Flipping homes can be a great primary or secondary source of income, but it’s certainly not without significant risks. If you’re planning to enter into this area of real estate investing, get acquainted with the common mistakes beginner home flippers make to help reduce your risk.
Above all, understand that it takes a lot of homework and effort to become a successful home flipper, and there will be a learning curve. It may look simple enough to buy a property, fix it up a bit and put in some upgrades, and sell it again for an easy profit, but making the mistakes beginner home flippers make is a sure way to cut down on those profits—and even negate them altogether.
Beginner Home-Flipping Mistakes
- Paying too much for the home. This one’s the most obvious, and one of the biggest concerns. A good point of reference—though by no means a hard-and-fast rule—is the 70% rule: If you intend to flip a home, spend less than 70% of its projected after-repair value, minus repairs. For example, let’s say the home is projected to be worth $400,000 after your fixes and upgrades, and your contractor estimates that it will cost you $20,000 to get it there; you don’t want to spend more than $266,000 buying the property (that’s 70 percent of $380,000, or $400,000 minus $20,000).
- Underestimating the cost of repairs and upgrades. Along with the previous entry, this is one of the most common and most detrimental mistakes beginner home flippers make. It’s so important to choose a reliable contractor who can give you an accurate cost and time estimate. But even still, always count on the work costing more than you expect. And it’s smart to get a few estimates. Also, on a related note, many new home flippers overestimate their DIY abilities. If you intend to tackle work yourself, be sure that you really know how to do it right and that you have the time for it.
- Making changes that don’t raise home value. Of course, not only do you need an accurate idea of how much you’ll spend fixing up the home, you also need to spend that money on things that provide an ROI. Don’t make assumptions. You’ll never recoup the $40,000 you spend adding an in-ground pool, for example. Bathroom and kitchen upgrades, on the other hand, are generally considered some of the best for increasing home value.
- Making highly stylize changes. Some changes don’t let you recoup your investment, and others just make it much harder to sell the home. Highly stylized design elements and landscaping are generally off-putting to prospective buyers. In fact, if they remain interested, they’ll often be calculating what they’ll have to spend to undo this work. Stick to classic, relatively simple looks.
- Not paying enough attention to the area. A home is more than just the building and its property; it’s also the neighborhood and surrounding area. For example, if it’s a family home, the quality of the school district matters. There’s a lot more to look at in the vicinity than just comparable home sale prices. For more about this, take a look at these considerations when evaluating the location for a home flip.
- Taking on too large or complex a project. When you’re just starting out, stick to homes that mostly need cosmetic changes and minimal rehabilitation. Buying an old home that needs extensive electrical or plumbing work or a complete gutting, and having no experience with that type of project, is just asking for trouble. Time-consuming, stress-inducing, surprisingly expensive trouble. Keep it simple while you learn the ropes.
- Asking too high a sale price. Just because you put a lot of love and sweat and money into the home, that doesn’t mean you’ll get more than a reasonable price for it. Setting the price too high can be extra tempting if you spent more than anticipated fixing the place up and making upgrades, but again, that isn’t part of prospective buyers’ thinking. Even though you can always lower the price, if the home sits on the market too long, that’s a red flag to buyers. Better to set a fair asking price—or sometimes even one that’s a little low to trigger more interest and a bidding war if the market and conditions are right.
