5 Deadly Mistakes For Real Estate Rehabbers

There are those who say that ‘flipping’ doesn’t work in this market.  First we need to make sure we are talking about the same thing – ‘flipping’ to me is buying a property, doing something to increase its value, and selling it for a profit.  This kind of flipping is alive and well and is always viable – regardless of the market.

However, there are pitfalls that can kill your flipping business rapidly.

Buy The Property For Too Much
The fact is that you make your money when you buy (you realize that money when you sell).  If you buy it for too much, then you will lose money – it is a simple as that.

Your purchase price needs to be low enough to allow you to do all of the work you need to do on the property to bring it up to market and still leave room for profit.  If you pay too much, then you will either run out of money to finish the changes or you will be pressured to cut the quality or scope of the changes to keep some profit.  Unfortunately, doing a poor or incomplete upgrade can make it so that you can’t sell the property and your holding costs eat away at your business.

Poorly Estimate the Work Required
You need to develop a strong vision of what the property will become after your upgrade.  It needs to be consistent with the neighborhood (no castles in tenement neighborhoods) but needs to be slightly better than the competing houses (or priced less).  Once you have this vision, then you can realistically get estimates on the work that will be required to get from the current condition to the condition in your vision.

Skip Inspection by Professional
It is tempting to save some money by skipping the inspection.  However, a professional inspector will save you a tremendous amount of money – much more than the cost of the inspection.

When you are starting out, you will miss things that a professional will spot.  Later, you will be looking at many houses and this limits how extensively you can inspect each property.  Having another set of eyes to review your potential houses will save you if you missed something expensive.

You may feel that inspection contingencies will kill a deal.  So don’t use a contingency, but still get the inspection.  In the worst case, you may have to choose whether to walk away from an earnest money deposit or eat the cost of the inspector-discovered defect.  Still, it is much better to have this choice up front rather than finding out about the defect after you hold title and have no chance to recover a profit from the house.

Get Lazy About Contracts
Contracts are only needed when there is a disagreement.  The problem is that you can’t predict when the disagreement will happen – so you ALWAYS need a contract.  The contract will describe exactly what you expect from the other party and what they expect from you.  It should also describe what will happen if these expectations are not met.

If you hire a contractor to do work on your property, the contract with them should discuss the following:

• Scope of the work.  I like to describe each room and the work that should be done within each.  I specify materials that will be used – often by Vendor and SKU
• When will work start, how many folks will be onsite to do the work, what hours (minimum) will be worked per day.
• Cost of the work and schedule of payments.  I want fixed bid work.  Time and materials contracts are a form of blank check for the contractor.  I want to hold a large amount (25% or more) of the total cost until the work is COMPLETE.
• Penalty for late completion.  My contract specifies a daily rate that is higher than my holding cost per day.
• A clause that states that they are an independent contractor – unless you WANT an employee
• A clause that specifies who is responsible for pulling permits – I have the contractors do it so that any delays in that process are their responsibility.
  

Make sure that you have your attorney review your contract before you sign it.

Badly Market the End Product
Everything is completed.  The property looks great.  Why spoil the experience by not getting the place SOLD.  You only need one buyer to do so, but to find that buyer, you need to make sure that everybody knows about the property.  Send emails, put a sign in the yard, post craigslist ads (or any other medium that is cost effective), etc.  I am a real estate agent, so mine always get listed.  I recommend that for all properties since the MLS is the biggest marketplace in any area.

The key is price.  Think of it as if you were fishing in a boat with a net.  If you throw the net out and pull it back before it touches the water, you won’t catch many fish (don’t overprice!).  If you pull the net back as soon as it touches the water, you will get some fish (pricing right at the market value).  If you let the net sink a bit and then pull it in, you will catch the most fish.  Likewise, pricing your house below the market will attract the most attention and get that one buyer to walk through the property.  I don’t recommend pricing it drastically below market, but if you do, it is likely a bidding war will bring the price back up.