A substantial percentage of the current real estate market is driven by fix-and-flip investors seeking to transform a hard money loan into a lucrative payday—and many of them do exactly that. Although it’s not atypical to see an investor parlay a temporary rehab loan into a considerable profit, there is always an inherent degree of risk associated with the fix-and-flip industry. Many of these potential setbacks don’t have anything to do with the property itself or the collective market conditions, but in the naïve assumptions of the real estate professional. Accordingly, the following article lays out some of the most common mistakes fix-and-flip investors make and how you can avoid them from impacting your revenue stream.
It can be easy to underestimate the time, expenses and workload associated with a given fix-and flip project—but doing so can be disastrous to your profitability. You estimate two months to rehab and resell a project, it takes five months. You budget for new shingles, then find out last minute that the entire roof has to be replaced. You project that it will take one month to resell your rehabbed home, but it sits for three. Each mistaken timeline and cost have a correlating negative effect on your ultimate bottom line. What’s the fix? Make sure that you build some wiggle-room into both your budget and schedule to account for unanticipated complications and delays. They’re inevitable in this industry but having the resources and flexibility to mitigate their impact is key for sustainable growth and long-term success.
Overlooking Non-Material Expenditures
Shingles, carpet, wood and landscaping are not the only costs you will have to cover when renovating a property. To make a profit when it’s all said and done, you will have to factor in all the other non-material expenses needed to close out the transaction. On the administrative end, you’ll be responsible for footing the bill for needed appraisals, closing costs, building permits, inspections, real estate agents, property taxes and utilities. These can all add up quickly, and if you haven’t built them into your project budget it can seriously derail your anticipated profit margin. Don’t fall into the trap of thinking the costs will automatically disappear when you sell the property. Anticipate these secondary costs on the front-end and factor them into your starting budget to prevent any financing issues down the road.
Doing it ALL Yourself
The fix-and-flip investment strategy is particularly appealing because you can often do a large amount of the rehab work yourself—saving both time and money in the process. Still, there are certain situations where you have to bring in the professionals to avoid catastrophe. For instance, some investors attempt to save a few bucks by forgoing an appraisal or inspection. Avoiding that $100-dollar professional review can end up costing you exponentially more in overlooked issues like cracked foundations, leaky ceilings or building code violations. Others bite off a bit more than they can chew and try to replace drywall or tear down whole walls on their own. While these types of tasks may take a seasoned contractor a couple of days to complete, it may take an inexperienced real estate investor weeks or months to do the same job. Knowing when to rely on professionals is key to keeping projects on schedule and avoiding a shoddy work product that could impact the final resale value.
Getting Tunnel Vision
The ultimate goal of every fix-and-flip investor is to purchase the most run-down, decrepit house in an otherwise perfect neighborhood and significantly increase its value via extensive, cost-effective renovations. For inexperienced investors, flippers on strict budgets and those in competitive markets, there’s will always be the temptation to pursue the cheapest property listed for sale. Unfortunately, those houses are typically surrounded by other run-down homes, condemned properties or in the middle of crime-riddled neighborhoods. Taking on a project just because it will cost you next-to-nothing could lead to a fix-and-flip investor’s worst nightmare: owning the perfect property in a vastly unappealing neighborhood—making it virtually impossible to sell efficiently. Do your homework before pulling the trigger on closing a deal. Make sure the surrounding community is appealing to would-be homebuyers and resist the draw of below-market deals that could be a waste of time and money in the long run. It’s important to partner with a trusted lender who can help guide you through the process. When you borrow from Express Capital Financing, not only are you getting access to capital, you are also getting access to a team of experts who have your best interest at hand.