By Fred Matera, CIO, Redwood Trust A lack of affordability will lead to near-term weakness,…
Be aware of these five common fix and flip mistakes that may push you over or under
With the rise of fix and flip TV shows that make rehabbing look like a breeze, home flipping has become a growing trend that many new investors are jumping right into and acquiring fix and flip loans. In reality, the smoke and mirrors of Hollywood don’t tell the complete story – it just isn’t as simple as it looks. You may end up with no profit or even a significant loss if you aren’t careful. Most importantly, make sure to research, plan, and execute accordingly. The five mishaps listed below are common mistakes that many new flippers make without even realizing. It’s okay to make small mistakes on your deals, but if you can avoid the setbacks below, your chances at successfully completing a hassle-free rehab project will be greater.
- Overpaying for a property – This is the easiest way to fail your flipping project. You must understand the numbers, trust your numbers, and stick with your numbers. If you have been unsuccessful in landing a deal, then make sure that you are not purchasing a property out of frustration. Be rational, and separate your emotions when making that offer.
- Underestimating the rehab budget – Likely your two biggest costs in a flipping project are the acquisition and the rehab cost. If you are unable to itemize renovation costs to a certain degree, you can easily underestimate your budget. If you do not have a lot of experience in determining rehab costs, be sure to do your homework and obtain multiple contractor bids.
- Over rehabbing your property – Many first time rehabbers tend to do this. Of course you are extremely excited and want to make this the best house in the neighborhood, but don’t forget your overall goal: ROI (Return on Investment). Always run a cost/benefit analysis and see if it’s worth spending extra dollars for additional features.
- Under-researching the neighborhood – Again, numbers are very important. You must determine ARV (After Repair Value) correctly before you purchase the distressed property. Many investors fail to drive the neighborhood and fully evaluate the surrounding properties. And, just because a property is in the same neighborhood, it doesn’t mean that it can always be used as a reliable comp. Neighborhoods can drastically change street by street and block by block.
- Over Leveraging – Simply because someone offers you more financing, doesn’t mean you should always take it. Over leveraging occurs when you borrow too much on your investment property loans and cannot make the mortgage payments, resulting in default and potentially a foreclosure. Your focus should be on your rehab strategy, not figuring out how you will make your next mortgage payment. Make sure that you are leveraging no more than what you can handle – Use leverage to your advantage, not your disadvantage.
Are you ready to complete your next project with a fix and flip loan? CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how CoreVest can help grow your rental and rehab business, please call 844.223.2231 or submit our contact form.