Watch Out For These 2 Profit-Killers
The excitement around flipping homes and investing in real estate seems to have hit an all time high. Networks like HGTV continue to create new shows featuring couples who rehab homes for profit, and with the advent of social media and YouTube, it’s easy to find vlogs, resources, and how-to’s from self-proclaimed professionals.
But flips aren’t always as easy, neat, or clean as they look - and I’m not talking about debris or demo day. Anyone who’s flipped a home or who knows the industry well, will tell you that if you get just one aspect of the flip wrong, or simply come across unforeseen damage, your dream flip can turn into a nightmare.
That said, there are a few things you can watch out for, to make sure you preserve as much profit as possible on the other end. While there are always hidden things that could bite you (like ripping off drywall only to discover you have a massive mouse infestation eating your insulation), there are also consistent factors to account for on every flip, that should allow you to walk away with some degree of profit.
So, if you’re considering emulating Chip and Joanna Gaines and trying a “fix & flip” of your own, here are 2 major profit-killers to watch out for...
Danger #1: getting your calculations wrong.
Professionals know that if you get your rehab or ARV calculations wrong, you’re in the hole from the start.
Eden, one of the founders of As Is Homes DFW, specializes in buying and selling homes for profit in the Dallas Fort Worth area. She warns, “the biggest profit killers are first, a wrong calculation of the repairs the house will need, and second, a wrong calculation of the home’s ARV.”
This is perhaps the most common reason homeowners or professionals don’t walk away with a profit, so let’s break each one down:
A wrong calculation of the repairs you’ll need.
In other words, when you walk through the home and make a list of the repairs the home will need in order to get it to selling condition, you either miss things or severely underestimate them.
Sounds simple, right? But this is a really easy mistake for newbies to make, because you simply aren’t familiar with everything you should be looking for. Or, you’ll see something that on the surface looks like it should only cost $x to fix, but in the end, ends up costing much more.
Even experienced contractors end up finding things during the gut or rehab that they couldn’t have seen, so you won’t be immune from making the same mistake.
Miscalculating the home’s ARV.
For those who don’t know, ARV stands for “after repair value”. The mistake here is that you essentially overestimate what the home will be worth, or what someone will be willing to pay for it after you’ve fixed it.
In other words, if you’re considering a “fix and flip”, you’ve got to make sure that someone is willing to buy it at the price you want to sell it for at the end, or you’ll be losing profit.
Danger #2: paying too much for the home.
Besides miscalculating or not factoring in costly repairs into your estimate, and besides overestimating what you think buyers will be willing to pay after the home is flipped, the next major profit killer is simply paying too much for the property.
Carter, the owner of Carter Buys Homes, is a professional real estate professional, and flips homes for a living, and thinks overpaying is the biggest contributor to a loss of profit: “overpaying for a property is always the biggest killer. It's very difficult to spend your way out of a bad deal.”
You can walk through the home, take a detailed inventory of all your rehab costs, and know exactly how much it will cost you to gut and flip the home, but if you pay too much for it - you’re behind from the start, and no amount of repairs is going to help you make what you should have.
So, what can you do to avoid these 2 dangers?
Just because these two factors are the biggest reasons most people walk away without profit (or in the hole) from a flip, doesn’t mean they can’t be avoided.
Here are a few tips to give you a better chance at success:
- If you’re inexperienced, pay a trusted contractor to walk the home with you and write up a detailed estimate of repairs. This will help you both learn what to look for, and ensure that you don’t miss anything obvious due to your inexperience.
- Invest a lot of time into researching the local housing market where you’ll be purchasing the property. Gain a very solid understanding of what homes in a related condition are actively selling for, and what homes in good condition are selling for. Be sure to look at homes in the exact neighborhood/area you’re buying in. This will help you recognize a deal when you come see one, avoid purchasing for too much, and help you get an accurate ARV for the home.
- Keep some extra padding in the bank before you flip, for unforeseen costs. Again, these things happen to even very experienced contractors. There are some issues you just can’t see until you get party-way through the flip. So having a little extra in the bank designated to your flip, will help ease the stress and risk of coming across a major repair that you didn’t account for.
Flipping a home can be a great and rewarding experience, if you have a proper understanding of what it’s going to take. So if you’re new to it, and gearing up to tackle your first flip, make sure you watch out for these two profit killers, and take steps now to educate yourself and prepare well.
Author: Jeremiah Rizzo
Digital Marketing Expert at AdWords Nerds