Blog - DealMachine for Real Estate Investing

6 Mistakes That Can Make House Flipping a Flop

Written by Samantha Ankney | Mar 16, 2023 1:30:00 PM

Flipping houses has become a popular way to make money in the real estate industry. However, not all house-flipping ventures are successful. You know that flipping can get out of hand in ways you least expect it especially if you’ve seen any of the HGTV flipping shows. I mean they literally even used to have a show called Flip or Flop.

In this blog post, we'll explore six common mistakes that can make flipping a property a financial disaster. From underestimating costs to choosing the wrong location, rushing the process, and not having an exit strategy, we'll provide practical tips for avoiding these pitfalls and maximizing your profits. Keep reading to learn more about the six mistakes you should avoid when flipping a property.

Mistake #1: Underestimating Costs

Flipping a property is not for the faint of heart, and one of the biggest mistakes that rookies and veterans alike can make is underestimating the costs involved. The last thing you want is to get halfway through a flip and realize you've run out of funds.

Unfortunately, this is an all-too-common problem that can lead to major financial headaches. From unexpected repair costs to permit fees, there are many expenses that people may overlook when flipping a property.

But fear not! There are steps you can take to accurately estimate your costs before you even begin your flip.

One key tip is to create a detailed budget that accounts for every expense, no matter how small. Another is to work with experienced contractors who can give you accurate quotes and help you avoid costly surprises. By taking the time to plan and budget properly, you'll be one step closer to a successful flip.

To learn more about estimating renovation costs you can check out episode seven of the DealMachine REI Podcast.

Mistake #2: Not doing enough research

Research is everything. Not doing enough research can lead to costly mistakes derailing your entire flip. From buying a property in a declining neighborhood to hiring unqualified contractors, there are many pitfalls that can be avoided with proper research.

One of the most important types of research to conduct is market research. This includes analyzing the local real estate market to determine if there is demand for the type of property you want to flip. Keep in mind comps (comparables) for the area to make sure you are buying right and can factor in a reliable budget based on the estimated sale price.

Another important type of research is contractor research. Taking the time to vet potential contractors can help you avoid hiring unreliable or inexperienced workers. To conduct thorough research, make sure to read up on the latest real estate trends and regulations, check out online reviews of contractors, and ask for referrals from other flippers or real estate professionals. Also, don't forget to make sure that you and your contractor are on the same page when it comes to what work is factored into the bid versus what you thought you'd be getting for the bid.

By doing your due diligence and gathering as much information as possible, you'll be better equipped to make informed decisions and avoid costly mistakes. And, the great news is once you’ve gotten your start and found a few reliable contractors you can go back to them for other flips!

Mistake #3: Choosing the Wrong Location

Location is key. Choosing the wrong location can have a major impact on the success of your flip. For example, buying a property in a neighborhood that is experiencing declining property values could leave you with a property that is worth less than what you paid for it. On the other hand, buying a property in an up-and-coming neighborhood could lead to a substantial return on your investment.

In fact, when we went on our case study trip to see Ryan and Megan Haywood in action they took us by a few of the properties they were fixing up. And, I remember at one of the properties the neighbors were out on their porch and shouted across the street how happy they were someone was finally going to do something with the property.

Anyway, to choose the right location for your flip, do your research and look for neighborhoods that have a track record of appreciation. These are typically areas with good schools, low crime rates, and proximity to desirable amenities such as restaurants and shopping centers.

Additionally, avoid areas with high vacancy rates or low demand for the type of property you want to flip. By carefully considering the location of your property, you can set yourself up for success and avoid one of the most common mistakes in the house-flipping game.

Mistake #4: Over-improving the property

Now I know what you may be thinking, “that’s absolutely not possible”, but I am here to tell you it is possible.

It's important to strike a balance between making necessary improvements and over-improving the property. What do you actually need to fix and what is too much of a high-end finish?

Over-improving a property can lead to financial problems, as you may not be able to recoup the costs of the improvements when you sell the property. For example, adding high-end finishes to a property in a modest neighborhood may not add value to the property, and may actually make it harder to sell.

To determine which improvements are worth making, consider the expectations of potential buyers in your target market. For example, if you're flipping a starter home, focus on making cost-effective improvements that appeal to first-time homebuyers. Additionally, avoid over-improving a property beyond the standard for the neighborhood, as this could make the property stand out in a negative way.

Finally, it's important to keep a close eye on your budget and make sure that the improvements you make are in line with your expected return on investment (ROI). By avoiding the trap of over-improvement, you can increase your chances of a successful flip.

Mistake #5: Rushing the Process

This might be a little confusing if you are thinking about it in terms of strictly sticking to the timing of the schedule or maybe even potentially finishing early, but hear me out. Rushing a flip can lead to costly mistakes and financial problems, as important steps may be overlooked or done improperly.

For example, rushing through the inspection process could lead to missed repairs or hidden problems with the property. Rushing through the renovation process could lead to shoddy workmanship or unfinished projects.

Make sure to take the time to do things right and create a detailed timeline for your flip that includes realistic deadlines for each step of the process. Be sure to build in extra time for unexpected delays or issues that may arise.

Additionally, resist the urge to cut corners or rush through important steps to save time or money, as this can end up costing you more in the long run.

Finally, consider working with experienced professionals such as contractors and inspectors who can help ensure that every step of the process is done correctly and to the highest standard. By taking the time to do things right, you can increase your chances of a successful flip and avoid the costly mistakes of rushing the process.

Mistake #6: Not Having an Exit Strategy

Not having an exit strategy is one of the biggest mistakes you can make when flipping a property. Without an exit strategy, you may find yourself holding onto a property longer than expected, or selling it at a lower price than you had hoped for. And let's be honest, no one wants to sell the house for less than they thought it would go for.

This can lead to significant financial problems and lost profits. To avoid this mistake, consider your exit strategy before you even begin your flip.

One common exit strategy is to sell the property quickly after renovations are completed, ideally within six months of purchase. Another strategy is to hold onto the property and rent it out for passive income. It's important to weigh the pros and cons of each strategy based on your financial goals, market conditions, and local regulations.

Additionally, be sure to have a backup plan in case your primary exit strategy doesn't work out. For example, if you can't sell the property, would you be willing to rent it out long-term or sell it to another investor? Just because it isn’t your original plan does not make it a flop as you've stayed true to the expected profit margins.

Conclusion

Flipping a property can be a lucrative way to make money in the real estate industry, but it's not without its risks. To avoid the pitfalls of house flipping and maximize your profits, it's important to avoid these six common mistakes: underestimating the costs, not doing enough research, choosing the wrong location, over-improving the property, rushing the process, and not having an exit strategy.

By following the tips we've talked about, you can set yourself up for a successful flip and avoid costly mistakes along the way. Remember to do your research, take the time to plan and budget properly, and work with experienced professionals who can help you achieve your goals. And above all, don't forget to have fun!

Flipping a property can be a challenging and rewarding experience, and with the right approach, you can turn it into a profitable venture. Good luck and happy DealFinding!