One Surefire Way to Lose Money Flipping Houses

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When you’re first learning how to flip houses, sometimes what you think will work and what actually does work aren’t necessarily one in the same.

Sorry to say, but your gut instinct when you first start out is oftentimes wrong. The good news is that your gut gets better the more experience you get. And this is one of the real reasons why you need to rely on your house flipping team to help you work through many of the more confusing aspects of house flipping.

This team can not only help you get a head start in your house flipping career, but can provide you with a valuable commodity right from the start, simply because they possess something that you don’t have yet…

How to Flip Houses with “OPE”

In previous posts here on Bigger Pockets, I’ve talked extensively about how to flip houses with no money using “OPM”, commonly referred to as other people’s money. Its a very effective way to fund your real estate investing.

Likewise, when you’re first starting out, just like you use other people’s money or OPM, you can use “OPE”, which is “other people’s experience”. And that experience is especially critical when it comes time to sell.

Although many house flipping professionals sell their flips themselves, I much prefer to hire a real estate agent to sell all of my properties. True, you give up some money on the commission, but there are several good reasons as to why you should do this.

The Importance of Real Estate Agent Experience

When you’re flipping houses, speed is the key. Time is of the essence. The early bird catches the worm. I think you get the idea…

It’s simple: the faster you can sell your flip, the greater your chances of enhanced profits. And this is one of the many reasons why I always use real estate agents when selling.

A real estate agent is solely focused on one thing and one thing only: selling your property. If you choose to do it, then in my opinion, you’re losing out. You should be spending your time networking and sourcing your next house flip instead of trying to sell the one you have. Leave that to the pros.

The Critical Piece: The Market Analysis

When selling, the first thing you’ll want your real estate agent to do is to do a competitive market analysis on the property. In a market analysis, the real estate agent uses the multiple listing service or MLS to show comparable or “comp” properties which have recently sold in the area.

After they do their competitive market analysis, there are now two possible scenarios:

  •     The property’s value has increased from the original ARV
  •     The property’s value has decreased from the original ARV

Obviously, the first scenario above is the most preferable one. Should the second scenario occur, thanks to the 70% Rule you used when buying the property, you have a cushion against unforeseen conditions such as this. If any downward market momentum occur, the 70% Rule can assist in safeguarding you against potential loss.

This is obviously another reason why we try to flip properties as quickly as possible so that we are not caught in any downward market conditions. Not only that, but the quicker you sell a property, the lower your soft costs are, as we have discussed previously.

The Secret House Flipping Strategy Revealed

Now here’s the real “secret.” If the market analysis after you have done all the rehab work is lower than your original ARV (after repair value), don’t stick your head in the sand and think that you can list the property with your original ARV in mind.

This is where you need to use the “OPE” of your real estate agent. If your real estate agent comes back with a market analysis lower than your original ARV, you will be tempted to ignore this data and list the house at a higher price.

It only makes sense, right? You are in this business to make the most amount of money, so why would you list the house at a higher price?

That all seems to make logical sense. However, it is dead wrong. This is where you want to use “OPE” to help you save yourself from yourself.

When you’re first learning how to flip houses, this is extremely difficult to do. Putting the house on the market expecting a higher ARV, even though market conditions have changed, would appear to be the right thing to do. The problem is that if you list the house at above fair market value, it will take longer to sell.

And when you do this, your “soft costs” can eat up your profit margins extremely quickly. It’s simple: the longer you hold onto a piece of real estate, the higher your carrying costs will be and potentially the lower your profit margins.

House Flip “Soft Cost” Case Study

let me show you what I mean. For example, you have a property with a $100,000 loan at 10% interest you’re trying to sell. The longer that property takes to sell the more you pay in interest.

Here are three scenarios:

  •     If it takes you 6 months to sell, your interest would be $5,000
  •     If it takes you 9 months to sell, your interest would be $7,500
  •     If it takes you 12 months to sell, your interest would be $10,000

You can see above that the longer you hold onto the property the more that property ends up costing you in the end. Additionally, this figure does not factor in other carrying costs like real estate taxes, insurance, utilities, maintenance, and any other fees. All these additional “soft costs” can add up to thousands of dollars.

In fact, just one additional real estate tax payment may cost you upwards of $1,000 – money that would have gone straight into your pocket instead.

Electric bills, gas bills, property maintenance, insurance…the list goes on and on. All of these soft costs that simply eat away at your margins the longer you own the property.

Here’s the bottom line:

The longer you hold on to a property, the greater your carrying costs, the less your profits.

And if you haven’t priced the property according to the market analysis, this is probably the main cause.

“OPE” Conclusion

So when first investing in real estate or even if you’ve been doing it for years, take the advice of your real estate agent. Use “OPE” and trust in their professional judgment. This maybe a difficult lesson to learn when you’re first starting to learn how to flip real estate, but the more house flips you do, the more you’ll learn.

And this lesson will save you thousands of dollars in potential losses the longer you invest in real estate.

So when you are about to sell, make sure you price the home according to the current market conditions, not to what you want those conditions to be. If you’ve used the 70% Rule correctly, you will lock in profits and lessen or even completely eliminate the chances of any potential loss on the deal.

If you’ve made it this far, tell me – what do you think? Should you use real estate agents to sell your flips? Should you list a property at what you think it should be instead of what the market dictates? Let me know what you think and leave a comment below!
Photo: Svadilfari

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About Author

Michael LaCava is a full time real estate investor, house flipping coach and the President of Hold Em Realty located in Wareham, MA. He runs the website House Flipping School to teach new real estate investors how to flip houses and is the author of "How to Flip a House in 5 Simple Steps".

6 Comments

  1. Nice concise post Mike. This is a lesson everyone has to learn quicky. Speed is critical in a rehab. Learning what you should and should NOT be doing is also critical. Delegate those tasks that are not your strong points, and spend more time doing what you are good at.

    Sharon

  2. Well I agree with most of what you say, a similar formula works for our clients. Yet what we “flip” the most is buying into new condo projects and selling them at the completion of the project. It saves people the possibility of a project that will not complete. So ….worth more da da do !

  3. I always find that flipping houses can be a mistake for beginner investors. They see the tv shows and think that it’s an easy way to make a buck but they don’t stop to think about the consequences. For a new or seasoned real estate investor this post is wonderful because it does open an investors eyes to the potential pitfalls of such an endeavor. However, as I said above I feel that for a new investor they should be looking to get into the business slow and steady using buy-and-hold investing.

    • Hello Devon
      You are correct that those shows can over glorify house flipping and in any business you need to plan to be successful. I don’t necessarily agree that buy and hold is a safer first time investor entry point. You can make mistakes that can devastate your investment just like in house flipping. I have seen people get slammed in buy and hold as well by over paying, spending too much on repairs, then getting bad Tennants that don’t pay. I believe it is all relative to where and what your expectations are on your investment. If you know nothing and you are looking to get in then maybe a turnkey buy and hold with with good management in place with solid cash flow would be the way to step in as a first timer. However you must do your due diligence regardless.
      Thanks for sharing your oppion I appreciate it.

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