Some may say HGTV has made house flipping seem glamorous. A real estate investor identifies a distressed property, knocks down walls, picks out new appliances, granite and tile, paints the walls, plants some flowers and voila - there's a $50,000 profit to be had. However, in the real world, it doesn’t always work out that way.
Here are 5 mistakes to avoid to help ensure your house flip is a success:
1. Not Doing Your Due Diligence
Before you sign on the dotted line, you need to perform due diligence on the market, the neighborhood, and location of the property. What are typical Days on Market (DOM)? What do comparable sales look like and what After Repair Value (ARV) can you expect? Is the property near shopping and public transportation or is it located near a busy highway or airport? Does the neighborhood attract young families or those who are single? This will determine the importance of good school districts.
It's important to consider the market and neighborhood as a whole to understand who your property might attract and at what realistic price point.
2. Not Creating a Full Budget
Putting together a long term budget can be tedious, but it can make thedifference between profit and loss.
You need to determine how much you can afford on a whole, what you want to spend on acquisition and what you have left for renovations. You also need to factor in wiggle room for unexpected costs that pop up throughout the process. For example, you may uncover structural or water damage during demolition that could be costly. Make sure you also take into account hidden costs such as taxes, insurance, utilities and other miscellaneous fees.
Not only can you get a sense of construction budgets via internet research, but it may be a good idea to attend real estate investor meet ups to speak with fellow flippers about project budgets, construction costs, and how to keep your spending numbers on track.
3. Skipping on Permits and Not Checking Local Zoning Laws
Yes, obtaining permits can be a pain. It's time consuming and costly, but performing work without permits can create real problems for your fix and flip if you are caught. Not only will you have to pay the original permit costs, but you will most likely be dinged with fees. In addition, you will be forced to stop all work on your project until the proper permits are in place. Though it may be tempting to proceed with work before obtaining all permits, it's best to just do it right from the get-go to ensure your rehab project moves along in a timely manner.
If an addition is part of your renovation plan, check the local zoning laws for height and setback restrictions as well as ratio of structure to lot restrictions. This is especially true in the closer-in suburbs with smaller lots. Flippers have been ordered to tear down part of addition if it was too large for the lot, or build up the ground around their homes because the roof was a few inches too high.
4. Choosing Bad Contractors
It is important to choose wisely when selecting a contractor. They will be leading the project and the quality of their work will directly affect how enticing your property will be to a potential buyer. Ask friends and family, fellow flippers, drive the neighborhood to see what contractors are working nearby, or use sources like Angie's List to whittle down your list of contractors to choose from. It may be enticing to go with a less expensive contractor, but if you can't be 100% confident that they will perform the quality of work you expect, it is best to go with the one who has a solid reputation but may be more expensive.
5. Making Poor Design Choices
Fit in with the neighborhood and stay neutral on style finishes. For major exterior renovations, stay with the home style of the neighborhood. For interiors, choose classic and tasteful stone, tile and finishes. A recent flipper in Alexandria had a house sit on the market for more than a year because it turned out not many other people liked the look of a Turkish palace complete with fountain in a row of Craftsman homes. That extra year of carrying costs takes thousands away from any potential profit.
Read more about fix and flip best practices in Part Two of the eBook:
Real Estate Investing 101