Now that house prices have fallen to their lowest level relative to income in decades, it seems that everyone with a little money in the bank and a paintbrush in the garage wants to get in on the house fad. TV shows, reality shows, friends of friends, weekend seminars—no matter where you go, someone is trying to show you how to quickly buy, fix up, and ditch a newly remodeled home for a handsome profit.
It can happen? Sure! Do you want to give it a try? Well, before you search for that perfect little house that needs a few coats of paint and some grass seed out front, understand what you’re getting into before committing to the project.
Flipping is not for the faint of heart, the easily bored, the fearful of commitment, or anyone without access to virtually unlimited funds.
Follow these guidelines to avoid making some very costly mistakes:
If this is your first time doing this, think twice before getting involved, unless you have professional experience in some of the construction trades: carpentry, plumbing, landscaping, etc.
· Understand that you are going to need to get your hands dirty! Like it or not, unless you can pay to have everything done for you, this is the name of the game.
How much money can you dedicate to this project? If you are on a very limited budget, this will be a problem. You has to plan to encounter unexpected problems, and these are usually quite expensive problems to deal with. If you find the septic tank is leaking and you only have $3,000 left… you have a major problem.
· If you haven’t yet seen one of those reality shows that follows various buyers trying to remodel and flip, you better start watching! Very few of these programs actually represent successful buyers. Some are so inexperienced that it’s actually painful to watch them empty their bank accounts and lose the house they hoped would provide some cash flow.
· You need to have time to invest, not just cash. If you’re working full time, this isn’t the best way to plan to spend the next few weekends, even if your entire family has pledged their undying love and support. He gets old fast.
· Before you buy any property, pay a licensed contractor to do an inspection! It is absolutely amazing how many people buy these distressed properties unseen and are then shocked to find out what really needs to be done. Don’t set yourself up for failure, I know what you’re getting yourself into! Yes, you may have to pay for multiple inspections on multiple properties simply because inspection reports come back detailing very extensive, budget-draining repairs. If you cannot afford this type of initial investment, No get involved in trying to flip a house.
· Get all the permits you need! Don’t think you can sneak off doing all this work, making all this noise, and creating a big mess with everything you’re taking out of the house, without anyone noticing. Get your permits and display them for all to see.
Prepare for the worst. Even the best home inspections can easily miss damage that may be hidden behind walls or in ceilings. If you plan to do any type of demolition work, such as tearing down a wall, replacing a floor, etc. – you never know what to expect when the original materials are removed. If you’re redoing a bathroom, for example, and remove the tub… you could find significant water damage behind or below. Water damage breeds mold, leading to quarantine as soon as a building inspector sees it. And it will!
· Even before you buy a property, look for contractors you can trust. Electricians, plumbers, carpenters, landscapers, flooring experts…anyone you may need to help get your home repaired and ready to sell. Don’t wait until you’ve taken out the kitchen cabinets to try to find someone to put in new ones and then find out you can’t afford to do it. Build relationships, get estimates on potential projects that could come up, and get referrals!
Have a realistic expectation of what you can expect to sell for the property, and what will be your profit. These are two different things, which may sound obvious, but many “pinball” enthusiasts forget to tell the difference when planning.
Remember: You also need to be able to afford the closing costs on your end, and if you’re using the services of a real estate agent to get a quick sale, you’ll have to pay a hefty commission, no matter what. is! That will take thousands off your earnings.
· Never price a property according to what you need to make. Nobody cares. The market doesn’t work like that. A buyer will walk into your home and make an offer totally dependent on what other homes with similar improvements, etc., in that area are selling for. He doesn’t care that you need to virtually dismantle the house and replace everything. It’s not their problem, it’s yours! And it’s a problem that should never have occurred if you had done all the proper legwork and planning beforehand.
· Never, ever, ever enter into these flip deals with a partner unless they are a savvy and experienced business person with knowledge of the real estate and construction markets. If you find a partner, keep one thing in mind: he needs to help invest, and he can also share the profits and losses. Any type of partnership agreement, established for whatever reason, must be turned into a legal agreement so that both parties fully understand the responsibilities of each party involved, legal and otherwise.
Your goal when making an investment is to complete all renovations and complete a sale before your first mortgage payment is due. By the time you need to start paying off the house, you’re cutting into your earnings. You must find a way to not pay out of your own pocket; In essence, your buyer pays at closing. However, if the house doesn’t sell, you better be able to afford the mortgage payments (which may include insurance and other amounts deposited together). Many pinball machines have literally gone bankrupt at this point and have lost their house to the bank.
· Don’t go into something like this thinking you’re going to take shortcuts and no one will notice. There’s a difference between getting a good deal on labor and materials, and doing a job yourself using shoddy materials that looks horrible. If you’ve never installed a toilet, tiled, or hung cabinets, this is not the time to practice!
· Do not ask for help from family and friends unless they know what they are doing. Paint, fine. But leave window installation, stove hookup, roof repair, and other tough projects to the professionals.
· Pay attention to the neighborhood. Don’t get too much better. Granite counters can be beautiful, but many neighborhoods call for plain, old-fashioned Formica. Make sure you get your money back with every upgrade you make.
Remember – you they will not live there. Do not decorate according to your personal taste! Making is simple, neutral. Nothing too unique. You might love concrete tile countertops and African stoneware on the kitchen floor, but will anyone else? I would hate to find out that the only buyer who loves the house will only buy it on the condition that he does certain things again.