At a time when reality television shows have made property novices into flipping geniuses, you may think success in fixing and flipping houses should be easily within your reach. Flipping houses seems pretty straightforward. And, you would think being in the building trade would give you an edge in understanding your expenses and anticipated resale value. But if you’ve ever jumped into a fix and flip project with dollar signs in your eyes only to find yourself blindsided by unexpected fix and flip costs, you know that developing a sound budget—and sticking to it—is not always an easy task.
Begin with a detailed house flipping budget
It may seem like everyone is entering the house-flipping business, but make no mistake about it: fixing and flipping is a high-risk venture. A lot can go wrong before you ever get to plant that for sale sign out front. While you may be adept at pricing out material and labor costs, renovating an existing house is a far cry from new construction.
Start knocking down drywall and pulling up floorboards, and you never know what you are going to find. It may be mold, unsafe wiring, leaky plumbing, termite damage, or something else. So, in addition to sharpening your pencil to price out expected materials and labor, budget for the unexpected. Look at your final budget figure, then scratch it out and replace it by a number that is 20 percent higher. That’s what experts suggest be the minimum cushion for what may go wrong. Keep in mind, however, that there are no guarantees a job won’t push that limit even higher.
Avoid these common house flipping budget-busting mistakes
Before you purchase a property to fix and flip, size up its renovation needs. Certain repairs can really eat into your house flipping budget:
- Gutting or moving a kitchen or bathroom
- Tearing down walls
- Altering load-bearing walls
- Finishing an unfinished basement
- Correcting foundation problems
- Repairing roofs
- Moving a fireplace or chimney
Some of these renovations will bring you greater return than others and are worth the fix and flip costs. Gutting an outdated, cramped kitchen and opening it up to the living area can help boost your sales price. Gutting and renovating a second floor bathroom may be less crucial.
Roofs and foundations in need of repair should not be ignored. Factor these big ticket necessities into your house flipping budget when figuring out what you can afford to pay when buying your property. If margins are too tight, these big items may eat up most of your house flipping budget, leaving you little to finance the remainder of the project. In those cases, walk away and find a flip with better potential.
Once you have a project under way, if too many “surprises” put you into a situation necessitating budget slashing, be careful where you cut. Top priority should be addressing any issues of safety and structural integrity. If you think you can cut costs by hiding mold or ignoring outdated wiring, you can expect a home inspector to spell these things out for a prospective buyer. You will also be required to disclose knowledge of any needed or completed repairs when you place the home on the market. Failure to do so opens you up to costly legal action down the road.
Cut costs with cosmetic alterations. Carpet in bedrooms is typically less expensive than hardwood. A pedestal sink in a hall bath should be less costly than a full vanity cabinet. Reduce your lighting fixture package, landscape plans or appliance budget, either by watching for sales or shopping around for deals. If you have the expertise, do more of the labor for the renovation yourself.
Know where to spend your house flipping budget
Besides costly surprises and needing too many expensive renovations, spending too much on updates is another budget buster. Too much spending and you will need to price the house well above comparable properties in the neighborhood. Particularly when you have the financing available, it can be tempting to turn the property into a real showcase, the envy of the neighborhood. That may be alright for someone planning to use the home as a personal residence for many years to come, but it is not the path to take with a fix and flip property.
Monitor neighborhood comps closely and be sure the price you need to get for your fix and flip house is not noticeably above the average for similar properties within a quarter mile radius or less. It may be tempting to put quartz in the kitchen and hand-finished genuine wood flooring in the great room, but in a neighborhood where laminate rules for countertops and floors alike, you could have difficulty finding someone willing to pay the extra price for those upgrades.