished properties that sit on the market. Interior dust is the flippers worse friend, as that means the property is sitting, not selling.

Mistake #8) You didn’t realize that the buyer may choose to have a home inspection, and you have to decide if, as the seller, you choose to make any concessions for repairs or credits for such prior to closing. The home inspection results have the potential to be a deal killer (back to the drawing board and remarketing). Negotiating sometimes comes in to play here to keep the deal together, but realize that if that happens, there is a cost born to either take care of the repairs prior to closing or credit supplied at the closing table for the items of repair in the negotiations.

Mistake #9) You didn’t realize that there are costs associated with disposing of the flipped property too. Such as: realtor’s commission, maybe seller help to the buyer for closing costs assistance, bring-to-date costs for water, sewer, taxes, any homeowners association dues, etc. that were incurred during ownership. Exit fees, or payoff fees from any lender that you borrowed money from for the project, or other unforeseen fees that creep in at the last minute and end up on the Seller’s side of the closing statement (HUD 1). These fees are real, and almost never discussed in the Flipping shows, workshops or boot camps.

I do not mean to sound like a Debbie Downer, but there are many working parts to a property flip, and if you do not try to avoid these mistakes, and maybe others too, you may find yourself upside down on the deal and either make very little profit, or none at all. With all of this said, if you do the homework, try to plan for everything and allow cushion in the numbers for the “What the heck!” moments, it is possible to earn profits flipping properties. Keep this phrase in mind, as it is also very important: “The profit is earned when the property is purchased.” In other words, the purchase price is the most critical number. Overpaying for the property can destroy the deal from the gate!

If gaining knowledge, resources & contacts FOR FREE by tapping into the minds of seasoned real estate investors is important to you, then subscribe for our free newsletter at: www.REIknowledge.com