Playing your cards right as a house flipper means making a lot of sound decisions. Unfortunately, many house flippers make costly mistakes, especially when they’re just starting out.
Save yourself the money and angst by avoiding these 10 common house flipper mistakes.
Mistake #1 - Over-improving the Property
Over-improving basically means going overboard with improvements and/or using materials and finishes that are more upscale than they need to be. In some high-end markets and neighborhoods, it’s virtually impossible to over-improve a property. However, in most cases making a flip better than any other home on the block doesn’t have the biggest return.
The best strategy is to make the home comparable to other top-selling homes in the neighborhood. Using quality materials is always a good idea, but there’s no need to install radiant flooring, a saltwater pool and marble showers in a neighborhood with $300,000 homes.
Mistake #2 - Not Knowing What Local Home Buyers Want
You can spend thousands renovating a home in a style that you find to be ideal only to discover that it’s not what buyers like. House flippers have to have a finger on the pulse of their local market. They should know what types of home styles have appeal, the finishes that are most popular and which upgrades will attract buyers.
When in doubt, always go neutral. It’s better to have a home that’s a relatively clean canvas for the buyer to make their own than to turn people off with a distinctly stylized decor.
Mistake #3 - Forgoing the Inspection
Even in distressed sale situations, you usually have an opportunity to do a home inspection. It’s a key part of doing your due diligence. Even if you can’t get inside the home, an inspector can still take a look at the outside to search for signs of structural, roofing, electrical, and foundation issues. You may even be able to tell if there’s water damage from the outside.
Mistake #4 - Not Running Good Comps Before Buying
After the investment property is bought and the renovations are complete is not the time to run comps for the first time. You’ll definitely want to run the comps before listing the home, but you should also do that before buying. It’s the only way to accurately guesstimate what kind of gross return you can expect after the acquisition, renovation, and listing costs.
Bonus Tip: In addition to looking at the recent sales in the area, your research should also take a look at how current prices compare to the last peak. This will give you an idea of whether prices are still on the upswing and by how much.
Mistake #5 - Not Analyzing the Sales Activity
There are a few other things to check in addition to comps that some flippers overlook. Three key factors are: the average days on market, rent versus own ratio, and foreclosure rate for the neighborhood. Ideally, you want to see lower than average days on market, higher than average owner rate, and 3% or less foreclosures in the last year.
Mistake #6 - Ignoring the Backyard
Curb appeal and outdoor living are huge selling points. Most flippers budget for improving the front of the house, but then they completely ignore the backyard. It’s a big let down for buyers that tour a beautifully renovated home only to find the backyard needs a lot of work.
Even if the reno budget is tight, a recent outdoor features survey from the National Association of Realtors (NAR) shows that new sod, lawn care, and landscaping are a great investment. These improvements have high ROI and will get you a dollar for dollar return while helping the home sell quicker. Fire features and wood decks also rate high on the home buyer wish list.
There’s another added benefit to outdoor improvements. If the home is small a deck or patio is a low-cost way of expanding the living space.
Mistake #7 - Trying to Do It All on Your Own
Are you a licensed electrician? Do you have a plumber’s license? Many flippers make the mistake of thinking that they can do most of the renovations on their own only to find it ain’t that easy. Trying to do it all on your own and making renovations you’ve never done before usually ends up wasting time, materials, and money.
Mistake #8 - Forgetting About Taxes
Purchase price and renovation costs are the major expenses of a flip, but there’s another line item people often forget to factor into their break-even calculations. Taxes are an inevitable expense that will eat into your net return. When you turn a profit you’ll have to pay short-term capital gains taxes. Transfer taxes and property taxes will also need to be paid.
Mistake #9 - Ignoring Zoning and Permits
So many flippers are tempted to bypass the permitting process and disregard zoning regulations. They are a hindrance, but ignoring them could be a costly mistake. If the city finds out work is being done without permits you could face serious fines and have to undo all the renovations that have already been completed. You could also find yourself entangled in a lawsuit or tough negotiations if the buyers find defects and unpermitted projects.
Mistake #10 - Not Enlisting the Help of a Real Estate Agent
Flippers that don’t have a real estate license really need to find a real estate agent with experience in the local market. They provide so many valuable services, some of which are free.
When you’re on the buying end a real estate agent is paid by the seller. All of their guidance and assistance won’t cost a penny. They’ll shoulder a lot of the responsibilities and can provide expert advice on whether a home is a good investment.
After the sell is complete, a real estate agent can provide insight into what local home buyers are looking for and pass along their industry contacts. When it comes time to sell, your agent can pull the comparables and help you determine the best list price.
Worried about the cost of paying commission? Research has shown using a real estate agent for a house flip isn’t more expensive. Homes sold by agents typically sell for 6% more than FSBOs, which covers the cost of the commission and they’ll handle the marketing expenses. The agent may even be willing to accept a lower commission rate if they helped you purchase the property or get a guarantee to help you with future flips.