UPDATED: SEPTEMBER 23, 2022 | 2 MIN READ
Flipping houses can be a tricky business. You buy a house needing remodeling, invest in a renovation, and then sell it with the added value on the market for a profit. While it may seem simple, there is much more to it than you realize, and sometimes renovations can be far more extensive and complex.
If you’re interested in flipping homes, you should consider people’s mistakes when they take on this endeavor. Here are some common errors in judgment when buying and flipping houses and how to avoid falling privy to them.
1. Underestimating Budget and Costs
Overpaying may seem easy to avoid, but it is the most common mistake when people buy and flip homes. So think again when you are eager to jump on a house you believe would be a good flip. Plenty of underlying issues can occur, from permits to plumbing and electrical problems resulting in overextending your set budget.
How to prevent overpaying
Gather as much information as possible about the property, and utilize an inspector or multiple inspectors to check for issues. Research comparable homes in the area, set up a budget, and create flexibility in your finances for unpredictable circumstances.
2. Failing To Prepare a Plan
Buying and flipping a home is a massive investment, so you must have a plan. Unfortunately, another common mistake people make is jumping into purchasing a residence to flip without having prepared themselves ahead of time for what is to come. When you are unaware of finances, risks, timeline, necessary renovations, and other factors in your potential flip, you set yourself up for failure.
How to set up a business plan
If you have them, strategize with a partner or two, and prepare yourself for what you may encounter. Understanding the risks, costs, and the potential Return On Investment (ROI) once the house is sold can give you an overall picture and help you know what to expect.
3. Hiring Unskilled Help
To make all of the renovations happen, you may need to hire contractors. Carpenters, electricians, plumbers, and skilled constructors are necessary to help bring the home more value.
Far too often, flippers hire cheap workers to save on costs. Unfortunately, this can backfire and be far more expensive when you have unskilled contractors who don’t do the work properly. In addition, it leaves you needing to re-hire to fix shoddy work, which extends your timeline and budget.
How to avoid hiring blunders
Get referrals, vet the contractors you need for specific jobs, and work out a deal ahead of time. Or, if you can, do as much work yourself on the renovations, so you don’t have to hire outside, and you can save yourself substantially on profits.
4. Not Purchasing Insurance
Buying property insurance when investing in a property is a severe mistake. However, buying insurance for the home, you plan to flip helps reduce risk and protect the home if or when any damages occur, even for the short term. You never know when you might be responsible for damages caused by a natural disaster or vandalism to your property.
How to purchase property insurance
Shop online and compare quotes for temporary property insurance while working on the home you plan to flip. If you have questions or aren’t sure what coverage to get, contact a licensed agent to help determine what is necessary.
5. Not Giving Yourself Enough Time
Buying and flipping a home is time-consuming, so you must exercise patience and have a realistic timeline in mind for how long you plan to make monthly house payments before renovations are done, and you can put the house up on the market to sell.
Not to mention, once you receive offers, there’s the possibility of delays due to missing documents or offers to fall through. Reaching a deal can take time, and it costs you if you underestimate the length you’ll need.
How to set up a working timeline
Research your market and be as realistic as possible with how much time it takes from start to finish. Take things step-by-step, and break it down as much as possible for how long the following:
- Putting in your offer on the home
- Home inspection; Closing the deal on the house
- Renovations and remodeling
- Preparing to sell/Putting a home up on the market
- Accepting offers
- Closing for the new homeowner
Make sure to add extra time for any unseen obstacles or unpredictable events that are possible during your flip.
6. Not Understanding Your Market and Selling Price
One last mistake you must be aware of includes market trends and pricing. Whether it’s a seller’s or buyer’s market, you need to make yourself aware of trends when buying and flipping houses.
When prices in the market go up because of competition, interest rate cuts, and other dynamics within the housing market are crucial aspects many beginners are unaware of when they decide to flip.
If you price too high, you risk having your home sit on the market for too long and cutting into your desired profits.
Research Trends and Price Appropriately.
Do research to consider multiple factors within your market, such as location, school district, amenities, and taxes. Your best course of action is to consult a skilled real estate agent who can provide you with knowledge of the market trends and help you determine how to price your home for a faster sale.
What is the 70% rule in house flipping?
The 70% rule aids in determining what to pay for an investment property. The regulation stipulates spending no more than 70% of the house’s after-repair value, subtracting renovation costs.
Is house flipping still profitable?
It can be profitable if you equip yourself with all the knowledge when buying, renovating, and flipping a house. You just have to put in the work, have patience, and set yourself up correctly to make it a worthwhile investment.
What’s a good profit for flipping houses?
A decent profit for flipping depends on your experience and what you consider a reasonable amount. Some home flippers make as much as $100,000, while some make less than $20,000. The average is around $30,000 net profit on a good flip.
How long should a house flip take?
The average time to flip a house is approximately six months from start to finish. As a beginner, however, you should set your expectations for it to take long until you get the hang of the process.
How do I avoid paying taxes on a house flip?
You can file at 1031 Exchange to save on taxes, which means you can defer your gains tax on a property when sold, as long as another property is purchased with profits from your sale.
Buy and Flip With Caution
When you’re interested in buying and flipping houses, the best thing to do for yourself is to take time and understand all the risks involved.
Underestimating costs or overextending yourself can make flipping challenging and leave you with little to no profit.
Set yourself up for success in your endeavor by creating a solid business plan, setting up your budget, incorporating extra finances for obstacles, and getting the best home insurance.