Real estate investors have been utilizing the fix and flip approach as an investment strategy for years, but it wasn’t until the advent of house flipping reality shows on major T.V. networks like HGTV that scores of individuals started jumping on the house flipping bandwagon. Although these shows make it seem like the process is relatively straightforward and uncomplicated, that’s typically not the case in the real world. New investors have to be mindful or they can dig themselves a major financial hole rather than make a profit on an attempted house flip. To avoid this conundrum, here are five common mistakes to avoid before getting started in the house flipping industry to get you off on the right foot.
MISTAKE #1: Lack of Research
While local real estate agents familiar with the local market are a tremendous asset, you shouldn’t rely on them solely when it comes to familiarizing yourself with the dynamics of the real estate transactional process. It’s still important to put in the effort to know the area—including finding out the answers to questions like: What types of homes and price ranges are typical of this neighborhood? What house manufacturing style and size are common in the area? What is the school system like? Is the location convenient to retail, shopping, or highways? How long are properties lingering on the market? Conducting this type of in-depth analysis will assist you in determining whether or not the area you are contemplating making an investment in is a viable opportunity or whether you should look elsewhere to conduct your fix and flip project.
MISTAKE #2: Not Crunching the Numbers in Advance
Numbers are the name of the game when it comes to flipping properties—especially the ones that are associated with your available budget and timeline. To get a better idea of these important metrics when it comes to your respective project, work with a local agent to acquire a property at an ideal price point that is located in a promising area in terms of potential growth and appreciation in value. Collaborate with your agent to examine comparables in the locality and determine an estimated after-repair-value (ARV) for the home. After you have the ARV, subtract out the purchase price and you are left with the available capital left to cover rehab expenses, staging costs and what you will take home as the net profit. Typically, investors are seeking to pocket anywhere between 10-20% when it comes to fix and flips, so plan accordingly before knocking down any walls.
MISTAKE #3: Not Getting Permits
If your contractor suggests that you should start work without obtaining the proper permits, it’s advisable you fire that contractor and start looking for a new one that understands the importance of playing by the rules. If you are attempting to save money by avoiding the cost of permits, it’s simply a dead end and will actually end up costing you more time and resources in the long run in the form of additional fees and inspections. Local code enforcement officials will halt the job when it’s brought to their attention that you do not possess the requisite documentation. And even if you manage to sneak under their radar, sophisticated buyers will demand proof that the work has been completed per official local code mandates—especially if the property you are selling is at the higher end of the price range.
MISTAKE #4: Attempting to Sell to High or Low
Determining the appropriate market price form the onset of a project is vitally important when it comes to the house flipping process. The last thing investors want is for the property they just spent a ton of money on in the form of renovations to linger on the market, which potential homebuyers will interpret as there being something fundamentally wrong with the property and subsequently avoid it. Correct price setting will get you more homebuyers through the door and ultimately generate more offers—both of which are ideal when it comes to your bottom line.
MISTAKE #5: Not Staging the Property
After going through months of extensive renovations, it is time to highlight all of your hard work. That’s where home staging comes into play. This process functions to accentuate the key features of the house and will remove questions that potential homebuyers often struggle with like: “Where will the furniture go?” or “What color schemes work with this lighting?” Home staging gives homebuyer’s that “wow” factor as soon as they walk through the front door. The chances of getting an offer are substantially enhanced when this type of first impression is made. So be sure to factor in the home staging cost in your budget and seek out a talented interior designer.
5 Mistakes to Avoid with Your next Fix and Flip | Gauntlet Funding – Melville, NY