Flipping Real Estate: 10 Reasons Why They Fail

Flipping Real Estate: 10 Reasons Why They Fail

From 2002 to 2006 real estate was such a lucrative business with the generous availability of loans and so much speculation that home prices would trend up forever. In today's market, they buying frenzy is long gone and real estate became a very tricky business, made so mostly because of the high transaction costs and how long it takes to sell a home. But never despair, you may be losing out on a great opportunity by sitting on the sidelines. There is always money to be made in real estate, even in a recession. You just have to avoid making these common mistakes:

Have a Plan - Are you flipping or planning on renting out the property? These are very different investing styles and the type of property you buy depends on what you are planning to do with it. For example, I have found that for tenants, the number of rooms is very important. The more the merrier. However, for home buyers, quality is much more important. For example, you should have quality materials especially in the kitchen, focus on the overall look and feel of the home, and be sure to have the amenities like a master bath, a spacious backyard, central air, and a backyard deck. If you are looking to make a quick flip, you have to get a phenomenal deal on your home to make any decent profit. Don't even bother looking at the mls. You have to use unconventional methods to find a killer deal. Search for homeowners who are at risk of having their home foreclosed, find out how much they owe on their home, and negotiate a deal that will benefit you both. A good website that lists homes with defaulted loans is foreclosure.com.

Thoroughly Analyze the Property and Its Neighborhood - Look at how the home compares to similar homes in the same neighborhood before you even think of placing an offer. Your realtor should bring up a list of recently sold comps so you can find out how much you can expect to sell it for. If you want to become a landlord, look up your local classifieds listing for similar homes for rent in the same neighborhood to see how much you can charge for monthly rent. You can also research your neighborhood rents on craigslist.org and rentometer.com. Always make sure that you can rent out your home for more than your monthly mortgage payment.

Do An Inspection - It costs $300 but you can avoid some very costly mistakes by having an expert look at your home, especially if the home you are buying is older than 20 years. There are so many things that could be wrong with the house and you won't even discover them until you begin remodeling. For example, if you discover extensive dry rot damage, that could cost tens of thousands of dollars to replace. You are better off spending the $300 and not getting involved with the property at all.

Create a Realistic Timeline - This could be the most challenging step in creating a plan to fix up and flip a home. We are always optimistic about how fast we can perform certain tasks and don't account for unforseen circumstances. When creating a schedule, give yourself plenty of time to finish the task. Then when you are done planning, you can expect it to take about 50% longer than you anticipated. No matter how hard we try, something will always happen to put us behind schedule. It's a fact of life so plan accordingly.

Budget Yourself Generously - Just like the timeline, there will always be hidden expenses that are unforseeable when planning your flip. You want to have a sufficient emergency fund just in case. Keep in mind that every time you buy a house there will be closing costs (3%-4% of the value of the home) and when you sell you pay your realtor's commission (6% of the sale price). And don't forget your carrying costs, which are your mortgage payment, warranty, and insurance. The longer you hold your property, the more you pay in carrying costs. You can never anticipate how long it will take to sell or rent your home so pretend that you will end up holding your property at least 3 months longer than you originally planned.

Know the Limits of Your Ability - Most newbie flippers try to save money by doing everything themselves. You may be able to get away with it if all you need to do is clean up, paint, and patch up small holes in your drywall. However, if you have no experience framing a room, plumbing, or stretching carpet, it's best to leave the heavy lifting to the pros. Otherwise you might end up wasting a lot of time trying to do it yourself and then having to hire an expert to fix what you've done. It's a good idea to get to know a handyman you can depend on. Use Job Bullet to find a contractor to do the work you need.

Have a Backup Plan in Case Things Go Wrong - If this is your first time flipping, do not quit your day job. You must have something to fall back on if for some reason your flip fails. If it's winter and the real estate market is in the dumps, then consider getting month-to-month tenants to help you with the carrying costs until you find a buyer. Or if you can put off selling your home for a few years, get a permanent tenant to move in so you can wait out the hard times and get top dollar for your property.

Don't Abandon the Property - Whether you are selling or renting, it is always important to maintain the home and make it look like someone is living there. If it's in your budget, get a staging company to come in and spruce up the appearance of your home. It will attract more offers from buyers because they can actually picture themselves living in that home. This is not as important for rental units, but it will help you find good tenants if you don't let your property go.

Don't Be Too Aggressive With Your Ask Price - A good rule of thumb when selling your home is to list the asking price 5% below the fair market value of the property and your realtor can determine that for you. That will get many more eyes on your home and you will receive multiple offers faster. With a competitive bidding process in place, you have a better chance of receiving an offer that is at or above what you initially wanted for the property. It is also a good idea to accept any offer that is reasonably close to what you want for your home. If you decline an offer simply because it is a few thousand dollars lower than you want, you are running the risk of holding out for less money. Carrying costs will eat away at your profits every month and in this economy you have to take what you can get.

Get Help From a Realtor - Trying to save money by not using a realtor is a big mistake. Over 90% of home buyers use the mls in their home search. So if you are not using a real estate agency, you are missing out on a lot of exposure. Your first priority when selling an investment property is selling it fast because of high carrying costs. Talk to your friends who have successfully sold a home and find out who their realtor was.
With so many great bargains left over from the real estate collapse now is the safest time to invest in real estate. Since banks have tightened their lending standards, the rental market is unbelievable. You can fill a vacancy in just one week! It's a sure win strategy to buy a rental now, hold it for 5 years, and sell at the next real estate boom.