There used to be a TV show called What Not to Wear, popular because it showed common clothing mistakes people make and then explained the process for making more flattering choices. Some people learn best by observing what not to do -- the image of the disaster being deterrent enough.
So if you want to get started in the house flipping business or want to try doing a flip to see if it's for you, learning what not to do might help you out. Here are four things you should never do as a house flipper.
1. Overestimate after repair value (ARV)
You need to know what houses comparable to the one you'll buy are selling for in your market. It's better to look at what buyers are paying rather than what sellers are asking. Sellers can ask anything. The real test is what people have paid. You can find this information by searching online for recently sold homes in your area or by having your real estate agent run a comparative market analysis for you.
Once you know what homes like the one you're intending to flip are selling for, don't make the common mistake of thinking you can get more money than the neighbors if you make better improvements, such as having the most modern kitchen on the block. Just because you spend $20,000 on a state-of-the-art kitchen, for example, doesn't mean you'll get $20,000 more from the sale. Making your home the best usually doesn't pay off. It's better to be similar to the other homes to have the best chance of netting the most money.
2. Underestimate repair costs
This is the step that often makes or breaks a flip. Sometimes when you start demolishing an area, you might find more wrong with it than you thought, which will cost you more money than you anticipated spending. You'll probably never know your exact costs until after you start working on the house. To give yourself the best possible estimate, hire a professional contractor.
The other complication with finding extra problems is getting them fixed in a timely manner. If you're working with a professional contractor already, you're more likely to get the job finished on time versus having to find someone you trust. Each month you go over your estimated time frame costs you in carrying costs.
3. Ignore the math
A house flipper's main goal is to make money, and that means you need to have an exit plan before you even begin. If you've accomplished steps one and two above, you can plug those numbers into a formula that lets you know how much you can spend. A common formula house flippers use is the 70% rule. It's best to not go above this figure.
Here's how it works: The 70% rule refers to spending no more than 70% of the after repair value (ARV), or market value, of the house minus repairs. If the ARV of the house is $300,000, for example, and it needs $40,000 worth of repairs, you should spend no more than $170,000 to help ensure you'll make money. (70% of $300,000 is $210,000 minus $40,000 equals $170,000.)
That formula looks easy enough, and it is. The hard part is putting in the correct numbers.
4. Not having a team
You and a friend might think you can do all the repair work and the buying and selling yourself, and you might make it work. But, especially with a first flip, you're likely to get in over your head and wind up spending more than you bargained for if you don't have experienced professionals on your side.
Before you buy your first flip, assemble a team. Good people to have on it would be a contractor, lender, real estate agent, and insurance agent.
The Millionacres bottom line
Finding the right property and assembling a solid team are keys to making money flipping houses. Most flippers find deals by buying foreclosures and distressed properties, having them inspected, and sticking with their numbers.