Five mistakes that make house-flipping a flop
Do your research and make sure you have what it takes before you try to turn a profit with real estate.
House flipping has become the day trading of this decade. But in the rush to make a profit, far too many would-be real-estate moguls overlook the basics and end up failing. Here are the five biggest mistakes investors make in this market and how to avoid them.
1. Not enough money
Dabbling in real estate is an expensive proposition. The first expense is the property acquisition cost. While low- and no-money-down financing claims abound, finding these deals from a legitimate vendor is easier said than done. Also, if you're financing the acquisition, that means you're paying interest. Although the interest on borrowed money is tax deductible, it is not a 100% deduction. Every dollar spent on interest adds to the amount you will need to earn on the sale just to break even.
Paying cash eliminates the interest, but even then, there are costs to holding a property, such as taxes and utilities. Renovation costs must also be factored in. If you plan to fix the house up and sell it for a profit, the sale price must exceed the combined cost of acquiring the property, holding it and renovating it. Even if you overcome these hurdles, don't forget about capital gains taxes, which will chip away at your profit.
2. Not enough time
Renovating and flipping houses is time-consuming. It can take months to find and buy the right property. Once you own the house, you'll need to invest time to fix it up. Before you can sell it, you'll need to schedule inspections to make sure the property complies with applicable building codes. If it doesn't, you need to spend more time and money to bring it up to par. Next, you'll need to invest time to sell the property. If you show it to prospective buyers yourself, you'll spend plenty of time commuting to and from the property and meeting with potential buyers.
If you are able to make a 10% profit on a house that cost $50,000, you'll make a $5,000 profit. For many people, it might make more sense to get a good job, where they can earn that kind of money in a few weeks or months via a steady paycheck -- with no risk and a consistent time commitment.
3. Not enough skills
Professional builders and skilled professionals, such as carpenters and plumbers, often flip houses as a sideline to their regular jobs. They have the knowledge, skills and experience to find and fix a house. Some of them also have union jobs that provide unemployment checks all winter long while they work on their side projects.
The real money in house flipping comes from sweat equity. If you're handy with a hammer, enjoy laying carpet, can hang drywall, roof a house and install a kitchen sink, you have the skills to flip a house. On the other hand, if you have to pay a professional to do all of this work, the odds of making a profit on your investment will be dramatically reduced.
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4. Not enough knowledge
To be successful, you need to be able to pick the right property, in the right location, at the right price. In a neighborhood of $100,000 homes, do you really expect to buy at $60,000 and sell at $200,000? The market is far too efficient for that to occur frequently.
Even if you get the deal of a lifetime, you need to know which renovations to make and which to skip. You also need to understand the applicable tax laws and know when to cut your losses and get out before your project becomes a money pit.
5. Not enough patience
Professionals take their time and wait for the right property. Novices rush out and hire the first contractor that makes a bid to address work they can't do themselves. Professionals either do the work themselves or rely on a network of prearranged, reliable contractors.
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Novices hire a real-estate agent to help sell the house. Professionals rely on "for sale by owner" efforts to minimize their costs and maximize profits. Novices expect to rush through the process, slap on a coat of paint and earn a fortune. Professionals understand that buying and selling houses takes time and that the profit margins are sometimes slim.
Before you get involved in flipping houses, do your research. Like any other business venture, flipping requires time, money, patience and skill, and it will definitely be more difficult than you imagined.
Thank you very much for this article.
Part of the reason why we're in the real estate bind our country is in is basically including within the comments of your article. Lack of education, skills, and money. It doesn't just apply to real estate investors.
On my blog at http://house-buy-coach-dennis.weebly.com, I blog about this article as well as what investors should do to avoid losing their money and their minds on a deal that they were unprepared for.
After 25 years in real estate, I've found that slow and steady wins the race. I recommend that real estate investors start off by getting a basic education about investment procedures, strategies, and options. Newer investors should begin by 'wholesaling' properties: simply putting properties with good levels of equity under contract and flipping the contract- not the house.
This minimizes and limits risk, while locking in a sizeable profit potential.
This method allows the newer real estate investor to learn, gain experience and cash reserves in order to start purchasing properties on their own.
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How many of you, working in a job, for any employer, would accept cutting your pay, because you are not thought of as essential. I will go to Wal-Mart, find something I need and then tell the clerk at the register that because they work there, my item costs more, and so pay for part of my item. That would be great. Only problem with this theory is that no-one who is working that hard for peanuts is going to pay your way.
If you think that Realtors are rolling in the dough at your expense then you should run to your state and take the real estate exam to get your Real Estate License. Then you can work hard to protect your clients, only to have to pay for your business, and see how much you have left at the end of your Real Estate career.
You will likely be in business for many happy years with debt for your effort. Everyone knows so much more than you about real estate law, ethics, agency, negotiation, contracts, short sales, foreclosure, RESPA, GLBA, the new contracts and all addenda that is now required, disclosures, escrow, what house will go with what loan program, I could go on...
OH, by the way, if you are buying an investment home do not forget that it is a business purchase so your tax rate will be higher, (double in our state), and there is not a no-money down loan for an investment home, unless you lie and say it is your primary residence. Call any lender and ask for the no money down commercial loan.
No-money down loans will soon be gone. FHA now requires buyers to bring the 3.5% down payment and it can not be a contribution from a seller or a loan from your parents or whomever. This was part of the cause with our current housing crisis as people with no money down, and no money to pay the mortgage, could get into a house with the idea of flipping it for quick cash.
The fact is that the true real estate investor is in it for the long haul, not the quick flip. Any investor worth his salt knows that if you do not hold the property it will not appreciate to a level that is worth cashing in. Investors don't flip homes, they invest.
With common sense, you too can figure out that there is way more to it than a Brokers Fee. Tell your lender to cut his pay for writing your loan and getting it through underwriting. Tell your Closing Attorney and Title Company the same. Better yet, tell your bank you only want to pay 1% interest, because that is what it is worth to you.
If this makes any sense to you, you may be on the right path. If not, well, good luck.
Have a Happy New Year Everyone
Dear Readers and MSN,
Part 1 of 2
I find this article to be well thought out and well written. I find it interesting that the comments focus solely on Real Estate Fees or commissions paid to Brokers. Let’s look at the facts folks. Before there was a National Association of Realtors, buyers were sold land that did not exist, banks made mortgages just to foreclose and resell properties which they held. Buyers were unprotected from banks that controlled the rates and costs. Many Americans needed protection from many types of illegal activities towards consumers who lacked the education to understand what they were getting into.
Because of this activity, Realtors are educated and licensed to perform their duties within a state. Each state has different laws and there are many federal laws which came about through the hard work of Realtors who helped build many of the protections that today’s buyers and sellers take for granted.
You may set fees for certain services, but sales commissions are set by the brokers, in most states. These fees pay for the marketing of homes, insurance for the business location, lights, heat, phones, receptionists, and many other association dues, fees, and taxes. After those costs are covered by the broker receiving most often a split commission, then the agent would get paid by the broker for their hard work and expenses. This includes vehicle, travel, food, gas, insurance, computer access to databases, marketing, taxes and a host of other expenses.
Realtors do all the leg work, assume all the liability for writing the contract, pay for all expenses up front, only to be reimbursed and possibly earn some income in the process. What a great deal. They make their money back, or they do all the work and get nothing because the house will not sell for a variety of reasons that they do not control, Sellers Price, House Conditions or dishonest practice of a seller, buyer, etc.
How many houses is an attorney going to show to you? None. How many houses will a bank show you? None. How many houses will your lender show you? None. So, let’s trash the Realtor.
Why go through all the BS of flipping houses. If you have the down payment and want to dabble in real estate buy REITS or other real estate related stocks.3
No property maintanence, No water bills, No city taxes, No nasty building inspectors, No lousy tenants, No broken pipes on weekends ETC.............................................................. Get the picture with real estate REITS you can get out any time, it may be a loss to you but what the heck no hassles of physical ownership..
Second - 35% of the buyers find their properties via Agent Websites! So now you've cut out 70% of the market by removing Agents and their online marketing abilities. Now you're sitting waiting to sell.
Third - 90% of the job is not showing the homes - it is making sure the investor is doing their job RIGHT - if a buyer is going to buy a property that is listed, that Realtor is liable to provide the documentation from the seller regarding all work done, with permits, with insurance/bonding etc so that it is done RIGHT - anyone can put lipstick on the pig but the job needs to be done RIGHT.
Fourth - anytime you deal directly with a seller there is the potential that miscommunications or misinformations may be disseminated. If the seller can out talk the buyer and the buyer buys the property on this misinformation, they could end up making a horrible financial move! A Realtor is a professional that is licensed by the state, insured for Errors and Omissions and has a code of ethics and conduct. Even the ones of us that stink (and there are plenty) offer the buyer and seller both a vehicle for recooping losses because when we make a mistake there are financial remedies for all parties.
You might save money in your mind but each month's carrying costs will eat up that commission savings in a hurry. The "flops" listed above don't specifically discuss how much it costs to hold the home for X months... to slow down the sale by cutting out the Realtor is just spending more time and costing more money. Anyone that dismisses Realtors must have had one bad experience and that just means they trusted the wrong person. We're not all cut from the same mold.
Also - on the flip - most lenders will not lend right away - there may be a 6-12 month waiting period so you're likely to alienate the low/no downpayment buyers. This is yet another reason to call a Realtor - if you're marketing to a smaller audience, getting the professional service is worth even more in the long and short run.
Not paying a professional to sell is like not paying a professional to fix...
David Podgursky, REALTOR
One thing you should remember with real estate agents, they make 5% if they show your house to one person and get a buyer or if they show it to 101 people before they get a buyer. If they based the commission on how many times they showed the house, I don't think you'd want to pay if your house was the one they had to show 101 times!
If you don't like paying the commission then sell the house yourself.