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The 7 Money Mistakes that Turn a Flip into a Flop

The 7 Money Mistakes that Turn a Flip into a Flop
4 min. read
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Image: Patryk Kosmider / Shutterstock.com

When it comes to flipping properties, you’ve got to take the TV shows with a pinch of salt. It’s no easy task to do it right and actually make money from it. Along the way, there are countless ways the rookie — and indeed the experienced — house flipper can go wrong. The following money mistakes are best avoided to prevent your flip from becoming a flop, check them out below:

Not knowing your market and paying too much

Educating yourself is essential if you’re serious about house flipping. The more you know about your market the better. Not knowing your market can have disastrous consequences, the most common of which is that you pay too much for a property.

Now, the idea of flipping a property is buying low and selling high. But, if you’re not familiar with a particular market, what looks like a great price might actually be higher than normal for the neighborhood. In this way, it’s unlikely you’ll make much profit, and there’s even the question of whether you’ll make your money back at all.

Not researching financing options

Nowadays there are hundreds of different ways to obtain financing for a real estate transaction. Unfortunately, not everyone seems to have gotten the memo, and many would-be flippers continue to obtain a mortgage through their bank, often with minimal negotiations regarding the terms. A variety of other products exist, including low interest, short-term loans. Do your research, and be sure to check out hard-money loans in particular.

Going all-in on a whim

Sometimes, a property looks too good to pass up; a home selling well under the market value, with seemingly only cosmetic repairs to make. So, you snap it up since you were in a bit of a rush to get your hands on something anyway. But, buying before you’ve budgeted normally only ends one way, and you’re seldom the winner. It takes time to really see what’s up with a house, what needs fixing, and who might buy it. Never rush, and never buy before you budget.

Ignoring the 70% rule

Many successful flippers follow the 70% rule, which states that they should not pay more than 70% of the after-repair value (ARV) of a home, minus the value of the repairs needed. As an example, if a flipper is interested in a home with an ARV of $200,000, that needs $25,000 worth of repairs, they should not pay more than $115,000 for it. In this way, they have a large buffer zone in case repairs cost more than expected, and while they might not make as much profit as originally expected, they are unlikely to end up losing money. To follow the rule, it’s necessary to have an accurate idea of the true value of the home after repairs, plus experience in sizing up and evaluating the cost of renovations.

Not paying for professional help

No one is an expert in every field, and sometimes it’s important to hire help. However, if you’re new to the game, you might be loath to spend extra money on services you think you could probably do yourself. This is dangerous, but an all-too-common mistake. If you’re not experienced enough to understand the local market or complete the process of buying and selling a house quickly and efficiently, it’s a good idea to hire a real estate agent who is. Likewise, many flippers skimp on hiring a home inspector, but this initial saving can often cost in the long run, when bigger, more expensive problems become apparent.

Over-doing renovations

So, you’ve bought a likely looking house, and you want to transform it into a luxurious home. You go out and buy the most expensive materials, fittings, and appliances, confident that potential buyers will immediately fall in love with what you’ve done. Unfortunately, going all out on renovations hardly ever pays off. Instead, you run the risk of pricing yourself out of the market, by increasing the value of the house so much that it is too expensive for the people who are looking to buy in the area.

Paying contractors up-front

One of the most common and costly mistakes is to pay contractors up-front. This is a risky move, as there’s a chance they might never do the work, or will continuously delay it. Aside from that, anything could happen in the meantime, from an accident that prevents them from working to severe weather that renders your home a ruin. In each scenario, you lose your money. Instead, agree on a payment schedule, so that even in the worst-case scenario, you limit your potential losses.

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