The pros on TV make house flipping look easy. You buy a property on the cheap, fix it up, then sell it for tens of thousands more than you spent. What could go wrong?
A lot, actually.
Novice house flippers may quickly find themselves in deeper than they planned on, turning their would-be “safe” investment into a financially crushing experience. While no fix and flip deal is ever foolproof, you can reduce your chances of losing more than you planned by avoiding these five financial pitfalls:
1. Did not calculate buffer in estimates
Costs should be estimated in ranges rather than flat fees. If you have an idea as to what a certain part or task will cost, you should assign a range to it to give yourself a buffer, or cushion. This allows you to plan for worst-case scenarios, so that if something does cost more than you initially estimated, it won’t drastically affect your total project outcome because you’ve already planned for it.
Unfortunately, many fix and flip investors don’t calculate this buffer in their estimates, so when expenses start stacking up, you find yourself in a hole.
2. Failing to get permits
A flip and fix is a major construction project, which means you’re going to need permits. This is an expense you should budget for, and costs can be obtained from your local municipality.
However, many contractors will try to get away with not obtaining the required permits, thinking they can save money in the process. This is a major gamble, and if you’re caught, you’ll have to purchase the permits PLUS pay fines. It’s just not worth the risk, and you’ll be better off financially by doing it right the first time.
3. Over improving for the neighborhood
Forget about your budget and vision for a moment. Look around at the neighborhood where the property is located. Think about what those properties are worth, the features they have, and what buyers in the area are looking for. These elements should provide a baseline for your finished property.
Value is much more important than uniqueness, despite what you may have seen on HGTV. It’s easy to go overboard when fixing up a place because you want it to look pristine, but it’s not totally necessary to make a profit.
4. Using too cheap or too expensive materials
There’s a reason why you don’t put expensive tile and granite in a $50,000 house — you’ll never see the ROI. Most home buyers won’t know the difference between a $5 tile and a $10 tile, so don’t go broke thinking that more expensive = higher property value.
Likewise, you also don’t want to use the cheapest of the cheap when it comes to materials. This can end up costing you more in the long run because of defects or quality issues, so find a strong, sturdy middle ground to avoid surprise headaches.
5. Going for the lowest bid
If you’re avoiding cheap materials, you’ll also want to steer clear of cheap labor. Good contractors know what they’re worth and don’t need to undercut anyone just to get work.
Plus, cheap labor will often make up the cost difference by taking longer to complete the work. This can be an expensive mistake that costs you more than you end up saving.
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