The real estate market has long been an avenue to business and financial triumph for savvy investors. However, realty success goes beyond curb appeal and sold properties–especially for fix and flip entrepreneurs. Flipping success hinges on investors’ knowledge, research, patience, and financing.
Experienced and prosperous flippers have a physical or mental “what to avoid when flipping a house checklist” they follow to avoid money pitfalls. Unfortunately, real estate newbies are often unaware of what to look for when flipping a house and suffer through early mistakes and financial growing pains.
Luckily, Finance of America Commercial (FACo) designed a cautionary flipping home checklist for fix and flip beginners. Below, we’ll discuss the four aspects investors should avoid when scoping out their next flip, and different options for when problems arise:
What to Avoid When Flipping a House Checklist
1. Poor Potential & High-Risk Properties
When it comes to flipping houses for beginners, you want to limit your financial risk and maximize your return potential. The ability to identify different red flags or possibilities is paramount. Therefore, determining what to look for before buying a flip house is invaluable for investors.
Seasoned investors consider each of the following factors when home flip shopping:
- Location: Nothing influences an investment’s potential more than its location. Identify and target markets with high demand (current or projected), with:
- Bustling job markets
- Residential growth
- Housing affordability
- Low unemployment rates
- Physical Characteristics: A universal understanding within real estate is that properties with broad appeal attract more buyers. While hints of uniqueness can help sway the right buyer, homes lacking fundamental conformity to their neighborhood and surrounding area are susceptible to longer hold times and less profitability.
- DIY Considerations: If you’re wondering how to flip a house on a budget, sweat equity is the best way to increase profit margins. While not all investors are handymen, some will consider homes that can utilize DIY renovation hacks that can skyrocket property resale values.
- Profit Potential: Analyzing the ROI potential before taking on a flix and flip project helps investors avoid bad investments and financial losses. To determine a property’s profit potential, you must find the ARV–or the amount the home will sell for after renovations are complete–and the overall project costs. These estimated costs include any renovation, purchasing, selling, and holding costs.
Profit Potential = ARV – Overall Project Costs
Many investors follow the 70% rule, which states that an investor should pay no more than 70% of the ARV of a property after repair costs. This rule does not include any selling or holding costs.
For example: Say a home’s ARV is $200,000 and it needs an estimated $50,000 in repairs. The 70% rule states you should pay no more than $90,000 for the home ($200,000 x 0.70 = $140,000 – $50,000 = $90,000).
2. A Lack of Knowledge or Skills
Nothing derails a fix and flip project quicker than unforeseen obstacles and missteps. Number two to consider on your “what to avoid when flipping a house” checklist is your ego. Too often, investors dive into investments or renovation projects without the knowledge and skills to succeed.
Operating solo is less costly until you take on a project with expensive and time-consuming problems (which may be hidden) like:
- Structural issues
- Water and fire damage
- Mold
- Bad sewers or pipes
Common Signs of Property Structural Damage:
- Internal or external cracks
- Water leaks
- Uneven floors
- Rust stains
- Gaps between the ceiling and crown molding
- Shifting floors
- Cracks or holes in the foundation
Expensive, hidden damages are all too common in the fix and flip game and can quickly lead to financial hardship–which is why building professional relationships with industry professionals is essential to mitigating big mistakes. Building a dream team of essential fix and flip players, like real estate agents and contractors, helps ensure you have the knowledge, skills, and experience to:
- Identify profitable properties
- Access more investment opportunities
- Create a profitable and successful house-flipping business plan
- Mitigate unforeseen obstacles, lost time, and money pitfalls
3. Don’t Be Unprepared for the Unexpected
While strategic partnerships can help you fine-tune your investor property walkthrough checklist or avoid purchasing in poor locations, individuals flipping houses for a living know that unexpected challenges are inevitable.
The best defense is a proactive offense, and having a well-formulated house-flipping business plan is important. Knowing your options when challenges arise will save you time and money.
For example, investing in properties with unforeseen structural damages can halt operations, but that isn’t necessarily the end of the world. Experienced investors plan for these challenges and act quickly, getting estimates and weighing the pros and cons of repairing the damages to selling the property as-is to another investor. While selling the home as-is diminishes profits it’s often less costly and cumbersome than taking on another major renovation.
A third option would be to tear down and rebuild the home. While you can expect longer holding times, teardown and rebuild projects are a quick way to enhance the features and value of a property while ensuring its integrity and longevity.
4. A Lack of Funding
Whether you’re looking to renovate or tear down and rebuild an investment property, partnering with a flexible and reliable capital partner is pivotal to flipping success. Many real estate beginners struggle to find financing due to their lack of experience, liquidity, or knowledge–and miss out on great opportunities.
Often, traditional lenders, like banks and credit unions, lack the freedom and agility to meet investors’ needs. That is why experienced investors turn to private lenders for their fix and flip financing. Private lenders provide the speed and flexibility necessary to win investment projects, renovate properties, and pivot when the unexpected arises.
Finance of America Commercial: Your Real Estate Financing Partner
Finance of America Commercial (FACo) offers the most reliable short-term fix and flip and tear down and rebuild (construction) financing options on the market. With flexible terms and rates, our team can tailor the ideal loan option to meet the unique needs of your fix and flip project and protect you from the unexpected.
FACo’s industry experts can help investors of any experience level navigate the complexities of real estate investing, helping to identify profitable properties, develop a “what to avoid when flipping a house” checklist, and get the project funding you need with our easy-to-use Snap Draws DIY tool.
See why FACo has been helping investors find success in the real estate investment market for over a decade. CLICK HERE to schedule a FREE consultation with a FACo team member today!