Home flipping can be a great way to make a living -- or even just add an extra stream of income. But it's not easy. Successful home flippers work hard. They search tirelessly for the right properties, they wheel and deal and negotiate, and they manage the remodeling process from start to finish, even DIYing some of it themselves.
It comes with a learning curve, for sure, and at the outset, there's a lot of room for error.
Are you just starting out in the flipping biz? Want to make sure you minimize losses and stay on track? Here are the most common mistakes newbie home flippers make:
1. Spending too much on the home
If you want to make solid returns on a flip, you have to get a bargain on the front end. That means sticking to the 70% rule, which says you should never spend more than 70% of your projected after-repair value (minus repairs) when buying a property.
The 70% rule ensures you have enough buffer to complete your repairs and still make a profit -- and it's critical you abide by it, especially when you're just starting out.
Here's how the rule looks in action: A house has an after-repair value of $250,000. Your contractor estimates it will take about $15,000 in repairs to get you there, ($250,000 - $15,000 x .70 = $164,5000.) If you can't negotiate the price to below that $164,500 mark, it's time to look for a new property.
2. Miscalculating the repairs
Estimating your repairs is just as important as paying the right price. In fact, you can't do one without the other.
To make sure you're accurately estimating your repairs, you'll first want to work with your agent to determine what projects to focus on -- namely, ones that will bring the property in line with neighborhood comparables, as well as current buyer preferences.
You'll also want to bring along your most-trusted contractor when viewing a property (at least one you're seriously considering) and have them quote you for the projects you have in mind. Getting a second or third quote from other contractors is smart too, if only to ensure you're estimating accurately.
3. Taking on too big a project
Aiming high is great, but in home flipping, taking on too much can come back to bite you. When you're just starting out, keep your flips manageable and within your wheelhouse. If you're not well-versed in electrical work or carpentry, don't buy a turn-of-the-century fixer-upper that needs a full gutting and re-wiring. That's just asking for costly errors and mistakes.
In the beginning, it's best to ease your way into flipping. Start slow with properties that need minimal work, and gradually work your way up to larger and more complicated projects.
4. Not knowing your market
Understanding the local market is critical before flipping a home. You need to know what area home prices look like, what buyers are looking for, and any trends that might be going on. Having a great real estate agent on your side can help here, but you should be tuned into the market as well, as it will make you a smarter, more-informed investor.
5. Improving the home too much
Not all improvements are created equal, and some can even hurt you in the end. When flipping a house, you want the end product to align with comparable properties in the area. Adding crown molding, a chef's kitchen, and other luxe features probably isn't necessary if other homes in the neighborhood don't have them too. In fact, it might actually make it harder to sell the home in the long run.
Make it a point to study up on the community before flipping a property. Attend an open house or two, check out other homes on the street on Zillow, and talk to your agent about the features homebuyers are looking for in your area.
6. Overpricing the home when selling
Pricing a property right is always important -- whether it's a flip or a home you've lived in for decades. As much as you want to up those profits, overpricing a home will just mean more time on the market and more costs for you. It could also have buyers worried about the home's condition. (As a listing's days on market start to rise, the red flags go up!)
The bottom line
Most investors don't get flipping right on the first try. Like anything, it takes practice, so start slow, ease your way into it, and be smart about where you buy and how much you spend.
Need more help learning the ins and outs of home flipping? Try these books on for size.