Flipping houses can be a very lucrative business, but it is not easy to get started. House flipping is often glamorized by television and companies trying to sell house flipping training programs. The television and real estate investing gurus make flipping houses look easy, when there is so much more involved than what they show you. If you learn some of the most common mistakes to avoid when flipping houses, it can be a lot of fun and be a great source of income. If you happen to make some of these mistakes, hopefully they turn into a learning experience and help your business get better. House flipping is not a get rich quick business and it can take time to build it up. I started flipping houses in 2001 and have flipped over 120 homes. I have 11 flips going right now and will come close to flipping 20 houses in 2016. Here are a few mistakes I have made myself over the years, and ones that I have seen others make as well.
1. Thinking that house flipping is as easy as it looks on television
I wrote a detailed article here on how accurate house flipping shows are. On most of the house flipping shows. they show the flippers making a lot of money in a very short period of time. The problem with the house flipping shows is they make the process look much more profitable than it actually is. The house flipping shows often forget to mention these costs:
- Selling costs: You have to pay real estate agents, closing companies or attorneys, title fees, transfer taxes, recording fees, and other costs on most houses you sell.
- Carrying costs: While you own the house you have to pay property taxes, insurance, HOA dues, utilities, maintenance costs (mowing lawn, snow removal).
- Financing costs: Few flippers have the cash to buy everything without a loan, especially if they are doing multiple deals at once. Some banks will loan to experienced flippers and others will have to use hard money. The financing costs can be as much as 3 to 10 percent of the cost of the home.
- Buying costs: When you buy a house you may have to pay for the appraisal, inspection, closing fees, recording fees and more.
These costs can easily add 10 to 20 percent of the selling price to the budget. When you see the house flippers buy a property for $100,000, put $30,000 of work into it and sell for $200,000, they did not make $70,000, they most likely made $40,000 or less once you figure all the other costs.
House flipping shows also show the flippers doing their own remodel, which does not happen in the real world and is another mistake house flippers make. Selling a flip also usually takes much longer than the shows portray as well.
2. Doing the work yourself on a flip
Another huge mistake flippers make is doing the remodeling work themselves. I made this mistake on a flip I bought in 2006. I thought I would save money on labor by working on the house and avoiding hiring a contractor. Doing the work myself cost me more money than hiring a contractor, because it took me so long to do the work. Here is what I took on to fix the house:
- Replaced windows
- Replaced Doors
- Painted interior
- Installed a new kitchen
- Removed a wall (had a contractor help me with this)
- Installed flooring
- Drywall work and texture
- Installed lights and fixtures
I thought it would take me a couple of months to finish the work on this flip and it ended up taking me over 6 months. Because the carrying costs are so high when flipping, any savings from labor were gone. I also did not do a great job with some of my repairs and had to have a contractor come in to make sure I did things right. The worst part was the stress it put on me to finish the stupid house. I also missed out on many opportunities with work, because I spent so much time working on the house. My time is much more valuable finding deals, managing the contractors or working on my business, than doing manual labor. Yes, you see the flippers on television doing the work themselves, but that is all show. I have talked to one of the house flippers on television and the producers had him lay tile for television. He had never laid tile before and it all had to be torn out when he was done. Just because they are doing it on television, does not mean it is a good idea.
3. Counting on house prices to keep increasing to make a profit on a flip
I am located in Colorado and we have a crazy market right now. We have one of the highest appreciation rates in the country and that can make it tough to find deals to flip. On some of my properties I have flipped the last two years, I made much more money than I thought because prices have been increasing. However, increasing prices can get flippers into trouble. Some people will assume prices will keep going up and base how much they pay for a flip on the future value. This strategy is what caused many flippers to go bankrupt during the housing crisis. They bought homes assuming the market would keep going up and when the market changed, they lost everything. I flipped houses before, during, and after the housing market crash. I never bought a flip assuming it would be worth more than the current market value when I sold it. This strategy has worked well and I will continue to use it.
4. Partnering with the wrong people on a flip
Many house flippers will partner with another investor when flipping houses. In many cases one investor will provide the money and another investor will find the deals and do most of the work. Partnering can work out great in real estate if everyone’s job is clear and it is all in writing. I see other real estate investors partnering on flips, because they want to share the risk. They do not have a clear job description for what each partner is responsible for or a clear definition of who pays what and when. Many times the partners have different ideas of what hard work is or how much time should be spent on the project. When problems come up, there is no clear solution on how one partner can exit the deal.
It is usually not smart to partner on a deal, just to feel safer and share risk. The best partnerships are when the partners have clearly defined roles that bring different skills to the project.
5. Hiring the wrong contractors or not keeping track of contractors
One of the biggest challenges of running a flipping business is hiring the right contractors and keeping them working. It is tough to find decent contractors and when you do find decent ones, many times they don’t stay decent. They will raise prices, take on too many jobs, hire the wrong people, or get tired of the business. We have to keep tabs on our contractors as well to make sure they are working fast and within budget. If we don’t check on a house or a contractor for a week or two, I can almost guarantee they aren’t doing what they are supposed to be doing. We are in constant contact with our contractors and always looking for more as well.
When you do not check on a house or the contractor, there is a better chance they will rip you off as well. Try not to pay too much money upfront to new contractors and make sure you keep close tabs on the work they have done before you pay them more. Get multiple bids from contractors as well. There can be a huge price difference in what contractors charge.
6. Underestimating the time it takes to flip a house
Another mistake I see house flipper make is assuming it will only take a couple of months to buy a house, fix it up, and sell it. In reality I would not count on a flip taking less than 6 months. Here is why it takes so long to flip a house:
- Getting the work done. When you buy a house, the contractor you use probably cannot start work right away. They may be a week or two away from starting while they finish other jobs. When they do start, you have to decide on what to fix and how much to pay. This all assumes you have a contractor lined up and ready to go. Many new flippers buy a house, and then start looking for a contractor. It can take from 1 to 3 months to get the work done, depending on what condition the property is in. Once the home is repaired, you usually need to do a walk-through with the contractor and have him fix mistakes. Then the home has to be cleaned before it can be listed.
- Getting the home listed and under contract. It can take a few days or longer to get a home listed once it is ready to sell. You have to take great pictures, have an agent list it for you, and possibly stage the home. Once the home is listed, it may take from 1 day to 90 days to get the home under contract depending on your market. We typically see our homes go under contract in 3 to 4 weeks in a normal market, but recently it takes less than a week in our crazy market.
- Getting the home closed. Once you get the home under contract, it can take from 30 to 60 days to close the deal. Lenders are taking longer and longer to close on homes. We usually sell to owner occupants, and it is not uncommon for the escrow process to take 45 days if nothing goes wrong. There is the chance a contract could fall through due to inspection problems or financing problems.
If everything goes well with the contractor, the listing and the sale, it could take as little as 3 months to sell a flip. But that is usually the best case scenario. If the work takes longer, the house does not sell right away, or a contract falls apart it could easily take six months to sell. It is very important for investors to count on the home taking longer to sell than they think, because the costs build very quickly the longer you own a property.
7. Underestimating the cost of repairs on a flip
Another difficult part of flipping houses, is knowing what it will cost to repair them. I have been repairing houses (or having contractors repair them) for over 15 years. I have a pretty good idea of what it will cost to fix things, but even I can be wrong. When I come up with a budget or get a bid from a contractor I always add about 15 to 20 percent onto that bid for unexpected costs. There are almost always repairs that pop up, which you did not think about or know of when you bought the home. If you are trying to estimate the costs without any experience and without help from a contractor, it can be a disaster.
8. Taking on too big of a project on your first flip
I have flipped houses that needed close to $100,000 in repairs. One house I flipped needed new stucco, a new well, electric, plumbing, windows, doors, kitchen, bath, drywall, foundation, insulation, landscaping, heating system, flooring, paint, and more. Not only does it take a lot of money to flip a house when it needs a lot of work, but it takes longer to flip as well. It can be harder to find contractors who will do the job and much more can go wrong. Some of my biggest flipping mistakes were from buying houses that needed too much work.
9. Paying over $30,000 to learn how to invest in real estate
There are many mentoring programs for real estate investors. Some are great and others are giant marketing ploys meant to take as much money as possible from unsuspecting investors. When you hear ads on the radio for a free house flipping seminar or workshop be wary, even if a popular house flipper is advertising it. House flipping is not easy, even though they make it seem that way. These companies pay television house flippers to endorse their program, but the person you are familiar with is not teaching the classes. The course is usually taught by beginner flippers or people who have never flipped at all.
The programs draw you in with a free seminar, then they say you need a 3 day workshop to learn the secrets, and finally they try to suck you into a $30,000 mentoring program to show you how to really flip. Save your money and buy a house instead. Here is more information on those programs.
10. Not knowing the value of the home you are flipping or overpricing a home
The most important thing to know when flipping a house, is what will the house sell for once it is repaired. If you think your flip is worth $10,000 more than it actually is, it will throw everything else off. You have to know your values and know them very well to be a successful flipper. The best person to help value your home is a real estate agent. Zillow gives values, but they can be as much as 20 percent off. You can look at houses for sale in the neighborhood, but that does not mean they are actually selling for that price.
If you over-estimate the value or price a home too high, it will cost you money. Houses that are priced too high sit on the market and end up selling for less money than if they were priced right. I see some flippers price homes too high because they are trying to make up for other costs being too high (repairs, carrying costs, selling costs). When you price a home too high it does not fix mistakes you made on the flip, it makes it all worse. The longer you hold the property, the more costs you will have and the less the home will sell for.
For more information on flipping houses, including how I average over $30,000 profit on each flip, check out my bestselling book Fix and Flip Your Way to Financial Freedom. It is available as a paperback or eBook.
Flipping houses is fun and you can make a lot of money, but it is not as easy as some make it out to be. The house flipping shows leave a lot of the details out and the house flipping gurus will not give you $30,000 of value. The best way to learn to flip houses is to educate yourself with books, learn from other investors, and do a lot of homework. Many successful flippers will not make much on their first flip. I have interviewed quite a few who lost money on their first deal. Just like any business it takes time to learn the best practices and find success.