By Jeffrey Kershner, Partner and Chief Operating Officer of Clickinvest, an Illinois-based real estate sourcing platform for investors.
Perhaps you have seen one of the dozens of house flipping shows now on TV, or maybe you attended a seminar at the local hotel ballroom. Either way, you’re ready to give real estate investing a try. Before you get started, it is important to note things are often not what they appear on television. Avoiding these common mistakes will increase your chances of a successful project:
1. Flipping based on emotional attachment.
Flipping right down the street might sound like a great idea. The project will be close to home so you will be able to keep an eye on it. The problem is that you have an emotional attachment to where you live. I built a house in the neighborhood I live in and got absolutely killed on it, like wire $40,000 to closing killed. You WILL overestimate the after repair value of your flip if you have emotional attachment. This is human nature; we value emotional attachment. The buyer doesn’t yet have that attachment. Rely on the data and if your emotions get in the way, go a couple of towns over for your flip.
2. Buying before your team is in place
Trust me on this one, buying the house is the easiest part of the flipping process. You can go through real estate investment tool such as Clickinvest that presents 60-100 opportunities every single week in the Chicago market. The worst mistake you can make is buying before you are ready. Being ready means you have your broker, contractors and suppliers lined up. The best flippers will have already decided which cabinets, countertops, flooring and other finishes they will be using before they buy the property. You don’t want to have money tied up and interest payments accruing on a house that is sitting there waiting for you to get your team assembled. At a couple thousand a month in mortgage payments, you can blow your profit in months of waiting to start.
3. Buying without proper inspections
Having a complete picture of the property condition is a must when you are buying a house to flip. Your buyer will get a professional inspection, and I highly recommend you do the same. You certainly don’t want to have a beautiful home, an excited buyer, and mold on the underside of the roof sheathing. Your buyer’s inspector will crawl in the attic and crawl space, so you better make sure every inch of the house is inspected when you buy. This is the only way to make sure you budget for every repair and there are no expensive surprises.
4. Overextending your finances
If you are putting your entire life savings into the flip purchase, you are making a major mistake. What happens when an unexpected item comes up during rehab and you don’t have any money in your account? You fail as a flipper and risk your family’s well-being. There is risk in all forms of investment, but real estate investing is especially risky. You must account for the risk with a contingency budget. I suggest a contingency budget equal to 15%-20% of the total project bid.
5. Overbuilding for the neighborhood
Many of the house flipping television shows use very high-end finishes. Items such as quartz countertops and professional-grade appliances look fantastic, but are not appropriate for an average neighborhood. The television shows can get away with this because they have other revenue than just the house flip. Make sure you build with your end buyer in mind and don’t fall for what they are doing on TV.
Avoiding these mistakes will hopefully contribute to your success. If you think of any common mistakes I am missing, leave them in the comments below.