In recent years, I have met several hundred people who have embarked on the adventure of real estate flips. Unfortunately for some of them, it was not a success. Still, it seems so simple and easy on TV! Why do some people manage to profit with tens of thousands of dollars while others “flop” the entire transaction? Is it flips that are good or bad, or are individuals making monumental mistakes?
Here is the list of the seven worst mistakes made during flips.
Mistake# 1: Paying too much
“To pay too much” is, in my opinion, the biggest mistake during a flip that has the greatest impact on the profits. Why are the expected profits at the beginning not always at the end of the transaction? Beginning investors who lack experience in flips are paying too much believing they can resell at a higher price point later. That is not exactly how it works. Do not make the mistake of selling it above what the current market dictates are the selling price. You may try to sell your $350,000 property, but if the current market reflects a selling price of $ 300,000, you will not be able to sell…at least not quickly.
Mistake # 2: Additional renovation
Here is an error that many investors make at the beginning of their project. They are injecting too much money into the renovation.
What does the term “additional renovation” mean?
This means to complete renovations that will not allow you to recover all the money invested. For example, imagine that you are investing $30,000 in renovations, but they only add about $10,000 value to the property. You will come to inject $20,000 in excess, which will reduce your net profits at resale.
Pro tip: visit several buildings in the area to know the “standing” of other buildings. Thus, you will be able to evaluate the quality of materials to use in your renovation and will not spend unnecessarily for granite countertops when a cost-effective product is suitable.
Mistake # 3: Only trust the broker to find deals
Receiving listings from a broker is not about looking for a bargain; it is about waiting for the bargain! Right? Wrong; this method for sourcing listings is a major mistake.
Several hundred people, even thousands, will receive the same listing. When a bargain comes up online, it is better to be quick on the trigger since most investors are only looking for it. Look for listings where most people do not bother to search. Go for it! Be proactive and do not rely solely on brokers. There are many other ways to source properties to review and flip.
Mistake # 4: Forgetting to ask for funding
When planning your flips, consider asking a financial institution to lend you some or all of the money so you can make the necessary renovations. Thus, you will increase your available cash, which will help you address unforeseen events and a resale period that gives you leeway.
Mistake # 5: Too optimistic
Being too optimistic is a very common mistake that tricks people into paying too much for the project property. They are convinced that their property will find takers as soon as it goes on sale, which is rarely the case. They are also too optimistic about the cost of the renovation, and they forget to take into account those unforeseen events that will undoubtedly occur.
To add to their optimism, they think they can sell the property themselves, without a broker’s help and without having to pay commission. It is certainly possible, but you need to anticipate and be comfortable with the worst scenario when analyzing a flip project. In summary, it is quite possible that your project lasts longer than expected, that the work is more expensive, that you have to sell through a broker and pay a commission, and that the final selling price is not as high as expected. Be realistic and do not give in to emotions!
Mistake # 6: Insure Property
Improper insurance is an error that could be prohibitively expensive should you have a claim that your insurer refuses to pay because the property was not properly insured. Be it an uncovered sewer backup, an inadequate rebuilding cost, a false statement, etc. These elements could cost you tens of thousands of dollars in profits or, even worse, in additional losses. Be vigilant and insure your project to avoid any unnecessary financial setbacks later.
Mistake # 7: Not having the right tax structure
It is staggering the number of investors who tell me that they did not consult a tax specialist because they find it too expensive to pay $300 an hour. Indeed, hourly rates are not the most affordable. Is it better to pay $500 to a tax professional, save thousands of dollars in taxes, or save $500 in tax advice only to remit thousands of dollars in taxes? To ask the question is to answer it. As they say, the calculation is worth the work.
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