1. Taking Too Much Time
Sounds pretty obvious, but time can kill your deal. Odds are, you borrowed money for your fix and flip and have a monthly payment. Unlike rentals, where you get paid once a month when you have a tenant, you only get paid once on a fix and flip — when you sell. Every month you carry that fix and flip, you ring up more interest. Whether you are financed with a bank, a private lender, or a hard money lender, the interest can start to pile up.
The same goes for those other expenses that are time based. The usual suspects are real estate taxes, insurance, and utility bills. Its simple math: the more you hold a property, the more of these things you will have to pay.
The way to avoid time sucking down your bottom line is to create a timeline for your project, and stick to it. The timeline should go hand in hand with your project budget and include all phases of the project: from the time you buy the property to the time that you sell it. Then you need to revisit the timeline and make adjustments.
As we will discuss later, there is no way you can know everything that will come up on a fix and flip. There are just too many variables. That shouldn’t deter you from making one, though. Avoid the urge to “jump in and figure it out” — and take that from me because I am a recovering “jump in and figure it out” guy. Make the timeline anyway, and keep making adjustments when things come up. The timeline will hold you on course and, along with your budget, will stop the project from getting too far off goal.
2. Not Having/Sticking to a Realistic Budget
Along with projecting the expected timeline for your project, you need to keep the project in line with your expenses. I’m sure this goes without saying for most of you, but creating a budget you can stand behind up front is the first step in keeping your project expenses in line.
There are two ways that your fix and flip can fall apart due to the budget. Here they are and how to avoid them:
Budget doesn’t cover everything: You want to make sure your project budget covers all the costs you will incur. This of course includes all improvements you plan to make, so be sure that all activity in the house has a line item (from demolition to final cleaning).
Also, make sure that the “soft costs” are included. These would be things like loan interest, taxes, utilities, permits, architect fees, etc.
Budget is unrealistic: If you plan on replacing the roof on your flip, be sure to budget more than $100 for it. I am being a bit extreme, of course, but I am trying to make a point. You need to make sure that the line item expenses in your budget are achievable given what you know about the property going in.
Run the numbers by someone – either another rehabber or, even better, call someone who will actually be doing the work for you. Instead of making up a number for the roof repair or the new bathroom, call a contractor to give you a bid. You can use their number in the budget and then get two more bids when it’s time to cut a check to make sure it’s a fair price.
3. Over-Improving the Property
It’s hard to know when to stop improving on a fix and flip, especially if you have the resources. There are things that really make a fix and flip pop, like granite countertops, crown molding, tile, hard wood floors, landscaping, and the list can go on. Every house needs these things. I call them “wow factors.” Every house should have a few things that make people say, “WOW!” when they walk through your property. These things make your house stand out and will help you sell quickly.
That being said, you need to know how many of them you need to sell in your market. There is a law of diminishing returns in fix and flips, meaning that people will only pay so much for your house, regardless of what you do to it. The trick is finding out what you need to do to get your price — and not doing anything more than that.
Everyone should be doing market research to validate your target price, but do it to validate condition also. Be sure to surf the internet to look at other houses for sale in your area, or better yet, walk through some of them when they are having an open house. If you can get access, look through interior pictures of houses that sold recently through your local MLS. All this should give you an idea of what condition will yield the price you are looking for in your area. Your end goal should be to SLIGHTLY exceed the market’s expectations for improvements in your area.
4. Not Preparing for Unforeseen Issues
This is by far my least favorite part of fix and flips. As I said before, there are just too many variables in a fix and flip to anticipate all of them. You just can’t know everything. I haven’t done a fix and flip yet that didn’t have some sort of surprise that came up during the project. I have had it all: from unforeseen termite damage to the local township giving us a hard time, things come up.
The first way around these issues is to do your best to minimize them while understanding that you won’t eliminate them altogether. You do this by doing as many inspections and as much detective work before your buy as you can. Call the local township before closing, do a termite inspection, have someone get up on the roof and look for damage you can’t see from the ground, have the furnace inspected, etc. What you find out may not prohibit you from buying the house; you may consider asking the seller for a discount. The key is to be aware of as many facts on the house as you can, so you can make preparations to handle them in your budget.
The second way around unforeseen issues is to have a line item in your budget for “contingencies.” This is intended to cover the things that come up on a project that were outside your budget. Its money set aside as “just in case money” to cover those inevitable things that can arise during a project. I normally use a contingency line item of 10% of my construction budget and have found that most things that arise can be covered with that.
5. Over-Pricing the Property
Don’t get too greedy when you go to sell! An overpriced house will not get the attention it deserves when it first goes out for sale. The first time a house is listed is when it’s on most people’s radars. If you are priced right, you should be getting interested buyers as soon as it gets listed. For a variety of reasons, you want your house to go under contract within a few weeks of getting listed. The obvious reason is that you want to sell and get your hard earned profits. The second reason is that you don’t want it to sit on the market.
The kiss of death for a fix and flip is your house getting stale. It’s hard to get attention from buyers once you’ve been on the market for a while, even if you drop your price. The problem is that savvy buyers will see that you have been out there for a while and that you’ve reduced your price at least once. You may get offers, but odds are, they will be well below asking.
We price most of our listings right at the average of the market and have gotten multiple offers within 30 days of listing, even in today’s marketplace. The key is to create a bit of frenzy up front with some well-placed marketing, and a fair price on a house that slightly exceeds the market’s expectations. Remember the “wow factor”? The buyers should say “WOW! I can get granite countertops and all these other improvements in this house for just a few dollars more than the house down the street!”