In the the world of real estate investment and flipping houses, there’s a lot to be said for being cautiously optimistic. A little fear can go a long way toward making sure you ask the right questions and avoid some of the common mistakes that could eventually cost you $10K—or more.
You Get What You (Don’t) Pay For
Although enticing because of the “free” price tag, tools like Zillow and Redfin aren’t that great for finalizing your After Repair Value (ARV), which is the anticipated amount of the sale price for your house. These types of sites are great places to start, for sellers to get a feel for the market when flipping houses, but they shouldn’t be your primary source of information.
To accurately calculate your ARV, make sure you have the right tools at your disposal. Knowledge is power in flipping houses; the more information you have from trusted sources, the more likely you are to invest in a good house to flip.
Trust the Formula
Many real estate investors fall into this trap when flipping houses: trying to coerce the Maximum Allowable Offer (MAO) formula.
The MAO Formula: (ARV x 70%) - (Repairs + Holding Costs) = MAO
The formula works well in finding you solid deals to pursue. The key is to avoid fixating on a particular deal, because it could force you into dangerously altering your renovation and holding calculations to make them “fit” the formula. The numbers must speak for themselves. If not, you will throw off MAO calculations and, ultimately, your profits.
Put the eraser down, and trust the 70 percent rule: To profit, you can’t pay the seller more than 70 percent of the ARV after repairs and holding costs. (It is also good to remember that the 70 percent may go up to 80, even 90 percent the hotter your market is).
Be Smart About Renovations
When renovating and repairing your flip for resale, make sure you’re working with a contractor you trust. A professional contractor will be upfront and honest about whether or not they need to pull permits and acquire licenses in order to renovate (or 'rehab') the house. No matter how big or small the repairs, make sure your contractor is licensed and has pulled the necessary permits, especially if you’re working on plumbing, structural, gas, or electrical systems.
Avoid Too Many Improvements
Another pitfall of flipping houses is doing too many improvements. All too often, ambitious real estate investors pour money into a renovation only to lose money on the resale. High-end flips are risky, especially if they don’t blend in with character of the rest of the neighborhood. If nearby homes are neglected or dilapidated, focus on carefully planning your renovations and make sure your resale goals are realistic.
If you get focused on what the renovation should look like, and let your vision cloud reality, you could end up pricing buyers out of your flip. Make sure you use accurate comparables (or comps) to find a fair market value for your deal, and then calculate the amount of time and expense you should spend on your rehab. Finding a diamond in the rough is every house flipper’s dream, but it must be reasonable.
If nearby homes have dated finishes, vintage fixtures, and linoleum flooring, you probably don’t want to spring for marble countertops, hardwood floors, and expensive fixtures. Be thoughtful about your repairs and renovations, or you could end up losing thousands in the process.
Have an Exit Strategy
Before you even invest in a house to flip, make sure you have a plan in case you run into difficulty when selling, or need to sell quickly. Some options include renting the house, selling it to another lender, or even leasing it to a buyer to avoid being a landlord.
Don’t let what you don’t know about flipping houses cost you. Sign up by clicking the image below for one of our live Deal Finding Fridays to stay confident and keep on the right track toward real estate investment success.