THE TOP 3 MISTAKES PEOPLE MAKE WHEN FLIPPING PROPERTY
March 21, 2017 By Larry Arth
If you are reading articles about flipping property chances are also very good you have watched the popular T.V. programs about fixing and flipping. There have been many so called reality shows (which are often far from reality!)
While you may think you are watching a show designed to show you how to fix and flip a property for profit, it may be important to point out that no-one had actually promoted that this is what the shows were about.
The name of the show may imply it. The outline of the show may suggest it, but in my belief they are not” how to videos”. They are T.V. programs designed to create an audience and sustain an audience so they can sell airtime to advertisers. The producers of these shows have a totally different business model and that is what they are focused on when making these shows.
Flippers drama is not reality
Notice how there is always last minute costly discoveries that will cost thousands or tens of thousands of dollars to fix the new found discovered problem and now the budget is destroyed. The last show I was watching, they discovered the roof was shot and that was going to add an $8,000 blow to the budget.
Interestingly enough, with multiple blows to the budget and running $20,000 or even $30,000 over budget, they still managed to pull off a profit equal to or larger than they expected because they took a chance and priced the home higher so they could make more money and funnily enough there were multiple buyers.
Often these types of repairs on these programs are found during a home inspection and a good flipper should know enough to get an inspection before the purchase. Even if you bought a property sight unseen, you would certainly know enough to identify things like a bad roof and add it to your budget.
T.V. indeed creates unnecessary drama for the purpose of making the show interesting and keeping you watching. There are however plenty of unforeseen issues that do arise that can create extra costs and headaches to flippers. Based on the hundreds of conversations I have had, I do see a few common mistakes that most flippers who struggle with profitability all have in common.
Top 3 flipping mistakes
Not having a true budget:
I know this may be hard to believe, but many people’s budgets are plucked from the sky. Investors research the price they can get for a home based on comparables and then subtract their desired profit and the cost to buy the property and the money that is left over is their budget.
Purchase price $60k, sell priced based on comparable is $100K. 20% profit based on sell price is $20k so repair budget is $20k. Wow this works on paper, but is not reality. You cannot back into the numbers. If the property requires $30k in renovations to make the property worth $100k, you need to budget $30k.
To be an effective flipper you want to sell good quality homes with great repairs or you will brand yourself as selling low quality garbage. You do not want to set a budget based on how much money is left in the equation to renovate. You want to establish true cost and if the numbers do not work on paper then you must move on.
Finding fix and flips that make sense is a numbers game. You will have to crunch numbers on a number of properties before you find a property worth buying. Establish your buying criteria and find a great calculator for computing purchase price, renovation costs, acquisition costs, liquidation costs, holding costs and you will be buying only those properties that have true potential for successful profitability.
Not having Contingency Funds:
Much of the drama created in flipping can be avoided by expecting the unexpected. When renovating you will often run into unforeseen expenses. When these needed repairs are uncovered it is important to have contingency funds to cover them.
While you always want to estimate the value of each item you want to repair as accurately as possible, often these prices can be higher than expected. Sometimes the cost to retrofit new to old may have unforeseen costs. Having contingency funds to cover this will keep you on budget and save lots and lots of stress..
The amount you want to allocate to contingency funds will depend on things such as how accurate your estimates are, the depth to the types of renovations you will be doing, etc. I have used as little as 5% and as much as 15% depending on how detailed the renovations are. Cosmetic renovations for example have less surprises than gutting down to the studs and upgrading entire rooms.
Not considering acquisition, liquidation and holding costs:
This goes hand and hand with budgeting, but as these are intangible expenses I hear that they are often overlooked. Even when purchasing with your own money in the form of cash, you want to consider the time value of money. This money tied up is costing you money. If it is your money it needs to be making you money each day.
Often it is borrowed money and you have interest accruing every day. The number of days or weeks or months you are making interest payments needs to be added to your costs. The cost of the loan and any closing costs on both the purchase side as well as the sell side all need to be factored into your total costs.
I always hear passive investors who now want to invest in fix and flip real estate who overlook these expenses. Fix and flip real estate investing of course is very much an active investor’s sport. while the game may be the same, the rules are a bit different. It takes a great deal of personal involvement and understanding of all expenses incurred to win .