7 Signs Your Flip May End Up A Disaster
Identifying potential warning signs during your due dilligence process with help prevent a disaster on your investments. Knowing what to look for, how to find that information and not half assing certain areas of research will help reduce some of the risk involved in rehabbing properties. The more unknowns you can figure out before you purchase and rehab the property, the safer the investment will be. By doing the proper due dilligence, you will ensure a profit is made on all your projects (if the house sells-which it should).
1) You determined your ARV through google - Your ARV is the most important number out of this whole process. The ARV (after repair value) is the starting point of all the (basic) formulas you will run to forcast profit expectations. Now, I am not saying that you should not begin your research with the internet to get a rough estimate of what the home will sell for, but starting out your research should be about the complete extent. After you do some light research on your end, you should contact your agent (who hopefully is an expert in the area) and have her run a CMA (comparative market analysis) to get a more detailed look into what your rehab will sell for.
2) Making numbers fit house - Dont fall into the trap of adjusting the numbers just to make the property work. You will soon find out that fugging the number is only effecting your business. It makes no sense to make yourself feel good and talk yourself into an investment that you will not profit on. It will be a waste of time and you will probably lose money. Try to ge the most realistic numbers you can for every aspect of the project, use a contingency and compute your formulas to figure out your profits. If the numbers do NOT work, then walk from the project. Believe me there will be more oppurtunities out there. If you never lose money on any of your investments, you will be a wealthy man--live by this.
3) Not having multiple exit strategies - Lets face it, all of our investments dont work out as we planned. Going into the investment we were planning on flipping it but after 6 months the property still hasnt sold.. Whats plan B, plan C. Make sure you have multiple exit strategies laid out for each of your investments, so you do not get stuck holding a property and losing money. For plan B, you man rent the home out then refinance to pull your cash out. For plan C you could offer a rent to own option.. whatever you decide on make sure you understand your reasoning behind it.
4) Not having Team in Place - Having a sufficient team in place will make all the difference in the world when it comes to your investment properties. Going into each rehab, make sure you know what areas you will be delegating and what areas you will be taking on. Do not try and take a flip yourself, although it is possible, I personally do not feel like it is a good idea. For these reasons-- no way to scale, rehabs take forever, alot of out of pocket costs, frustrating, overwhelming -- all just to make a couple thousand dollars.
5) You used all your savings on your flip - As we spoke about before, flipping houses is risky. You never know for sure what the rehab will entail intil you open up the walls inside so risking all of your savings or a large chunk of them is probably a little to risky unless you been doing this for a long time (but then again if you been doing it for a long time, you should be investing ALL of your savings). Just be careful taking on to much risk and understand the consequences if you fail.
6) Managing rehab without experience- For your first couple flips, you should have a general contractor on site who will manage the property for you. This is your time to learn from him. It will cost you a little more to have a contractor manage the property for you but it will probably save you thousands of dollars in the long run. Do not try and manage professional contractors if you have no clue what your talking about. This will cause them to lose respect for you and not want to work for you. If your just starting out always ask for help and advice, thats the only way to learn.
7) Your Gut is telling you NO but you go forward ANYWAYS- You ever get that feeling before you do something that just maybe this isnt right. That feeling holds true for flipping houses. If deep down inside you feel that this investment is not going to work out for whatever reason, walk away. Dont test your instincts or your gut--- believe me its telling you something.
Always do your homework- always do your research - Try and figure out all unknowns before a project starts - Build a good relationship with your team - Be on the same page as every one involved - ask questions - ask advice - ask for help - ask, ask, ask - create a scope of work, budget and schedule and live by these documents - understand the game and limit your risks and you will be successful in this business, its easy as that! Now go make it happen!!