Pitfalls to Avoid When Flipping Houses

We love working with clients that are looking to “invest” in real estate. I’m talking about the every-day, hardworking people who have built up a little bit of a nest egg and who want to grow that nest egg by investing in real estate. The purchasing and selling of properties, called flipping, or the purchasing and renting of properties is an excellent tool for building your net worth and creating wealth. While an investor can earn high returns on their investment, there are potential pitfalls that can cost a lot of money. We believe in working with our clients to help them find properties with high ROI potential while helping them navigate the pitfalls to mitigate as much risk as possible in their investments. Here is some of the advice we give our clients:

1) Fully Understand the Profit Potential

The first thing we do to help our clients is perform a comprehensive market analysis to determine if a property is worth the investment. As an investor, you will want to know what the profit potential could be. There are no guarantees in real estate, but we can help you make the best possible decisions. We evaluate every property as if we were going to invest our own money, and sometimes just knowing the value is not enough. You also need to understand the market dynamics and trends. A property may have great profit potential, but based on the market, you may be sitting on that investment for a while if properties aren’t moving fast in that area. Things like the local schools and politics, zoning codes and master plans, and slow housing markets can all impact the project and make the investment riskier. How much and how long are you willing to invest, and is the profit potential worth it? We will provide you with as much information as we can to help you make informed decisions.

2) There is Such a Thing as OVER Renovating.

Flipping a property does not mean that you must put high-end, designer finishes in every property. Sometimes, it just doesn’t make good financial sense. It all goes back to #1; knowing your value, knowing your market, and knowing your profit potential. The goal of flipping property is to MAKE MONEY. You minimize your budget to maximize the profit. We work with our clients to help them understand what renovations they will likely get a return on and help them avoid costly mistakes that will impact their bottom line. It won't make sense to include marble countertops, heart-of-pine floors, stainless-steel appliances, designer closets, etc. into every property. It is possible to lose money by putting higher quality finishes in a property if you will not receive a return on those expenditures. We will help you determine what renovations will offer you the biggest bang for your buck!

3) Make Sure Potential Buyers Can Mortgage the Property

This is one of the most important factors in flipping properties. The vast majority of buyers have to secure a mortgage loan in order to purchase a home. The importance of knowing and understanding the mortgage process cannot be stressed enough. As an investor, you will want to understand what parameters the property must meet for a mortgage company to approve the loans and for what loans the home will qualify. Doing your due diligence on the front end, before you purchase a property, can save you a lot of money and heartache from investing in a property that lenders may not approve for common mortgages that buyers prefer. It's also extremely important to recognize the behavior patterns of the buyers-market. Are buyers saving for conventional loans? What are the current interest rates? What will a monthly note be for a mortgage on your property, and what earning bracket of buyers will you attract? These are all essential questions to answer BEFORE you purchase a flip property. Additionally, you will want to know how much insurance will be required for someone who holds a mortgage, as that can drastically impact the ability of a buyer to afford to purchase your property. As we walk with you through the flipping process, we will help you to understand the mortgage potential of the property you are interested in purchasing.

4) Be Prepared for the Known-Unknowns

You can pretty much count on the fact that there will be something that you were not aware of when you purchased the property that WILL COST YOU MONEY. It’s pretty much the only guarantee there is in the flipping process. Even if you performed the most thorough inspection possible, unforeseen issues and repair needs are extremely likely happen in the life of a flip. We encourage our clients to have contingency reserves, what we call the “known-unknowns,” in their flip budgets. We recommend to not have your budget so tight that there is no room for unforeseen issues that pop up. In the end, it could cost you a lot of time and money and ruin any profit potential the project may have had.

Although not as glamorous as HGTV makes it appear, flipping properties can be a solid way to grow your investment portfolio. Let us walk with you through the process and helping you navigate the potential pitfalls that could occur.

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