Seven common mistakes of property flippers

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1) Overpaying

Buying a property that has solid value is the most important thing, but finding that property usually takes time and patience. The most common mistake is overpaying. You may want to start with a low-ball offer and work up to a price point before settling your deals.

2) Lack of in-depth knowledge of after-repair market values

Most people find distressed properties either via foreclosures or short sales; that does not mean you are buying for less than the fair market value.

Before bidding you need to understand the after-repair market value of the property or you may overpay Being patient while you search is key. The profitability of your rehab depends directly on the initial price at which you buy your property.

3) Property is not a “rehab”

Some properties lack sufficient upside to make them viable fix-and-flippers. A house, for instance, that just needs some yard work, new paint and other cosmetic work leaves little opportunity to add value. Unless that house was obtained at a foreclosure sale or under unusual circumstances, it is unlikely to be discounted much and the brokerage commissions will eat into limited profits.

At the other end of the continuum are properties that are close to being “teardowns.” Flawed foundations, systemic drainage issues,

major roof problems, or environmental problems including mold – these are some problems that can be “beyond repair” economically.

Sweet spot?

Ideal fixers often have poor curb appeal, bad landscaping, minor structural problems, and perhaps extensive interior problems. An ugly property often offers the most profit potential.

Do not get overoptimistic about the economics of the renovations. Do not overestimate the increase in market value of the proposed improvements and do not underestimate the out-of pocket cost of those repairs.

Cutting down view-obstructing trees or landscaping a backyard—these are kind of improvements that may make economic sense. You need to analyze how much value is added by each renovation (or other added value feature), and compare that value to the costs, while keeping in mind the value of comparable houses in the neighborhood.

4) Failure to have a well thought-out budget before bidding

Estimating the acquisition costs and the interest payments on any borrowed money is straightforward, but rehab costs must be guessed at (and then tightly controlled). Property flippers are project managers as well as investors. Timeframes for the project must be estimated and understood.

A realistic budget not only helps you get organized but can serve to make sure that each contractor is bidding on work you want. Try to get line-item bids with each sub-project broken out separately. 5) Not using the best sources of financing

Try banks and savings and loans, crowdfunding portals, angel investors, friends and family—in that order.

6) Failure to keep the project on time and on budget

No matter whom you hire, you must be in control of all the details, including scheduling, budgeting, and monitoring workmanship. You are the one with the “vision” of the renovation so you will often have to be on-site to answer last-minute questions. Tasks performed out of order throw a wrench into the schedule that you have developed.

You may want to set up incentives for the contractors in exchange for meeting project completion dates. You need to have a schedule.

7) Not having alternative exit strategies.

Exit strategies are crucial when the market turns against you. Exit strategies include: lease with a purchase option; wholesale to another investor; rent out the property.