There are plenty of ways that a fix and flip deal can go south, but which are the most common?
Real estate investing has a lot of moving parts to it. As a successful investor, you’ve got to keep a lot of plates spinning, so to speak, to maintain profitability and ensure your business stays viable. While there are lots of places where things can go right, there are just as many where things can go really, really wrong. These are the “Deal Killers” that you need to know about before jumping into your next investment.
The biggest deal killers involve not having a plan in place for what happens after the flip, not pricing your costs correctly, not keeping your eyes wide open and looking out for lemons, finding unfinished rehab work, and finally, spending too much or too little time renovating.
That’s a quick rundown, I know. So let’s talk more about what a “deal killer” is and the signs you’re about to end up committing one of these easy-to-avoid missteps that instantly destroys your profitability.
What’s a Deal Killer?
Real estate investing is fluid; there’s no set standard for what it takes to make a profit or how much money you can make. However, in my experience, everyone makes a few mistakes at some point in their investing career. I call these “Deal Killers” because they’re so pivotal for determining whether or not your investments will be successful. The worst part about Deal Killers is that they’re so easily avoidable! Once you recognize the signs that you’re heading towards one of these killers, you’ll be able to change course and get back on track toward profitability.
The 5 Things That Will Destroy Your Profits
Taking on a real estate investment can be either a fortune-maker or a colossal disaster. However, if you work hard and smart, your real estate deal can come out on top and make you more money than you thought possible. To put your best foot forward with your first (or next) investment deal, we’ve put together a list of Top 5 Deal Killers so you know what to do to ensure a lucrative fix & flip.
No Vision for What Happens Next
Many excited investors get so caught up in the vision of dollar signs that they forget to work smart. They find a property and immediately start making renovation plans and assumed profit. What they fail to realize is that to sell the house successfully, you have to cater to the buyers. You can renovate a home to the nines, but if there are no buyers, you’ll end up losing earnest money and all of your anticipated profit. To not count your chickens before they hatch, get a buyers list before you start searching for and renovating properties. You always want a strong buyers list first. Then you can go searching for deals and match them to potential buyers based on what they want, where they’ll want it, and how much they’ll pay for the property.
Avoiding the Numbers
When it comes to any kind of investment, you have to pay attention to the numbers and the solid facts of a deal. Idealistic thinking won’t get you a profitable return on your investment. You have to be aware of all the details before taking the plunge. When you’re looking for a good property to rehab and sell, take into account specific calculations, such as:
- ARV (the after-repair value of a property)
- Repair/Rehab Costs
- Property Purchase Price
- Fees/Points/Interest
- Earnest Money and Cash-to-Close
Once you get all the facts, move on to the next one if a deal proves unprofitable. Don’t get so emotionally caught up in a deal that you’ll risk your hard-earned capital on an agreement that doesn’t make financial sense.
Not Keeping an Eye Out for Lemons
Know the ins and outs of the property so you won’t be stuck with a lemon that will collect dust on the housing market for years and allow carrying costs to eat any profits. To avoid paying too much or not knowing which items should be rehabbed, it is essential to have thorough inspections and evaluations performed on the property. Otherwise, you could end up with a lemon on your hands that the best you can hope for is to break even.
Unfinished Rehab Work
I know what you’re thinking, “Why in the world would someone go to all the trouble to get funding and buy a house and then not complete the rehab work to sell the property and pocket the profit?” Believe it or not, this unfortunate occurrence happens to far too many borrowers. More often than not, a borrower gets overwhelmed by the amount of work needed or by unanticipated additional costs. Be sure to have some additional emergency funds or risk an unfinished deal.
Over or Under Renovating
If you skimp on the rehab work to save money, it will cost you money in the long run if the house proves difficult to sell. Likewise, the mistake of over-renovating can potentially throw your money away just as easily. If you go crazy with renovations in hopes of upping the selling price to the point of pricing yourself out of the market, you could end up with a property that will sit for years on end. Additionally, leaving a fix-it list of half-finished projects for the prospective buyer to deal with will make them run screaming to your competition.
Final Thoughts
While it’s critical you avoid hitting any of these five deal-killers, the good news is that all it takes to dodge them is due diligence. Don’t make assumptions or overestimate the potential of an investment property. Take your time, crunch the numbers, and stay conservative about your budget so that you’ll have a much higher chance of success than your competitors.
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