House flipping is a wholesale real estate investment strategy in which investors buying a fixer-upper renovate it to sell for profit. Properties can range from single-family homes to condominium units, to entire buildings or groups of buildings.
Unlike other real estate investments, which create profit in the long term, house flipping relies on a quick buy-low, sell-high turnaround strategy to protect the investor’s capital investment. For example, an investor might purchase a distressed home in a hot market, renovate, then sell for profit when the home’s value appreciates and capital improves.
Property flipping looks easy on TV — where full renovations appear to happen over a weekend — though it’s not without its pitfalls and risks. Below, we outline a few common house flipping mistakes, but do your due diligence and thoroughly research house flipping before jumping in with both feet.
Skipping a real estate agent
Many flippers believe enlisting the help of a real estate agent will chip away at a profit margin, but research shows that experienced agents typically sell homes for 6% more than those sold without one. That’s a margin large enough to cover almost any broker’s commission.
A budget-friendly real estate broker is an invaluable resource — someone who can answer questions, offer market advice, pull comparative analyses, help you price the property correctly, and market it when it comes time to sell.
Buying an expensive property
Experts recommend purchasing a property for no more than 70% of the property’s after-repair value (ARV), minus the renovation costs. This buffer ensures you have enough margin to make a profit and the budget to make the repairs and upgrades.
For example, if a property’s ARV is estimated to be $200,000 after putting in $15,000 worth of repairs, your purchase price should be no more than $129,500 ($200,000 – $15,000 × .70 = $129,500).
If you can’t reach that price point with the seller, it’s probably not the right property for you. Particularly if you’re a novice flipper, you don’t want to jeopardize your budget or your ability to maximize your profit.
It’s valuable to remember the 70% rule of thumb is a guideline. Plenty of factors can affect your budget and projected profit margin including market fluctuations, costs of materials, or unexpected renovations. But basing your budget on the cost to renovate the home — versus the home’s future market value — will help to prevent you from overspending on the wrong home and eating up your profits.
Blowing the budget
New flippers tend to grossly underestimate expenses. Don’t “guesstimate” or judge the cost of renovations, upgrades, and repairs on your own.
Instead, consult your real estate agent on which improvements are appropriate for the property and the neighborhood and will therefore get you the most return on your investment. Have an experienced and reliable contractor provide estimates for everything from the cost of labor and materials to appliances and permits.
Regularly refer to a working budget to see if you’re on track or if your spending is spiraling. Don’t forget to factor in the fixed costs — mortgage, insurance, property taxes, and utilities — that you’ll be carrying until you sell the finished flip.
Buying too much of a fixer-upper
Homes with major structural damage are seldom good candidates for flipping as you’re unlikely to recoup your expenses after renovating. And some homes simply need too much work to make them a good investment. Focus on properties in established neighborhoods that need cosmetic updates or renovation on one or two rooms.
If you’re planning to do any of the work yourself, be realistic when it comes to assessing your skills, available time and money, and willingness to do the work. If you’re an experienced DIYer and are confident you can install that backsplash, go for it.
But leave jobs that involve electrical, plumbing or anything else that needs a permit or will have to pass an inspection to the pros. This is not the time to learn how to rewire a home from top to bottom from online tutorials. Selling a home with code violations is a big no-no.
Over improving the property
Tempting though it may be to go all out on new appliances and other upgrades, renovating too much may actually hurt you in the long run. If your property is the most expensive house in the neighborhood, it can make it harder to sell — so keep your improvements commensurate with what the market will bear if you want to sell quickly.
Do a reality check to make sure you’re renovating to the neighborhood, and not to your own personal tastes. So if your flip happens to be in a high-end neighborhood, high-end finishes may be called for. Otherwise, choose durable, middle-of-the-road finishes — neither the cheapest nor the most expensive.
Overpricing when it’s time to sell
House flippers often make the mistake of pricing the property based on how much money they spent renovating it or how much profit they’d like to make. But buyers only care about market value.
Price the property correctly so that it moves quickly. Overpricing can lead to a home sitting on the market for months. And if it lingers too long, carrying those costs will ultimately eat into your profits.Flipping homes can be enormously profitable and rewarding, but it’s not a part-time hobby. There are significant risks to consider before taking on a fixer-upper. Consider partnering with an experienced flipper who’s willing to mentor and educate you before venturing out on your own.