What NOT TO DO When Flipping Homes.

In the past five years, our team has fixed and flipped hundreds of houses in Colorado and Nebraska. Along the way, we learned valuable lessons about best practices, but more importantly, we learned the major house flipping mistakes.

As Will Rogers, famed actor and social commentator said, “Good judgment comes from experience and a lot of that comes from bad judgment.” In this blog, I’ll take you through the flipping process from potential property evaluation to final sale. I’ll pinpoint our mistakes as well as those we’ve seen our competitors and industry peers make and how to avoid them. Use the information below as a guide to building a home-flipping business that provides you with income, flexibility and fulfillment.

Mistake #1: Property Evaluation at Face Value. Trusting the Seller to Give You the Correct After Repair Value (ARV).

The path to failure starts with relying on the property seller, the person who stands to gain the most from a sale, for an accurate After Repair Value (ARV) estimate. This is particularly true when working with a wholesaler or a realtor who tells you the property will easily sell for X dollars after renovation, and that buying the property is a screaming deal. If you hear anything similar to, “If you can’t give me an answer in 15 minutes, I have 5 other investors ready to buy it,” RUN!

It is awful to realize that your property will sell for $40,000 less than the ARV estimate. And when you push the seller or realtor for reasoning behind the lowered price, I guarantee that you will hear, “I was assuming you were going to ___________.” Fill in the blank with “finish the basement,” “add a master bathroom,” “install hardwood floors throughout the house,” or a multitude of other improvements.

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Fix #1: Complete Your Own Property Evaluation.

There is easy-to-use house flipping softwareavailable today that can help you accurately evaluate a property. Also, there are many competent realtors who can help you with an ARV estimate. The best fix: do your own homework so that you feel confident in your estimates and can properly forecast the end result.

Mistake #2: Putting Location on the Backburner.

Location, location, location… it is an overused real estate mantra, but it is true. When it comes to selecting a house, location is key for buyers. Don’t trick yourself into thinking granite countertops, superb landscaping or hardwood flooring can overcome busy streets, neighbors from hell or high tension power lines. On the other side, there are properties in challenging areas that are good investments. Flippers often get distracted, losing sight of overall profitability of the property.

Fix #2: Again, We Urge You To Do Your Research.

Be sure to make good comparisons with similar properties. Don’t use a comparable property on a quiet street in a great neighborhood to value your property on a busy street next to the neighbor who parks three cars on the front lawn and a boat in the driveway. Even if it’s just one street over, they are not comparable. Know as much as possible about the location before buying. For more factors to consider when evaluating a property, check out Make or Break Your ROI: Fix and Flip Property Evaluation.

Mistake #3: Doing Whatever it Takes to Finance Your Purchase.

Many new flippers are anxious to get to work on their first property, so they will make deals with the devil to get the sale financed. Some loans will charge 5 origination points up front and as much as 14% interest — which is less than ideal. While predatory financing may be your only option, high-interest money lending leaves little room for unexpected items such as structural damage, termite infestation or bad weather, quickly turning a first-time flip into a serious flop.

Fix #3: Explore Funding Opportunities for Your Deal.

Financing options range from low to high risk, so ensure you get proper information and counsel before making your decision. Options include hard money lending, lines of credit, private investors, partnerships, and others. Determine which is best for you based on your flipping timeline, renovation skills, and financial background. If you are unsure where to start, join our Free Webinar, to help identify the best options for your situation. Our team can also connect you with some of our partners to get started.

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Mistake #4: Being an Absentee Flipper.

Many of the horror stories that we hear from flippers come from those who fail to make frequent visits to their properties and rely too heavily on their General Contractor for progress updates. Once the flipper arrives onsite, they may discover that the work was misrepresented, and the project is now behind schedule. To make matters worse, the absentee flipper is making “progress payments” so the project may be only 40% complete, but it is 80% paid. That is a recipe for disaster!

When this happens, the General Contractor lacks the incentive to prioritize the property and could run out of money at the end to pay subcontractors or employees. Unfortunately, there are times that General Contractors will not finish the job unless they receive additional payment. We’ve even seen them disappear altogether.

Fix #4: Make Frequent Visits to Your Property.  

See it with your own eyes. Yes, you’d like to trust that everyone you work with has your best interest in mind, but it is better to be safe than sorry. Outline the Scope of Work thoroughly and ask your General Contractor a lot of questions to ensure that you understand exactly how they are spending their time and your money.

Mistake 5: Creating a Too Simple Scope of Work for Your Remodel Project.

Many novice flippers will walk a property with a General Contractor and get excited by the possibilities of a potential flip. After a simple, one page remodel bid is received, the project begins. Then, we hear a conversation like below:

The flipper is now in a no-win position since the choices are:

  • Risk a negative relationship with the General Contractor by questioning their integrity or negotiating the price.
  • Agree to the extra charge and set the stage for additional charges the next time this happens.

Neither is a good option and this is how a project ends up being 50% over budget.

Fix #5: Complete a Detailed Scope of Work.

If there is a place to spend a large amount of time, this is it. Ensure you take all factors into account — inside and outside the home and in each room. Again, use a trusted tool, like Fixters Evaluate, to ensure you are accounting for everything. Your detailed scope of work will make the best accountability tool for you and your GC.

Mistake #6: Making a Hefty Deposit to Start the Job.

General Contractors often want a 25% deposit, or down payment, at the beginning of a job. However, they do not need that much upfront. We have heard unfortunate stories of a new flipper paying the hefty deposit upfront never to hear from the General Contractor again.

A down payment is often requested by a General Contractor because they got behind on the last job and the subcontractors will not start a new one until they get paid. This perpetuates the cycle all over again.

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Fix #6: Check Your Local Better Business Bureau for Recommendations on a GC.

Before signing with any General Contractor, confirm the details of the agreement and ask questions about their process. A small down payment is sometimes needed for good faith and materials, but if your prospective General Contractor cannot afford to buy the initial materials for a project, watch out!

Mistake # 7: Over-improving Your Property.

When you are a flipper, it is exciting to brainstorm design ideas when walking through a new property. It is easy to convince yourself of awe-striking customizations. But let’s face it, no one wants a McMansion in the middle of a starter neighborhood.

If your property is in a $250,000 average house neighborhood, there is no amount of great design, berber carpet or stainless steel that will turn it into a $325,000 property. Buyers have good realtors who will not advise their client to overpay for a home in a neighborhood where comparable sales do not support the price. You may get a small premium, but not much.

Fix #7: Aim for Conformity.

When deciding rehab priorities, keep the neighborhood in mind. Improve enough to fall into the average look and feel of the homes around your property. Focus on high-value areas such as kitchens and bathrooms and avoid too much personalization such as adding a pool or converting a garage into a bedroom.

Mistake #8: Being a Fashonista.

When fixing and flipping properties, unless you are in an eclectic and higher priced area, you must appeal to as many buyers as possible. You need to sell your property quickly and move on to the next one.

This means your choices — color, tile, carpet and design packages — must appeal to many people. Buyers can visualize painting a master bedroom or a bathroom their favorite color. They cannot visualize changing out art deco vintage light fixtures or purple tile. While your design may be fashionably cool, if it appeals to a narrow buyer pool, your property will take longer to sell and be less profitable.

Fix #8: Choose a Neutral Canvas for Your Design Choices.

Agreeable Gray by Sherwin-Williams is a popular wall color right now. Choose simple but appealing backsplashes and tile.

Mistake #9: To Stage or Not to Stage….That is the Question!

The property you bought and renovated was probably available because it had a funky floor plan, was badly neglected or simply needed updating. With the rehab, it looks much better and is easier to sell. However, leaving a property empty gives your buyer a cold feeling and makes it harder for them to imagine living there. Buyers want to see furniture that fits the design of the house so that they can envision making it their “home”.

Fix #9: To Stage.

Unless your new design and layout are easy to visualize, spend the money to stage it. Make it easy for buyers to feel like they are at home. We experimented with a number of scenarios and landed on light staging (bathrooms and kitchens only, no furniture) for properties under $250,000 and full staging for anything above. If you have renovated a mid-century modern home or an older home with some character, staging makes a difference and is worth every penny.

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Mistake #10: “For Sale By Owner” (FSBO).

It is easy to get caught in a pennywise, pound foolish trap when selling your home. If your project is located in an extremely desirable area, advertising on Craigslist or FSBO websites can be a good strategy. It’s enticing to list your home as “For Sale By Owner” and save commissions and other costs associated with a realtor. But, it also creates more risk since you are solely responsible for successfully marketing your property, attracting the right buyers and negotiating a good deal for both parties.

Fix #10: Trust an Experienced Realtor.

Unless you are highly experienced, we strongly suggest partnering with a realtor. The most successful flippers partner with a realtor who understands the property type, target buyer and location. Moreover, if the realtor brought you the property or is interested in a long term relationship, they may be willing to discount their commission. Every situation is different, but a knowledgeable realtor at a discounted commission tends to yield the best results.

Mistake #11: Overpricing Your Property.

Many flippers price a property based on where their remodel budget ended up, instead of the true ARV. When this happens, the price is always higher and the showing feedback is generally along the lines of “great remodel, but priced too high.” When reality sets in and the first price reduction happens, savvy buying realtors take advantage. They see the decrease, recognize that loan interest is piling up and that the flipper is desperate to sell. Lowball offers arrive along with tough inspection demands. The ultimate result is that the net proceeds from the sale are less than if the property was priced correctly in the first place.

Fix #11: Consider Your ARV to Determine the Price of Your Property.

Look into comparable properties and ensure that you are competitive with the neighborhood. Get multiple opinions from your flipping coach, realtor and others to account for all pricing factors. Do it right the first time and spare yourself a headache!

Flipping houses can be emotionally and financially rewarding when done correctly. With the right framework, which you can find with Fixters, you can take the fear out of flipping houses.