The 12 Biggest Financial Mistakes of House-Flippers

House flipping is a fun and exciting market that can be highly profitable. Many people leave a flip laughing all the way to the bank, while others are stuck with expensive flops. What can you do to keep your flip from turning into a flop? Don’t make these big money mistakes:

1. Misuse government funding: If you’re using government funding, make sure your sale won’t get you in trouble with Uncle Sam. FHA federal assistance mortgages have restrictions on their use. For example, buyers cannot use FHA financing to buy property that is being sold within 90 days of purchase. FHA financing is also not available if you’re selling for double the original price within 180 days of the initial purchase.
2. Leave your homework undone: Talk to the right people before you buy a house to get a clear estimate of the profit you can make from the flip. Loan officers, agents and contractors can give you a general idea of the costs you’ll incur when renovating. Know the area’s economy and real estate market to approximate the likelihood of a successful sale. Failure to get your facts straight upfront can leave you with a house that’s not worth the money you put into it.
3. Long-distance buying: Never buy a house that you haven’t seen with your own eyes and never buy a house that’s too far away for frequent visits. Renovation is an expensive, hands-on venture; you don’t want contractors to take advantage of your absence. Your profit margin depends on effective management: make sure you can be there to oversee work.
4. Overdo work: There’s no end to the amount of improvements that can go into a house. Be careful not to do redundant work. Can you clean fixtures instead of replacing them? A little elbow grease can save you lots of money. Remember to keep the home’s renovations within the standards of the neighborhood as well. Otherwise, you’ll have wasted work and money on a home that’s too expensive for the area.
5. Get emotionally involved: Don’t buy overpriced property just because you like the seller. You’re in the business to make a decent profit, not do social service. Keep a level head and make practical financial decisions.
6. Buy too many too fast: New to the business? Don’t do too much at one time. The worst thing you can do is buy a large number of houses and take on multiple renovations at the same time. You’ll put too much money on the line. If you’re not able to sell the properties in a timely manner, you’ll get stuck with lots of bills to pay.
7. Delay the sale: Don’t hold on to property that’s ready to sell. The longer you own the property, the more costs you incur. Utility bills, insurance premiums and property tax payments will eat into your profit. Sell the house as soon as you can to avoid having to deal with excessive maintenance costs.
8. Hire an unscrupulous contractor: A good contractor is essential to your success as a house flipper. Don’t get stuck with someone who will waste your money and time. When shopping for a contractor, consider only those that are licensed. Take the time to check out references and ensure that you’re hiring someone that’s guaranteed to do a good job. If you hire the wrong person, you could end up with low quality work and an expensive, unfinished house on your hands.
9. Lose track of the improvements you’ve made: Maintain proper records of the renovation work done to the home as well as the costs involved. Take these into account when calculating your asking price. Failing to do so can cause you to undersell the home, cheating you out of potential profit.
10. Underestimate costs: Don’t get in over your head. Understand that you’ll need to put forward a significant amount of money before you can realize a profit.Do a comparative market analysis and take into account all of the costs you’ll incur. This includes taxes, insurance, materials and labor, permits, brokerage fees, carrying costs, closing costs, debt repayments, and more. Overestimate so you’ll have a buffer in case of unexpected delays or extra costs.
11. Start work without a plan: We’ve all heard horror stories about the contractor who doesn’t start work for a month, does shoddy work, and disappears. Nip this problem in the bud. Work out a contract that clearly defines your renovation budget and schedule. You’ll save yourself time, money and headaches.
12. Waste money on useless courses: There are a host of self-help books, tapes and seminars that promise to teach you everything you need to know about house flipping. There are some legitimate educators out there, but many are just out to make a quick buck at your expense. Don’t spend money on advice that’s unhelpful and incorrect. If it sounds too good to be true, it probably is. Rely only on reputable publishers and read reviews before you fork over your cash.