The 8 Biggest Mistakes You Can Make Fixing Up Houses
Buying distressed properties at wholesale prices, fixing them up, and then selling them at retail price remains one of the most popular ways to make big profits in real estate. If you are prepared to put in some hard work, property rehabbing remains one of the fastest ways to make money from real estate. Unfortunately, would be rehabbers can be easily seduced by the promise of fast money. You see it’s not simply a case of buying a house, fixing it and selling it for massive profits. The following are 8 of the biggest mistakes you can make when fixing up houses. How do I know this to be the case? Because many investors have made most if not all of them when starting out.
Big Mistake #1: This Is A “Get Rich Quick” Strategy
While adding value to property can rapidly increase your wealth, it is not a miracle cure nor is it a ‘get rich quick’ scheme. We’ve all heard the radio ads with some guru promising you will make huge profits in your “spare” time. It still requires time, dedication and effort. Yes, it can be done while still working your 9-5 job, but don’t fool yourself into thinking the results or deals will just fall in your lap. The results that you ultimately achieve will reflect on your commitment to these three areas.
Big Mistake #2: A Lack Of Extensive Research
To do many things in life correctly, the preparation is most of the actual work. For example, painting is 80 percent preparation and 20 percent application. This very same rule applies to buying and rehabbing property. A majority of your time will be spent locating and purchasing the property itself. In this instance, your preparation will be research, viewing, negotiating and more research. This is where you will make your money, so don’t try and cut corners.
Big Mistake #3: Do All The Work Yourself To Save Money
As rehabbers, we can easily convince ourselves to do the work and save a few dollars. HGTV makes it look so easy, and it always turns out perfect while being on budget. This train of thought is fraught with danger on two levels.
First, if the level of workmanship is substandard then this can and will affect your resale price. Experience has taught me one very important lesson: If you’re no good at it yourself, pay an expert to do it.
The second danger refers to time leverage. This will cost you more money than anything in the rehab. It is doubtful that you can get it done faster, while still having the quality necessary to resell.
Big Mistake #4: Insufficient Cash Flow
As with any business venture, cash flow is king. There is no point having a potential $50,000 profit up your sleeve if you can’t pay your bills or take care of unexpected overages. Unless you have sufficient cash reserves, I recommend bringing in a partner to do the deal. Having someone else as part of the deal and splitting the profits helps you get it done vs. being greedy and only doing a deal if you can do it yourself. No reserves = no deals.
Big Mistake #5: No Exit Strategy
There will be times when, despite your meticulous research and planning, the property doesn’t sell. External influences that are beyond your control pop up from time to time. With the uncertainty of our economy right now, this is more relevant than ever before. Be prepared for this with an exit strategy and you’ll be fine.
First, never enter a project if you cannot afford any unforeseen holding costs. This refers back to cash reserves.
Second, there is no shame in holding a good property. In fact, this can be a favorite strategy of some investors. If the market doesn’t agree with you at that particular time, then refinance and rent it out. Getting preapproved with a conventional lender for the refinance prior to getting the rehab loan would be a good plan B.
Big Mistake #6: You Pay Too Much When You Buy
You make your profit when you buy. Pure and simple! I always tell new investors this is the most valuable advice that they will ever receive from me. The added value from the renovation is the icing on the cake.
Always research your market well and ensure that the potential selling price is achievable when all costs and profit margins are taken into consideration. Never, ever let yourself be ruled by your emotions when buying. You must always allow for buying, selling, rehabbing and closing costs. Where possible, your purchase price must be sufficiently below market value to at least allow for these costs. Even better, the price should be low enough to allow for closing costs as well.
Big Mistake #7: Failure To Understand Your Target Market
How often have you walked into a home and been totally horrified by the décor? Yet this is another common mistake made by renovators. They let their emotions get in the way and decide what is good for them is good for everyone else.
There are two principles that you should apply when renovating. The first is pretty basic: Keep It Simple!
The second is to focus on the ‘WOW’ factor. It is no coincidence that a home sells quicker and for a higher price when it possesses strong buyer appeal. Focus on kitchens, baths and master suite if you have the ability to create one. You’re here to make money, not live in this property.
Give the market what it wants, not what you think it wants! Looking at recently sold comps in your area will tell you what is moving in your market.
Big Mistake #8: Spending Too Much On The Rehab
The great temptation of renovating is to do too much. Yes, the ‘WOW’ factor is critical, but you MUST keep your emotions out of the equation and strictly adhere to your budget. The last thing you want is a property that is the largest or nicest in your neighborhood. Over-improving a property doesn’t make you more money, it hurts the ARV and you’ve spent money that you won’t re-coop on the resale.
Nothing goes exactly to plan when renovating, so don’t panic if you exceed your budget by small amounts. We say unexpected overages, but you always expect those to pop up. Allow for a buffer to cover any surprises (I would suggest at least 10 to 15 percent).
Always have your costs estimated as accurately as possible prior to purchasing a property. Early on in your investing, it would help having a contractor or mentor inspect the property with you. This will enable you to discover any unforeseen surprises. I encourage you to renegotiate the price should the inspection uncover any major defects – or better still, walk away. That may be a hard pill to swallow, but it is better to maybe lose your earnest money, instead of tens of thousands by getting into a bad deal.
Conclusion: Research, Plan And Implement Lessons You’ve Learned
Understand that things can and do go wrong in this business. There is always risk, but it isn’t anything that should keep you from taking the leap into this great business. Being aware of the pitfalls and mistakes others have made, will make you better prepared from the outset. If you put in the research, planning and implement the lessons other’s have taught you, there is no reason why you can’t quietly make huge profits from your flipping business.