Every week, we ask a real estate professional for their Short List, a collection of tips and recommendations on an essential topic in real estate. This week, we talked with Dave Seymour, the Co-Founder of CityLight Homes, shared seven costly mistakes to avoid when flipping a house.
House flipping can be a very lucrative and rewarding career path, but it takes hard work and determination to be successful. Many first time house flippers jump head first into their first flip without knowing the possible pitfalls. Over the course buying, fixing, and flipping millions of dollars’ worth of real estate I’ve come-up with SEVEN common mistakes that cost first time home flippers serious time and money.
7. Getting too emotionally involved in the house
Never fall in love with a house you’re going to potentially flip. The decision to pursue a deal or not should always be based on cold hard numbers. Numbers do not lie. And never decorate according to your personal taste. Just because you’re favorite color is pink, doesn’t mean your buyers would agree. While our deals are bought based purely on the numbers, we the flipper create an emotional transaction for our buyers because we know what our buyers are looking for (see Mistake 1).
6. Not investing money in the perceived value areas of the home
This is where we talk curb appeal and bragging rights. “Drive by” is a real estate term that is forgotten way too often. They have to love it from the street before you can wow them with the interiors. Remember to budget for exterior curb appeal from the beginning. And if we have to document here how important the kitchen and bathroom are to a retail buyer, maybe you should just go sell Amway products.
Mistake 5: Not being prepared for the unexpected
Remember Murphy’s Law: “if it can go wrong, it will go wrong, at the worst possible moment.”
To cover this, add 10% of the ARV to your expected costs to account for any unplanned expenses. Also, don’t get hung up over scheduling delays. Accept that things will go wrong on occasion. Make sure you have a contingency plan and motivate your contractor with an added bonus when they complete projects on time and on budget.
4. Not having an inner circle
Your net worth will be a direct correlation of your network. The first-time-flipper who thinks they can do it all alone is destined for failure. You will need to assemble a team of experts who know each aspect of flipping a house – General Contractor, Real Estate Lawyer, Realtor, Mortgage Broker, Hard Money Lender, etc. Each team member should be rooting for your success because when you win they win.
3. Forgetting that house flipping is a business
Flipping houses can be very profitable, but it requires regular time commitments. Flipping houses is not a get-rich-quick scheme, it is a business and you should conduct yourself in a manner befitting a business.
2. Choosing an inspector and/or contractor based on cost alone
Quality and reputation are more important than price. Finding the best Inspector and Contractor — not the cheapest — will save you money in the long run. Your uncle’s friend’s brother is not your best option here.
1. Not knowing your Market
Is the seller motivated? Don’t waste your time with tire kickers. Divorce, death and disease are incredible motivators. Find people with a real estate problem and solve it for them quickly.
What are the comparable list prices for the area? Knowing the “true” after repair value (ARV) is critical. Many new flippers will assume the retail sale price without basing their assumption on facts. Get multiple realtors to give you comparable listing information (comps) based on recent homes sold.
What are people looking for in a home in this market? Many first time flippers enter a new flip with guns blazing and commit the sin of over rehabbing a property. Granite countertops, stainless steel appliances, or what we call “Bragging Rights” only increase the house’s ARV in areas where they are popular or expected. Determine what’s necessary in your market.
How much will it cost to renovate the house? Before paying for a professional inspection do your own. Take note of sloping floors, buckling walls, water damage, etc. Determine if rehabbing the home and fitting it with the market’s desired features and finishes warrant even attempting the flip.
Dave Seymour is a real estate professional and co-founder of CityLight Homes. Seymour works directly with investors and lenders to buy/sell any type of property, with the overall goal of finding solutions for today’s market challenges.