Hi, everyone! I hope you all had a great turkey day and are back in business, ready to complete 2014 with a bang!
Today, I am doing a tribute to my fellow fix and flippers (and aspiring ones also). Fix and flips are a major part of our investment strategy and can be a good way to either make a living or raise cash for buy and hold deals. That being said, there are some things that we all need to look out for that will suck your deal dry!
This article is dedicated to talking about some things that can throw off your fix and flip project — and how to avoid them.
5 Common Mistakes That Sabotage Fix & Flip Profits
1. Taking Too Much Time
Sounds pretty obvious, but time can kill your deal. Odds are, you borrowed money for your fix and flip and have a monthly payment. Unlike rentals, where you get paid once a month when you have a tenant, you only get paid once on a fix and flip — when you sell. Every month you carry that fix and flip, you ring up more interest. Whether you are financed with a bank, a private lender, or a hard money lender, the interest can start to pile up.
The same goes for those other expenses that are time based. The usual suspects are real estate taxes, insurance, and utility bills. It’s simple math: the more you hold a property, the more of these things you will have to pay.
Related: It’s Entirely Possible to Fix & Flip 10 Homes at Once: Here’s How
The way to avoid time sucking down your bottom line is to create a timeline for your project, and stick to it. The timeline should go hand in hand with your project budget and include all phases of the project: from the time you buy the property to the time that you sell it. Then you need to revisit the timeline and make adjustments.
As we will discuss later, there is no way you can know everything that will come up on a fix and flip. There are just too many variables. That shouldn’t deter you from making one, though. Avoid the urge to “jump in and figure it out” — and take that from me because I am a recovering “jump in and figure it out” guy. Make the timeline anyway, and keep making adjustments when things come up. The timeline will hold you on course and, along with your budget, will stop the project from getting too far off goal.
2. Not Having/Sticking to a Realistic Budget
Along with projecting the expected timeline for your project, you need to keep the project in line with your expenses. I’m sure this goes without saying for most of you, but creating a budget you can stand behind up front is the first step in keeping your project expenses in line.
There are two ways that your fix and flip can fall apart due to the budget. Here they are and how to avoid them:
Budget doesn’t cover everything: You want to make sure your project budget covers all the costs you will incur. This of course includes all improvements you plan to make, so be sure that all activity in the house has a line item (from demolition to final cleaning).
Also, make sure that the “soft costs” are included. These would be things like loan interest, taxes, utilities, permits, architect fees, etc.
Budget is unrealistic: If you plan on replacing the roof on your flip, be sure to budget more than $100 for it. I am being a bit extreme, of course, but I am trying to make a point. You need to make sure that the line item expenses in your budget are achievable given what you know about the property going in.
Run the numbers by someone – either another rehabber or, even better, call someone who will actually be doing the work for you. Instead of making up a number for the roof repair or the new bathroom, call a contractor to give you a bid. You can use their number in the budget and then get two more bids when it’s time to cut a check to make sure it’s a fair price.
3. Over-Improving the Property
It’s hard to know when to stop improving on a fix and flip, especially if you have the resources. There are things that really make a fix and flip pop, like granite countertops, crown molding, tile, hard wood floors, landscaping, and the list can go on. Every house needs these things. I call them “wow factors.” Every house should have a few things that make people say, “WOW!” when they walk through your property. These things make your house stand out and will help you sell quickly.
Related: Why I Pay More for Fix and Flips than the 70% Rule States I Should
That being said, you need to know how many of them you need to sell in your market. There is a law of diminishing returns in fix and flips, meaning that people will only pay so much for your house, regardless of what you do to it. The trick is finding out what you need to do to get your price — and not doing anything more than that.
Everyone should be doing market research to validate your target price, but do it to validate condition also. Be sure to surf the internet to look at other houses for sale in your area, or better yet, walk through some of them when they are having an open house. If you can get access, look through interior pictures of houses that sold recently through your local MLS. All this should give you an idea of what condition will yield the price you are looking for in your area. Your end goal should be to SLIGHTLY exceed the …read more