Flipping Mistakes to Avoid

 4 Mistakes to Avoid When Flipping Your First House

 

 

So, you've decided to flip your first house. That's fantastic! Flipping houses can be a great way to make money in the real estate industry. But not all house flipping opportunities are successful, and some can even end up being financial disasters. So if you don't want your house flip to be a flop, there are some mistakes you need to avoid making. Let's talk about a few things to avoid when you're flipping your first house.

1) Do Your Research

You need to have a plan. Don't just jump into the first house flipping opportunity you get. You want to research the neighborhood thoroughly. You need to pay careful attention to things like crime rate and location. You also need to make sure that the market trends are suggesting property values are on the rise. You don't want to take a loss because your plans don't match up with the financial trends of the neighborhood.

2) Keep to Your Budget

The cost of flipping a house varies for every property. Even if you find a great deal on a house that's located in a popular neighborhood, it may need a lot of repairs, which will make your profit margin much smaller. You want to set a budget and stick to it like glue.  Factor in the original price you pay for the house and all repair costs. Also don't forget about listing costs, and of course closing costs when you do sell the property.  Keep in mind that you may end up holding onto the house for several months, both while you're fixing up the property and while you are waiting on it to sell. Repair and upgrade essential items, but remember not to go overboard with expensive add-ons. There's an unwritten rule in house flipping. It says that when you are purchasing a home to flip, you shouldn't pay more than 70% of a home's after-repair value. After repairs, you should be able to make a 15%-20% profit.

3) Be Careful When Financing Your Flip

Of course, the best route is to purchase the property with cash. That way you can avoid debt, and not have to worry about paying the interest on a loan until the house sells. However, that isn't always an option for everyone. And remember that because house flipping can be risky, most banks aren't interested in financing that type of mortgage. But if you must finance your property, there are a few options to consider.

• Hard money loan - A hard money loan is a short-term loan (usually for a 6-12 month duration in most cases) that is issued by a private lender. These types of loans can be expensive, though, with high interest rates and require a downpayment, sometimes as much as 40%.
• Home equity line of credit - This is a loan that uses the equity on your home as collateral. Which means that if you don't make enough on the flipped property, you could put your own home in danger.

3) Not Everything is a DIY Project

While you may be able to complete some of the necessary work yourself, you probably aren't going to be able to make every repair needed. Some repairs are complex and need to be completed by a licensed professional. Plus, you don't want to put a lot of time and money into a repair that you aren't confident in.

4) The Right Contractors are Key

Unless you know construction from top to bottom, you'll need to hire contractors to help you with some of the work.  Don't get stuck with an inexperienced contractor who either doesn't know how to do the work, or ends up spending more than you budgeted for. You want to make sure that the contractors you hire are experienced and reliable, and that they have the proper licensing to do the job. Make sure to look at recent reviews online, because they can tell you a lot about prospective contractors. You can also ask for referrals from real estate professionals, or even other house flippers. Once you've chosen your contractors, discuss the expected cost of repairs and make sure you are on the same page.

The bottom line is mistakes do happen, especially for first-time house flippers who are figuring it out as they go. But learn as much as you can before you buy your first property. That way you'll be as prepared as you possibly can be, and you'll be able to avoid a lot of the most common mistakes when you're ready to flip your first house.

Build a Reliable Network of Contractors

  Guide to Building a Reliable Network of Contractors and Suppliers

Flipping houses can be a rewarding venture. Transforming distressed properties into desirable and profitable residences requires a network of dependable contractors and suppliers. Unfortunately, finding reliable professionals can feel like an uphill battle. The industry is rife with untrustworthy, unlicensed, and unqualified "cowboy builders" who can deliver shoddy work, cause delays, and drain your profits. However, building a team that streamlines your projects is not an impossible feat. Let's lay the groundwork;

 

Research and Referrals

The foundation of your network starts with exhaustive research. Use online resources to find contractors and suppliers in your area. Look for reviews, testimonials, and ratings that shed light on their reputation and quality of work. Don't underestimate the power of word-of-mouth referrals, either.

Contact trusted sources within the real estate industry. This could include fellow real estate investors, realtors, or even property managers with experience working with reliable contractors and suppliers. Their recommendations can provide valuable insights and help you narrow down your initial list.

 

Assess for Success

Once you've shortlisted potential partners, assess whether they are a good fit for your projects. Ask detailed questions about their experience, qualifications, and past projects. Inquire about the types of flipping projects they've handled and whether they have experience working within your budget and timeline constraints.

Request references and follow up with them to validate the candidate's track record and credibility. Past experiences with other clients or collaborators can shed light on their reliability, work ethic, and communication style. Direct feedback also gives you a clearer understanding of the contractor or supplier's strengths, potential limitations, and compatibility with your project requirements.

Don't forget to verify if they hold the necessary licenses, insurance, and permits to operate legally. This is not just a formality—it protects you and your business. Licensed contractors have the training and capability to ensure the work is completed safely and up to code. Insurance guards you against financial liability in case of accidents or injuries on the job, while permits ensure the project adheres to local building regulations.

 

Find the Value Equation (Quality and Cost)

While the allure of the cheapest option might be tempting, remember that subpar work or low-quality materials can lead to costly repairs down the road. Cutting corners on workmanship also causes delays that disrupt your timeline, eat into profits, and even lead to potential non-compliance with industry standards that could result in fines.

Using inferior materials may culminate in safety hazards, potential lawsuits, and damage to the company's reputation for reliability and professionalism. Ultimately, the short-term cost savings of choosing a subpar contractor or supplier can pale in comparison to the long-term ramifications on both finances and credibility within the industry.

To mitigate this pitfall, obtain multiple quotes and compare them to establish the average market price. Look for contractors and suppliers who offer competitive rates without sacrificing quality. Investing in reliable professionals who deliver exceptional results is far better than cutting corners and jeopardizing the overall success of your undertakings.

 

Match Expertise to Needs

The construction and renovation niche is vast, with different contractors and suppliers specializing in various areas. Some might excel in kitchen remodels, whereas others shine in plumbing or electrical work.

Specialization ensures that professionals have honed their skills and knowledge in specific areas, leading to higher efficiency, accuracy, and quality of work. Focusing on their niche can deliver specialized solutions tailored to the unique requirements of each project for enhanced client satisfaction.

Assess your projects' specific requirements and onboard experts with experience in those areas to ensure high-quality work and attention to detail. For instance, if you're tackling a bathroom renovation, find a contractor skilled in plumbing, telework, and water fixture installation. Your projects receive the focused expertise needed to deliver superior outcomes that meet or exceed project expectations every time.

 

Collaborate with Industry Experts

Participate in industry events and join professional associations to collaborate with experts in your niche. These gatherings unite seasoned house flippers, contractors, and realtors to help form valuable partnerships. For instance, attending a real estate conference may lead to collaborations with renowned contractors or seasoned flippers.

Join groups like the National Association of Home Builders (NAHB) that may provide access to networking events and support. Online platforms like LinkedIn and real estate forums facilitate discussions with industry leaders and promote knowledge-sharing within the house-flipping community. If you need additional support for your house-flipping business, the Leaf Management and Funding team can be part of your network. Contact Us today to learn how we can help connect with fellow construction professionals.

How to Fund Your Flip

 Cracking the Code to Funding Your House-Flipping Dreams

Flipping houses can be a lucrative way to profit from the real estate market. But before diving in headfirst, you must understand the financial realities involved. The overall expense of flipping a home typically accounts for around 10% of the property's purchase price. However, this figure can fluctuate based on various factors, such as the extent of renovations and the financing strategy employed.

Seasoned investors often advise maintaining a buffer by never exceeding 70% of the property's after-repair value (ARV). The initial hurdle for any new house flipper is securing the capital to get started. Fortunately, several financing options are available, each with advantages and drawbacks. Let's look at some of the most common methods.

 

Hard Money Loans

These are popular loan choices for flippers provided by private lenders who focus on the property's potential rather than the borrower's credit history. Hard money loans offer expedited access to capital yet often come with a notable downside—steeper interest rates, typically ranging from 8% to 15%. For new flippers with limited experience, the high cost of borrowing can make hard money loans a risky proposition.

 

Home Equity Line of Credit (HELOC) 

A HELOC functions more like a credit card secured by your home's equity. Once approved, you're granted a credit line with a maximum limit to draw funds as needed during your project. Interest is only charged on the amount you borrow, and you have a draw period, usually 10 years, to access the funds.

After the draw period ends, a repayment period kicks in. You'll be required to repay the principal and accumulated interest, usually in monthly installments over 15-20 years. The challenge with HELOCs is that interest rates can fluctuate with market conditions, which may increase your borrowing costs.

 

Home Equity Loan

This loan provides a lump sum of cash upfront, similar to a traditional mortgage. It's a fixed amount based on the appraised value of your home and the amount of equity you've built up, typically capped at an 80-90% combined loan-to-value (CLTV) ratio. You then repay the loan with interest over a set term, usually 5-15 years, with a fixed monthly payment.

The downside is you'll need significant equity built up in your primary residence to qualify for a home equity loan. Also, the fixed nature of the loan limits your access to additional funds as the project progresses. Like any loan secured by your home, defaulting on payments could lead to foreclosure.

 

Bridge Loans

This temporary financing solution covers the gap between buying and selling a property after renovations. These loans can be a good option for experienced flippers with a proven track record of successful flips and a clear plan for selling the renovated property quickly.

New house flippers face a double challenge with bridge loans; the loans are typically short-term (6-18 months) and have interest rates that can be higher than traditional mortgages. These high-interest rates can quickly erode profits. In addition, house flippers are constantly under pressure to sell the renovated property quickly to avoid defaulting on the short-term loan.

 

Private Lenders

Hard money lenders aren't the only private financing option. Wealthy individuals or investment groups may also be interested in funding your house-flipping venture. The terms of such agreements often involve a combination of loan repayments and profit-sharing arrangements.

Although securing financing from private investors grants autonomy in negotiations, it may entail higher interest rates and strict repayment terms. Also, such lenders can be more selective about the house flipping projects they fund.

 

Traditional Bank Loans

While securing a traditional mortgage loan may seem ideal, sometimes banks hesitate to lend to new flippers. This is due to their lack of established track records in real estate investment and the perceived higher risk associated with the short-term nature of house-flipping ventures. However, seasoned flippers with a healthy credit history and a solid business plan may be able to qualify for a loan specifically designed for investment properties.

 

The Bottom Line

Choosing the right financing option depends on your individual circumstances and experience level. Regardless of your chosen method, focus on building your experience and creditworthiness. You also need to research the local market and set a realistic budget before tackling large projects. 

In this case, Michael Leafer of Leaf Management can be an invaluable asset as our company offers rehab, management, and funding for residential contractors and real estate investors. If you're a house flipper looking for financial assistance for your investment property(s), Contact Us today to forge a mutually beneficial partnership.