Common House Flipping Mistakes

A main problem I see with new flippers is they flip based off a budget instead of a neighborhood.  Let me illustrate this with a story.

A friend of mine saved up some cash and decided to try his hand at renovating and reselling a house in his area.  He called me asking if I had any tips and words of wisdom so I met with him for lunch.  He started off by telling me about a few listings that he was looking at, all of which I thought were in terrible neighborhoods.  “Why don’t you look at this other area?  Redevelopment’s starting to move that way and they’re seeing an influx of younger families looking for cheaper homes.”  He laughed and said, “I can’t afford that neighborhood!  I’d have to wait another year before I have enough cash to start there.”  Well against my advice, he bought a small 1200 sf home in an impoverished area and turned it into a shining beacon in a sea of misery.  The problem was, once he put it back on the market, no one was biting.  Prospects would drive through, look at the surrounding area, and take their money elsewhere.

He broke the cardinal rule in real estate that is location, location, location.  The renovated house looked fantastic and he was even under budget but honestly, who in their right mind would pay that kind of money to live in a higher crime and run down area!  Eventually, he decided to rent it out, and was able to convert his construction loan into a traditional mortgage.

My advice? Look for the worst house, in a good area.  Start in neighborhoods you know well and utilize local resources.  Talk to realtors, ask them where they see the market moving and which areas are up and coming.  You’re much better off waiting, saving more money than trying to entice big bucks to a bad neighborhood.

Another common problem with new home flippers is the inexperienced DIY crowd.  It’s very tempting to watch flipping on TV and think “Gosh that doesn’t look too hard I could do most of that myself.”  Don’t overestimate your abilities and always have a trusted contractor work on your projects.  Instead of tackling a project yourself, ask a contractor for easy ways for you to save money.  He’ll probably recommend you do the demo work yourself, and help him with tedious but very easy tasks.  Most contractors are able to do the work faster, and nowadays cheaper than you can, so it’s best to take their advice.  Another reason I recommend hiring a good contractor is the speed of the project.  Once you close escrow your average renovation shouldn’t take more than 45-60 days (on an average sized house) and if you try to tackle a single project at a time it’ll end up taking you six months.

Hiring a good contractor helps on the sales end as well.  Home buyers can spot shotty work, and expect renovations on their potential home to be done right the first time.  Nothing ruins a reputation faster than trying to sell a subpar product at par value.  I’ve walked into many houses on the market that screamed “I watched too many episodes on HGTV” and thought no one would notice this entire house is DIY.”

Lastly, don’t get too discouraged.  Many first timers (or second or third for that matter) finish projects, close escrow, pay closing costs only to find they made the same amount as if they still worked their old 9-5 job.  There’s a learning curve like anything else and overtime you’ll find ways to find houses cheaper, finish projects faster, and streamline your process.  Not every flip will be a slam dunk, I’ve lost thousands on flips before and it definitely hurts.  Push forward and I look forward to seeing everyone succeed!

 

Another problem with new flippers is their over confidence in their own ability to do renovations.  I’ve run into countless cases where individuals are laying out their renovation plans and they expect to be able to do much of the work themselves because either they’ve “seen it on TV” or “have a contractor buddy.”  Unless that contractor buddy and his crew are willing to work for free, you’re already in a world of hurt.  First off, I don’t NOT recommend doing some work yourself, if you have advanced knowledge or experience in what’s going on than of course go for it!  What I always see however is someone getting way in over their head and end up hiring a GC to redo all their work costing them more money and extending the project another 2 months.  The key with a successful flip for most transactions is being able to do it under 45 days, which is difficult with a one-man crew, and being able to renovate multiple rooms at once.

I recommend, if you’re dead set on DIY, involve a trusted contractor as much as possible, even if it means paying him a consulting fee.  You want multiple opinions and inspections not only to ensure the work is done right, but to make sure everything’s to code.

 

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