Every deal, no matter how much of a slam dunk it may appear, has many ways that it can fail. Here are the top 5 you need to guard against.
Let’s face it; we’ve picked a risky business to get into. There are many reasons why fix & flips can fail even when we’ve done everything right. If flipping a home was easy, everyone would do it! Anytime you’ve got the potential to earn tens of thousands of dollars in profit, people will flock by the millions to try to get their piece. And while we can never really know why an individual property failed to turn a profit, there are typically five key reasons why a fix & flip fails.
The biggest reasons a fix & flip property fails to turn a profit are most likely due to a combination of lack of preparation, not understanding your actual costs, hiring the wrong people, bad marketing, and not understanding your market.
Luckily these are all easily avoidable if you know what to do. So let’s discuss each of these more and discuss how you can ensure your properties are never affected by any of these problems.
Reason 1: Lack of Preparation
New flippers often lack the proper preparation needed to succeed. You can tell when doing a walkthrough there wasn’t enough prep work done. This can lead to problems such as not getting the property marketed properly, not being able to negotiate a good deal, or not being able to get the property ready for sale in the desired timeframe.
How to be better prepared for your next fix & flip
To prepare yourself and your business, you’ll need to do a few things to ensure you’re successful:
- Research your target market: What are their needs and wants? Sure, you can try to flip that giant Victorian monstrosity, but if your target market is single professionals who just want a place to crash between work trips, then you’re going to hold onto that property longer than you hoped. Most entrepreneurs start out thinking they’ll sell to whoever wants to buy from them, but this is a lousy way to run a business. You’ll spend so much more time trying to appease multiple groups that never want the same thing and will end up burning out faster than you think. Instead of being the “whatever you got” flipper, be the “Millennial First-Time Homebuyer” flipper or the “Downtown Condo for Senior-Level Managers” flipper. You’ll be surprised how much more profitable it is to be a niche real estate investor than a jack-of-all-trades.
- Get organized: Keep your business plan organized and detailed, so you know exactly what you need to do in order to flip the property. Remember that you’re running a business and need to treat your fix & flips accordingly. Create budgets, projections, and cash flow statements. Hire people who can do things better than you can and let them do their things. Stay on top of your taxes. And finally, please pay yourself an income.
- Get a good agent: You may be able to do the legwork yourself, but it’s always better to have an agent on your side who can help negotiate the best deal and market the property in the right way. Real estate agents who specialize in or have extensive experience with fix & flips are worth their weight in gold especially when you’re ready to source new inventory. Here are three questions you really need to ask when interviewing potential real estate agents.
- Have realistic expectations: Don’t put all your eggs in one basket and think you’re going to flip that 2 million dollar property in no time. It takes a lot more than that to be a successful flipper. Understand your costs (more on that later) and make realistic projections about how much income you can truly earn a year. Check out this guide that has the average reported yearly salary for experienced flippers to give you a better idea of how much you’ll probably earn once you’re into the business for a few years.
- Be patient: This is real estate, not a department store, and finding a buyer who’s willing to plunk down a serious amount of money for your property will take a while. Don’t expect to flip a property in one weekend or one month, as the average turnover for a fix & flip is six months. Needless to say, it’ll probably take longer than you anticipated, especially when you’re starting out. That’s okay – it’s part of the fun. Just be prepared for the long haul and be willing to put in the hard work.
- Know where your funding is coming from: The last thing you want to happen is to find the perfect property but lose it due to the time it takes to get the money you need. Get pre-approved for a mortgage, find the right hard money lender for your situation, and work on improving your finances so that you’re getting competitive rates. You should also start saving a rainy day fund for emergency costs, down payments, etc., just in case (but hard money loans can take care of these things, too).
- Always assume that repairs will need to be made: No matter how good your property looks on the outside, it’s going to need some TLC on the inside. Be prepared to fix any leaks, broken windows, or other problems that come up. This will add to your costs, so factor it into your budget and make sure you have enough money set aside to cover it. Don’t let yourself fall in love with the wrong property and get stuck in a situation where you weren’t prepared for the actual amount of work that needs to be done. Expect (and budget) for the worst but hope for the best.
Reason 2: Not Understanding Your True Costs
Another common issue with fix & flips is not understanding the true costs associated with the project. Many flippers think they can simply take on a project and figure it all out as they go. This is rarely the case and can lead to significant problems.
For example, one of the highest costs of a fix & flip is the renovation or repair work that needs to be done on the property. Unless you’re familiar with this type of work and have the necessary skills, you’ll likely end up costing yourself a lot of money in wasted time and resources.
Likewise, you’ll also need to factor in your actual expenses – things like advertising, legal fees, staging, and more. Unless you have a solid understanding of these costs, you’ll likely end up overpaying for services and end up losing money on your project.
Lastly, you must factor in your carrying costs since they can cause your property to go from profitable to a money pit without you noticing until it’s too late. Carrying costs can include things like
- Maintenance and repairs
- HOA fees
Unless you’re prepared for these costs, you’ll likely find yourself in trouble quickly.
How to better understand your costs:
The easiest way to understand your costs is by getting into the nitty-gritty as much as possible with your estimates and adding a buffer of both time and costs to be safe. This will help you be more accurate in your planning and avoid surprises. Other things you can do:
- Get itemized estimates from your contractors instead of general bids.
- Research the average costs for home improvement projects in your area.
- Keep up to date with material costs since they tend to fluctuate now, thanks to supply chain issues.
Reason 3: Hiring Inexperienced or Bad Contractors
Real estate investors who don’t yet have a good network of professionals will often hire inexperienced or bad contractors, which leads to poor quality work and a high failure rate. This is because inexperienced contractors usually do not have the knowledge or experience to properly handle the different aspects of a renovation project, which can lead to missed deadlines, unfinished work, and costly mistakes.
Bad contractors also tend to be expensive (in the long run. At the beginning, they’ll probably seem pretty cheap) and may not have the necessary licenses or insurance to do the job correctly. This can lead to extensive damage to your home, which may require extensive repairs or even replacement.
How to hire better contractors for your fix & flip:
When looking for a contractor, be sure to ask for references and follow up on calling them. Also, make sure to ask the contractor specific questions about their experience and knowledge of renovation projects. Finally, always have a contract in place that outlines the project specifics, payment terms, and any other important details.
One other thing you can do is get involved in your local real estate investing community. Network and start asking others in your area for recommendations for great professionals when you need a good plumber, electrician, etc. I’ve found that flippers are a welcoming bunch that is eager to pay it forward for the help they received when they, too, were starting out in the industry.
Reason 4: Poor Marketing
One of the better things about going into real estate investing is that you’ve (hopefully) got a captive market already looking for what you’re selling. Unfortunately, this becomes a double-edged sword for investors who think they don’t need to market their inventory that’s for sale or their services. Here’s a great guide with examples of how you can successfully use marketing tactics for real estate investing.
Marketing is one of the best avenues for growing your business, especially when you focus on using it for lead generation (like sourcing new properties that aren’t on the MLS).
Here are some tips to help improve your marketing efforts:
- Create and regularly update your marketing materials, such as flyers, website content, and email newsletters.
- Reach out to local newspapers, radio stations, and online publications to promote your listings.
- Use social media to build relationships with potential and current clients.
- Attend real estate events and meet-ups to network with other professionals.
- Use technology to automate your marketing efforts. For example, you can use a lead capture form on your website or create an email campaign that automatically sends buyers follow-up information after inquiring about your property.
Reason 5: Not Understanding the Market
If you’re not familiar with the market in which you’re investing, you’re at a disadvantage. Not being familiar with the trends and cycles of the real estate market can make poor decisions when it comes to purchasing or selling properties. Every market is unique, so if you’re not staying on top of what’s going on in your town, you’ll likely have more trouble creating a successful fix & flip business.
Here are some tips to help you stay on top of the market:
- Keep up to date on local news and events affecting the real estate market.
- Observe how your competitors are marketing their properties, and try to emulate their strategies.
- Monitor the performance of individual properties in your area, and make changes to your investment strategy based on what you learn.
- Stay educated about zoning laws and regulations in your area, so you can make informed decisions about where to invest.
- Make time for regular real estate scouting—going out and looking at properties in your area on your own can give you a better understanding of what’s available and how to best market your listings.
- Take a real estate course or seminar to better understand the ins and outs of real estate investing.
- Be patient—the market can be unpredictable, but it will eventually correct itself.
Although there are many reasons why fix & flips can fail, understanding these five key factors can get you further ahead faster. If you do your research, be prepared, estimate costs accurately, hire experienced contractors, and understand your market, you’ll be well on your way towards a successful flipping career.