Engaging in house flipping is an exciting venture that offers the possibility of significant financial gains. Nevertheless, successfully navigating this industry demands meticulous planning and the ability to sidestep typical pitfalls that could hinder your progress. This in-depth guide will explore the most common mistakes made in house flipping, helping you avoid them, and guarantee the success and profitability of your project.
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TOP TEN HOUSE FLIPPING MISTAKES TO AVOID
1. Underestimating Renovation Costs:
One of the most critical mistakes in house flipping is underestimating renovation expenses. Failing to budget adequately for repairs, upgrades, and unforeseen costs can quickly diminish your profit margins. I can recall a particular flip that I did on a house that has a basement. This wouldn't necessarily be a bad thing, but the fact that the house is located in Louisiana is one of the main things that should have caused me some concern since this is not typically what we see in homes in this area. According to Alpha Foundations - Damp soil is the major culprit in most cases in the southern states as to why we don't have basements here.
Not only did this home have a basement but the basement leaked every time it rained. Before I purchased it, I had it inspected and was advised of this and some other things. I figured it was just coming from a crack in the sidewalk on the top level (and it was) but I learned well afterwards that it was coming in from many other places as well. Needless to say, 2 French drains later and a special sealer paint fixed it and I was able to sell it 6 months later (most time I ever had one on the market). I very much so underestimated my renovation cost on this flip because of the basement and spent way more than I budgeted for. Trust me, take heed to this valuable tip: Do your research and add a cushion for unexpected renovation expenses.
2. Overlooking Due Diligence
Skipping thorough due diligence can lead to purchasing a property with hidden issues such as structural damage, zoning restrictions, or outstanding liens. Always conduct comprehensive inspections and research before committing to a flip. I learned the hard way on the same basement house above with due diligence. Although basements are uncommon in Louisiana, septic tanks aren't uncommon and this home had one. What I did not know was that the septic tank was installed by the previous homeowner who also was a contractor. Well he didn't follow the exact guidelines that he should have followed when making repairs on his own home and the pipes extended onto his heirs property. When it drained, it actually drained onto another neighbor's property. We found out about this issue when the seller requested a septic inspection. I asked the neighbor could I have access rights and was denied. Luckily we were able to reroute the pipes onto the existing property and finally passed inspection by the city. Had I done my due diligence or knew to check on this before hand, I would have known.
3. Ignoring the Location Factor
Location significantly influences a property's marketability and resale value. Flipping a house in a less desirable neighborhood or disregarding local market trends can lead to longer holding times or difficulty finding buyers. Check Zillow.com or Realtor.com to see if anything has sold in that area and how long it stayed on the market
4. Overpricing the After-Repair Value (ARV)
Setting an unrealistic ARV can deter potential buyers or investors. You should determine what the home can be sold for BEFORE you buy it to flip. Buyers buy what they feel it's worth and what the comps allow. It's crucial to conduct thorough comparative market analyses (CMAs) and consult with local real estate experts to accurately assess the property's post-renovation value.
5. Rushing the Flipping Process
Another house flipping mistake to avoid is cutting corners or rushing through renovations to save time. This can result in subpar workmanship and compromise the property's appeal. Take the necessary time to ensure renovations are done correctly and to a high standard. Typically homeowners will have an inspection done and if anything can be found that's subpar, it's then. If you have to go back to fix what you should have done the first time, you will delay your own closing.
6. Inadequate Marketing and Staging
Effective marketing and presentation are essential for selling a flipped property quickly and at a favorable price. Neglecting professional staging (with certain properties) or failing to market the property effectively can prolong holding periods and reduce profitability. I have not staged every property that I have flipped but I do believe that some properties will sell faster than others when staged properly. Some houses can sell themselves just by the renovations that have been done, others not so much. If you struggle with getting walk-through's after listing it, you should consider staging. Speak with a local agent to find stagers in your area.
7. Underestimating Holding Costs
Holding costs, including mortgage payments, property taxes, utilities, and insurance, accumulate during the flipping process. Failure to account for these ongoing expenses can eat into your profits over time. The longer a property sits on the market, the more holding costs you have. Remember the goal is to buy, flip, and sell not buy, flip, and hold.
8. Overextending Financial Resources
Having too much debt or not enough capital reserves can expose you to market changes or unforeseen costs. Make sure you have a strong financial buffer to handle unexpected obstacles to avoid this house flipping mistake.
9. Not Having a Contingency Plan
Unforeseen setbacks are common in house flipping. Without a contingency plan such as additional funding or alternative exit strategies, you may find yourself unable to complete the project or sell the property as planned. Whenever I am interested in a house to flip, I consider 2 things: My allowable time that at I will allow it to remain on the market before I do something about it and secondly I calculate the numbers as if I would be buying it as a rental property to add to my portfolio. If I can't sell it in 6 months, I have to be able to rent it out. Determine what exit strategy works for you and be prepared to make make it work if it doesn't sell.
10. Neglecting Legal and Tax Considerations
Engaging in house flipping requires managing legal contracts, permits, and tax considerations. Not adhering to local regulations or handling tax responsibilities appropriately may result in penalties, setbacks, or legal conflicts. The more you flip, the more you need an accountant; otherwise, capital gains is something that you will be made aware of during tax time. Seek an Accountant and Attorney to determine if you should be an LLC, S Corp. or any other type of entity that works best for your house flipping.
By avoiding these common house flipping mistakes and adopting a strategic approach, you can significantly enhance your chances of a successful and profitable house flipping venture. Subscribe for more tips!
The information in this article are the opinions of the writer. Before investing in real estate, conduct extensive research and perform due diligence.
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