Now that housing prices have fallen to their lowest in relation to income in decades, it seems everyone with a few bucks in the bank and a paint brush in the garage wants to get in on the house flipping fad. TV shows, reality programs, friends of friends, weekend seminars – no matter where you turn, someone is trying to show you how to buy, fix, and quickly dump a newly remodeled home for a nice profit.
Can it happen? Sure! Do you want to give it a try? Well, before searching for that perfect little cottage that needs a few coats of paint and some grass seed out front, understand what you’re getting into before committing anything to the project.
Flipping is not for the weak of heart, the easily bored, the afraid of commitment crowd, or anyone without access to virtually unlimited funds.
Follow these guidelines to prevent yourself from making some very expensive mistakes:
· If you are a first timer doing this, think twice before getting involved unless you have professional experience in some of the building trades: carpentry, plumbing, landscaping, etc.
· Understand that you are going to need to get your hands dirty! Whether you like it or not, unless you can pay to have everything done for you, this is the name of the game.
· How much cash can you devote to this project? If you have a very limited budget, this will be a problem. You must plan on encountering unexpected problems, and these are usually pretty expensive issues to deal with. If you find the septic tank is leaking and you only have $3,000 left… you have a major problem.
· If you have not yet watched one of those reality shows that follow various buyers trying to remodel and flip, you’d better start watching! Very few of these shows actually portray buyers who are successful. Some are so inexperienced it’s actually painful to watch as they drain their bank accounts and lose the house they hoped would bring them some cash flow.
· You need to have time to invest, not just cash. If you are working full time, this is not the best way to plan on spending upcoming weekends, even if your entire family has committed their undying love and support. It gets old fast.
· Before buying any property, pay a licensed contractor to do an inspection! It is absolutely amazing how many people buy these distressed properties sight unseen and then they are shocked to find out what really needs to be done. Don’t set yourself up for failure – know what you are getting into! Yes, you may need to pay for multiple inspections on multiple properties simply because the inspection reports come back detailing very extensive, budget draining repairs. If you cannot afford this type of initial investment, do not get involved in trying to flip a house.
· Get all the permits you need to! Don’t think you can sneak around doing all this work, making all that noise, and creating a huge mess with everything you are removing from the house – with no one noticing. Get your permits and display them for all to see.
· Prepare for the worst. Even the best home inspections can easily miss damage that can be hidden behind walls or in ceilings. If you plan on doing any sort of demolition work – tearing down a wall, replacing a floor, etc. – you never know what to expect when original materials are removed. If you are redoing a bathroom, for instance, and remove the tub… you could find some significant water damage behind or underneath. Water damage leads to mold, which leads to quarantine as soon as a building inspector sees it. And he will!
· Before even buying a property, find contractors you can trust. Electricians, plumbers, carpenters, landscapers, flooring experts… anyone you might need to help get the house fixed and ready to sell. Don’t wait until you pull out the kitchen cabinets to try to find someone to put in new ones, and then find out you can’t afford to have it done. Develop relationships, get estimates on possible projects that could come up, and get references!
· Have a realistic expectation of what you can expect to sell the property for, and what your profit will be. These are two different things, which might sound obvious, but all too many eager “flippers” forget to differentiate between them when planning.
· Remember – you need to be able to pay for closing costs on your end as well, and if you are using the services of a real estate agent to help get a fast sale, you’ll need to pay a hefty commission, no matter what it is! That will take thousands away from your profit.
· Never price a property according to what you need to make. No one cares. The market doesn’t work that way. A buyer will walk into your house and make an offer totally dependent on what other homes are selling for with similar upgrades, etc., in that area. He doesn’t care that you needed to virtually gut the house and replace everything. It’s not his problem – it’s yours! And, it’s a problem that never should have happened if you had done all the proper leg work and planning beforehand.
· Never, never, never enter into these flip deals with a partner unless you are an experienced, savvy business person, knowledgeable about the construction and real estate markets. If you find a partner, keep one thing in mind – he needs to help invest, and he also gets to share in any profits and losses. Any type of partnership deal, established for whatever reason, should be made into a legal agreement so both parties completely understand the responsibilities of each party involved, legal and otherwise.
· Your goal in doing a flip is to do all the renovations and make a sale before your first mortgage payment is due. The minute you need to start to actually pay for the house, you’re cutting into your profit. You need to find a way to not pay out of your own pocket – your buyer pays at closing, in essence. However, if the house doesn’t sell, you’d better be able to cough up the mortgage payments (which might include insurance and other amounts escrowed together). Many flippers have literally gone bankrupt at this point and lost the house back to the bank.
· Don’t go into something like this thinking you’re going to cut corners and no one will notice. There’s a difference between getting a good deal on the labor and the materials, and doing a job yourself using crummy materials and having it look awful. If you’ve never put in a toilet, laid tile, or hung cabinets – this is not the time to practice!
· Don’t enlist the help of family and friends unless they know what they’re doing. Painting, fine. But leave window installation, stove hookup, roof repair and other difficult projects to the pros.
· Pay attention to the neighborhood. Do not over-improve. Granite counters might be gorgeous, but many neighborhoods call for plain old Formica. Make sure you’ll get your money back on each improvement you make.
· Remember – you are not going to live there. Do not decorate according to your personal taste! Make is simple, neutral. Nothing too unique. You may love poured concrete tile counters and African stonework on the kitchen floor, but… will anyone else? You’d hate to find that the one buyer who loves the house will only buy it on the condition that you re-do certain things.