When taking on a house flipping project, you want to do everything possible to ensure your profit. Try to avoid these common mistakes.
In 2022, 10.2% of all house sales were for flipped homes. This number reveals the popularity and need for real estate investors.
Are you hoping to begin a house flipping project soon? Is this your first project?
Flipping homes is harder than it appears, but it can be a lucrative activity if you handle it properly. Choosing the right properties is a vital step, and another essential step is avoiding common mistakes.
Here are seven common mistakes that people make when flipping homes. If you can avoid these, you’ll make more money with your projects.
1. Overpaying for a House Flipping Property
You can make many mistakes when flipping properties, but one of the most significant flipping mistakes is overpaying for a property.
If you are new to flipping homes, you might want to spend some time researching tips to get started. When you research these tips, you will likely learn that the price you pay for the homes you flip matters more than most other factors.
Paying too much for a house puts your profit at risk. If you overpay on the house, how will you make money from the property?
Therefore, it’s vital to take the appropriate measures to ensure that you pay the right price for every property you purchase. If you aren’t sure how you can use this simple method:
- Determine how much you can sell the house for after you complete the repairs
- Add up the cost of repairs
- Subtract the cost of repairs from the selling price you will likely receive
When you calculate this, you can see how much profit you will make if you paid zero for the house. With this information, you can see what a good price is for purchasing the home and the amount of profit you can make from the deal.
2. Underestimating the Expenses and Repairs
The second flipping mistake to avoid is underestimating the expenses and repairs that the property needs. Imagine starting on a project that you expect to spend $30,000 to complete but spend $50,000.
You would lose $20,000 on this home by spending more than you planned.
So, how do you avoid this problem? The best way is by using an effective system to estimate the repairs a home needs. Here are some tips to help you with this:
- Evaluate every part of the house yourself
- Hire contractors to evaluate the home
- Ask the contractors for estimates
- Use a partner or someone else you trust for their opinion
- Get several estimates for every repair you detect
Going through many steps to determine the work a house needs will help you avoid surprise expenses. If you use these steps, you might make more money than you expect, as the repair costs might be lower than you planned.
It’s always better to estimate your repairs higher than lower. If you think something will cost $2,000 to repair, write it in as $3,000. It is also helpful to include a 10% miscellaneous expense, too. By doing this, you’ll have extra room in your budget.
3. Rushing Into a Purchase Without Evaluating the Calculations
As you can see, it’s essential to pay the right price for a property and accurately add up the expenses. Still, it is also vital to calculate the profits thoroughly and accurately.
One of the best ways to do this is to set a budget for the home renovations. A budget gives you guidance and direction with the project. It tells you your expenses and your profit.
Without a budget, you walk into a project blindly, which is a mistake. The calculations for the expenses are vital for your budget, which is why you must fully evaluate a property before buying it.
Keep in mind; you should perform all these calculations before buying the home — not afterward. These calculations protect you from buying properties that will not result in making a profit. In other words, they guide you in your purchases.
4. Taking Too Long With the Renovations
The next mistake many investors make when flipping homes is taking too long with the renovations. One unique part of flipping homes is the speed in which you must complete the work.
You might have to put in a lot of time before making the purchase, primarily to plan everything for the project. Proper planning before the purchase helps you minimize the time needed to complete the work.
Several reasons explain why time matters with house flips. First, you have money invested during the project. This money is tied up with this project, which means you can’t do other projects until you’re done.
Secondly, you pay interest on any money you finance. The longer it takes to finish the house, the more interest you pay on the loan.
Finally, lenders that issue money for house flips offer short-term loans. They often call these hard money loans. They may be due in one year or less. Timing is crucial with all house flips for these reasons.
5. Thinking the House Is Worth More Finished Than It Is
Another mistake you’ll need to avoid making is thinking the house is worth more when finished than the amount it is actually worth.
Suppose you purchased a home expecting the finished price to be around $350,000. What happens when the home is worth only $300,000 when finished? Would you have enough money in your budget for the loss of this $50,000?
People who flip homes care a lot about finished values. They go through various steps to determine how much these homes will be worth after the repairs, yet it’s sometimes hard to know for sure.
One way you can know is by hiring a home appraiser to appraise the property. A home appraisal can reveal a very accurate amount, yet this step is challenging when the home is not complete.
You can also spend time comparing the home’s finished value to similar homes. In fact, this is the method that appraisers use when determining home values.
Finding out the true value of a house after the repairs is essential to make a profit with a home flip. This value is something you should strive to determine before you buy a property to flip.
6. Handling All the Work Yourself
It’s important to handle some of the work and repairs yourself when performing a flip, but it might not be a good idea to handle all the repairs.
If you have to do all the work yourself, it might help you to estimate how much time this will take. Could you finish it all yourself in one month? If so, doing all the work yourself might be a wise move.
What if it would take you a year to complete the repairs, though? Would it be worthwhile?
It’s helpful to compare the trade-off with these options. If you hired a contractor to complete some repairs, how much time would you save, and how much money would it cost?
Comparing these things can help you choose what steps to handle yourself and which to hire a contractor to perform.
Handling all the work yourself might not be smart financially. Paying a contractor for all the work might not be either. Therefore, you may want to come up with a mix to use for your next house flip.
7. Failing to Stick With Your Budget
The final mistake that many real estate investors make is failing to stick with the budgets they created. It is hard to make a profit if you don’t stick with a budget.
The first step in this is creating an accurate budget, and you can do this by using the tips listed above. Next, it’s important to avoid overspending on any of the categories of your budget.
If you have a miscellaneous expense category in your budget, you’ll be less likely to overspend. Having this expense category gives you room for repairs that cost more than you planned and upgrades you deem necessary while flipping the house.
One of the areas you might overspend is on unexpected expenses. If you didn’t know the roof was leaking when you bought the house, you might instantly have a repair bill of $8,000 to replace the roof.
Another area that is easy to overspend is on the finishing touches. If you planned for granite counters, you might need to stick with a lower grade of counters to fall within the budgeted amount.
If you find more expensive counters that you really love, you might be tempted to upgrade to these to make the home look nicer. While you could do that, it will increase your costs, which may result in overspending.
Ready to Flip a House? Call Us for a Loan
Finding the right financing is another essential part of house flipping projects. Without financing, you might not have a way to finance your homes.
We offer financing for house flipping projects, and you can contact us to learn more. We’d love to hear from you