Flipping homes can be a lucrative way to invest in real estate, especially in areas where home prices are appreciating rapidly. The concept is simple: Buy a home under market value, make repairs and improvements, then sell it for more than you paid.
During a time when foreclosures and interest rates are down, it’s especially tempting to acquire homes to flip with financing. But using leverage (debt) to acquire homes to flip adds a little bit of risk compared to paying cash, simply because carrying costs are higher.
Greater carrying costs mean it’s even more important to avoid missteps flippers can make along the way. Here are four common home flipping mistakes to avoid.
Overpaying for the home
The profit on a house flip is determined by the proceeds from its resale minus the acquisition and repair costs. For example, if you pay $150,000 for a home, put in $15,000 worth of improvements, and sell it for $215,000, your net gain is $30,000 ($215,000 minus $185,000 in costs).
If $30,000 is your goal and $215,000 is the resale price the market will bear, then you really can’t afford to spend more than $150,000 to acquire the property. If you do, and simply try to skimp on repair costs to cover the difference, you might wind up with a home that can’t get a top-of-the-market resale price.
Once you’ve established the margin you need to make on a flip and accurately estimate the cost of repairs, you’ll know the maximum amount you can spend to acquire the property.
Miscalculating repair costs
Acquiring a property at a great price won’t matter much if you spend more than you should on repairs and improvements. Going over budget eats into your profits.
It’s imperative, then, that you get an accurate estimate of what it will cost to make the necessary repairs and improvements. If you’re an experienced contractor, you can probably calculate those costs yourself. If not, it’s well worth it to find a reputable contractor you trust so that you get the clearest possible picture you can of expenses.
It’s also helpful to build in some sort of contingency amount into the estimate so that if you encounter something unexpected, there will be money in the budget to cover it.
Over-improving the home
When you buy a home to flip, the repairs needed are sometimes very obvious. Problems with drywall, carpeting, kitchen cabinets, appliances, and more are easy to see and estimate costs to replace.
But there’s also such a thing as over-improving a home. Installing expensive hardwood floors when a good luxury tile flooring product will do is one example. Spending time and money on fancy built-in bookshelves or crown molding throughout a home might not be the best use of resources.
There can be a temptation to make the home the nicest on the street, but the nicest home on the street rarely sells for enough to cover the extra upgrades.
Ignoring the market
No matter what you pay for a home or how much money you put into improving it, there’s always going to be a top-end for sales prices in any market. You can think of it as the maximum resale price you’ll get no matter what you spend trying to add value to a home.
Knowing the market helps determine what to spend on acquisition and repairs. If homes are selling in a certain range in a certain amount of time, you can get a good idea of what to expect when it’s time to re-sell your flip.
It also might help to talk to a real estate agent about the features in nearby homes. What are the strongest selling points, and what are the things that turn off buyers? That kind of information helps to avoid over-improving a home, too.
The bottom line
The bottom line on any flipped property can be affected positively or negatively by a mistake or two along the way. Avoiding the most common ones can help any flipper be more successful.
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