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The 7 Deadly Sins of House Flipping

by Michael LaCava on June 29, 2013 · 20 comments

  
House FLipping

When I first started flipping houses, I made so many mistakes it was a wonder I even made it through my first few years as a full time real estate investor.

When I made them back then, the big difference was I thought that if I made any mistakes, I’d be sunk. Like we discussed last week, your worst fears realized are never as bad as you make them out to be in your mind.

I once heard a quote that said:

“The more I make, the closer I am to success”

Although I don’t think that purposely making mistakes is the way to go when you’re doing anything, mistakes are inevitable – but the biggest thing is to just learn from them, don’t commit them ever again and keep driving forward.

Of course even today, I still make mistakes every day – but the difference is now I know that unless I all of a sudden I just completely lose my mind and have a total lapse in judgment, none of them are going to sink my business now.

And none of them are as bad as you think they are when they do happen.

But the biggest mistakes I really do my best to no longer make can be wrapped up into seven big ones.

And if you continually commit these sins, chances are your house flipping career is going to be fairly short.

Truth be told…I’m writing this today as much of a reminder to me to not do them (tough to resist sometimes) – but for you to hopefully avoid them as well.

This is a bit of “blogging therapy” for me LOL.

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The 7 Deadly Sins of House Flipping

So OK, you are going to make at least a few of these in your real estate investing career – nuff said. Can you avoid committing these sins consistently?

Unless you wish to be condemned to real estate investing hell—surrounded by bad credit, debts, and worthless properties – at all cost avoid these bad boys:

1. Lust – Falling In Lust With A Property

As a real estate investor, you’ll spend a very large portion of your time uncovering and finding deals to invest in – trying to find one that will work for you. In fact, we just surveyed our members at House Flipping School and “finding a deal” was the #1 thing they have issues with now!

It used to be how to flip houses with no money – but with foreclosures drying up and run down properties becoming harder and harder to find, this is now a big issue for many house flippers.

But finally all your hard work starts to pay off and that’s when you see it—the perfect house flip.

It’s in a good neighborhood – but its the worst house on the block. Cool. Its got tons of “potential” and you can see in your mind’s eye how awesome it will look when you have that first open house.

You’ve finally found the perfect property. Your starting to lust after it….

You put in your offer and wait for the reply – knowing how great of a deal its gonna be.

However, the seller isn’t budging. Your MAO, or “maximum allowable offer” is too low for them – even after you raise it up a few thousand from your original bid.

The house is so cool, maybe just this once, Ill break the 70% Rule and go over my MAO. After all, the house is killer good!

Worth it, right?

Wrong. Stick to your rules. Follow the MAO Rule, the 70% Rule – don’t get drawn in the siren song…if you do that your house flipping ship is heading straight for the big jeddy….

Think with your head. Don’t fall in lust. If the numbers don’t work, they dont work and don’t do that “eraser math”. Move on.

2. Pride – Doing Everything Yourself

Ah yes, pride.

For me, this is a tough one I’ve had to learn over and over again. I’m much better at it now though…although I used to be horrible at it.

So many new real estate investors have the delusion of sauntering into a run down hell-hole (those are the most ideal ones for us flippers by the way), picking up the sledge, smashing open some walls, drawing the nail gun out of the tool-belt holster, putting up some walls, fixing a little electrical, sweeping away the dust, and slapping on a new layer of paint.

Voila. Fix and flip – done!

How hard could it be anyway? Those guys on TV make it look pretty easy, right?

Even the smallest rehabs just aren’t that easy. The truth is to do a rehab the right way, is a very complex task. That’s why even the most experienced contractors have difficulty doing it all on their own.

Maybe you know a little bit about flooring (guilty as charged) – so you figure why should I pay someone else to install new subfloors in that rotting bathroom? “I can do it myself”, you think.

Two weeks and dozens of trips to Home Depot later, now you think to yourself how could I have been so stupid!

Remember that in house flipping its not just the costs – its the TIME. Time is money – literally. If you can get a flip done in six months with a professional crew, instead of twelve months with you doing it by yourself – you may have saved hundreds in labor costs but you likely spent thousands MORE in financing and carrying costs due to holding the property six months longer than expected.

There’s nothing worse than being up to your knees in unanticipated soft costs that destroys your house flip budget.

Which brings us to our next sin…

3. Gluttony – Overspending On The Rehab

Many house flippers think they have to make everything int he flip be like as if THEY were buying it themselves. I just HAVE to have 30 square feet of 1 1/2″ granite in the kitchen and stainless steel appliances – because thats what I would want in my kitchen!

When you are renovating your flip, you don’t want to go to the extreme and get the cheapest of everything either. If you do, potential buyers will notice.

By the same token, you have to reel in your costs and extra dollar wisely where it has the greatest impact. For example, granite countertops are awesome. I love them in my kitchen and in my flips…but only if it makes sense.

For example in one of my more successful flips, we did install granite in the kitchen – but only because it had a very small countertop footprint and I knew if I installed it – it would make the house appear more luxurious, without spending a ton of money.

On that flip, we sold it and made a tidy $56,000+ profit – and that was after ALL expenses.

We also added a back deck and vaulted ceilings int he master bedroom for short money – both which we got so many compliments on.

It sold in one day above asking.

Was it the countertops? Was it the deck? Was it the vaulted ceiling in the master? Could be.

The point is you dont need to overspend – just spend in the high impact zones. Just make sure that if you do, you don’t exceed your predetermined budget. If you do, be ABSOLUTELY certain you’ll make it back – otherwise you might run the risk of losing money on the project.

4. Wrath – Getting Upset When Things Go Wrong

On so many occasions, I’ve wanted to strangle my contractor.

In flipping, things go wrong, people mess up. Deal with it. Don’t let it eat you up.

Sometime during your flip, you’ll most likely run into many unforeseen problems. Expect on an average flip at least twenty of them or so.

Twenty? Yes, twenty. Budget for it and expect it.

If its only ten, then consider yourself lucky.

So when they happen, expect it and make sure that you don’t let your emotions get the better of you – don’t do something you’ll later regret. Although it is tempting to ring that contractor by his neck….

But I digress.

When he mis-schedules the drywall guys before the insulation guys have finished and BEFORE the housing inspector has done the electrical walk through…you may be temped to let him have it…

Don’t do it.

Take a deep breath and control that deadly sin of wrath boiling up inside of you. I’m not saying this is easy – its going to be hard – but remember that you really need him – maybe more than he needs you.

So treat people with decency and without wrath and youre house flip career (not to mention your blood pressure) will be all the better for it.

5. Greed – Asking Too Much

We all want to make money in this business, but sometimes an indirect approach is more successful than a direct one.

What I mean by this is, you’ll make more money in the end if your initial asking price on the property is somewhat reasonable. If it is much higher than any potential buyer in their right mind would pay for, you might lose the interest of some promising prospects.

You’ll end up having to re-price and relist the property, but by then it might be too late to get to the prime candidates. All the while, the longer you hold, the more your soft costs and your finance costs add up.

Price it right and listen to your broker and the CMA you get from your broker. After all, it’s better to cater to the demands of a small few rather than lead a whole school of fish.

6. Envy – Trying To Get Rich Quick

Getting rich quick sure sounds good.

Getting rich slowly is far less sexy…but its the way it actually works.

So many gurus online preach the message of getting rich quick in this business. Software programs that will help you find properties from the comfort of your home. Babes in bikinis and hot shots driving Lamborghinis, all with just the snap of your fingers.

In reality, flipping houses takes a considerable amount of time and effort like anything else. If there really was one hidden secret that could make you a millionaire overnight, I’d be the first one to line up and get it.

If you’ve been on here at Bigger Pockets for any length of time, you’ll know that it doesn’t quite work that way.

When buying real estate, there really isn’t going to be one payday that’s going to earn you an insane amount of money and fix all your problems. Then you can retire on a beach somewhere and just count your cash.

Real estate investing and house flipping is a process. Your job is to optimize the chances of making the most money you can on each property. Once you get good at it one at a time, you can then start to scale. That’s when you can work on multiple projects at once and generate diversified income from a few different sources.

Maybe some are flips, some are rentals, some are spec homes.

But at first, concentrate on just one and get really good at it.

Just don’t expect to look under your pillow when you wake up tomorrow and find yourself living in a million dollar mansion with bikini-clad babes, a few hundred thousand dollars in a pile on your desk right next to the keys to your Lambo.

Instead, get to work. Take one step forward every day. Do it every day and that is how you make it to success.

Forget the Lambo for right now and just concentrate on the next step, then the step after that, then the step after that…

7. Sloth – Failing To Take Action

There’s one of my wife’s DVDs that I see evry time I look into our DVD drawer near the TV (on my way to finding Braveheart, Shawshank Redemption or Stripes by the way) called “Failure to Launch”.

Without checking IMDB, I think Sandra Bullock was in it and that Brad something or other guy who seems to be in every movie right now…

Although I’ve never actually watched it, whenever I see it in the drawer, Im always struck by the title: “Failure to Launch”. Although the movie may be a dud, the title is a good one.

The reason it resonates is because the title encapsulates the single most common problem for beginner real estate investors.

It was my biggest problem when I first started as well – its starting the process in the first place.

While educating yourself and preparing yourself for success is vitally important – and I highly recommend people learning as much as they possibly can to be successful – taking actual action is the most necessary step of all.

There is always more information to learn and some of it can be picked up during the process.

Start by writing down exactly what you want to do and start completing the steps one by one to make it happen. Dont get lazy. Get to work instead. Start and don’t fall victim to the deadly sin of doing nothing. In this case, the deadly sin of sloth.

Or more poignantly…failure to launch.

Because when all is said and done, you’ll never become a house flipper from your couch.

If you’ve made it this far, please leave a comment below! What mistakes and sins have you fallen victim to? Did I miss any??

Leave a comment below and let me know!

Photo: Scabeater

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{ 20 comments… read them below or add one }

Tom Phelan June 30, 2013 at 8:33 am

I don’t know exactly what category to place it under so lets try “Sloth”.

I am referring to the laziness of an Investor who won’t even take the time to study 1031 Exchange strategies and possibly save 35% by not rolling over for the IRS and paying Ordinary Income Tax Rates of the profits made from the sale of the property.

True, a Fix and Flip property must be held for a minimum of one year and a day to qualify for a 1031 Exchange but after the repairs are made a Lease with Option To Buy for 6 – 12 months could easily meet this requirement.

How many times have I seen Fix and Flip Gurus tout doing dozens of deals a year and making zillions yet they never mention having to pay up to 35% in taxes on the profits.

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Mark Ferguson June 30, 2013 at 9:00 am

For us it does not work to hold a property for a year, the profits are in quantity. We can sell a flip in 3 to 6 months after purchase and holding it ties up our money for rehab and new purchases. I am also a Realtor and lease/options are frowned upon by our Real Estate commission. Then the re is the source Of funding and many banks who offer short term loans do not want that loan to last more than a year.

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Sharon Hiebing June 30, 2013 at 10:07 am

Excellent points, Mark. I don’t know many flippers who would be willing to put tenants in their freshly remodeled home for 6-12 months. First, they for certain would need to perform a “second rehab” to clean up the mess the tenants might make, and second, the market could completely change in that amount of time, rendering your original ARV useless and potentially destroying the profit.

Most savvy flippers, Tom, utilize proper corporate structures, like LLC’s or S-Corps, to offset taxes, and some even calculate their tax exposure into their MAO. Tax strategy is definitely very important to a flipper, but 1031 is not the proper vehicle for them.

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Michael June 30, 2013 at 4:51 pm

you are absolutely correct Sharon. Thanks for taking the time to comment.
Excellent point on the market shifting as well.

Michael June 30, 2013 at 4:49 pm

Great points Mark. You just can’t say I am going to hold all my properties for 1031 exchanges. It makes sense if you are holding for rentals and then go to sell in the future where it does make sense to do a 1031 exchange.
Thanks for your comments

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Michael June 30, 2013 at 4:48 pm

Tom with all do respect how can you call investors that flip houses lazy because they don’t use 1031 exchanges. There are many reasons why as you can see from some of the comments already made. There are very strict rules to 1031 exchanges and there is no set number of months to when it qualifies. I have asked many exchanges and 12 months is risky and most recommend 18. I am not 1031 exchange expert but it is irrelevant.
You talk about saving 35% on taxes but have you considered damage from tenants when you rent it out, not all flips are great cash flow rentals, many flips are in hard money loans and need to get out quick and don’t want to spend the time or can refi traditionally……..
I don’t mind your opinion and stating it as an option but I take offense along with other investors about the Lazy comment when it has nothing to do with being lazy.
Its an investing strategy like buy and holding and 1031 exchanges…… and many more.

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Shaun July 6, 2013 at 9:42 pm

You hit the nail on the head Mike.
1031 exchanges are a great vehicle for investors, but generally not for someone doing rehab flips. I know very few of my properties would cash flow with the financing I usually have on them. Also as you and others are saying you might have to do extensive repairs after the tenants leave and the market could be totally different when you sell (Which can be a good thing or a bad one, nobody really knows!).

There was an investor, who’s name is escaping me right now, that gave a presentation at the NEREIA last year that did the rehab, rent for a year or more then retail it kind of strategy. However he planned on doing 2 rehabs. The first did all the major upgrades like roof, heating system, plumbing and electrical and an apartment level rehab then after booting the tenants doing the higher end finishes and refreshing everything for resale.

If you KNOW that is how you want to do it then that is great. As long as you setup your financing to ensure cash flow and you are okay tying your capital up that long it can be lucrative. The question is if it is worth the tax savings to tie up the capital and risk market downturns and terrible tenants, or look at the velocity of money and doing 2-3 deals in that time with a higher success penalty going to the IRS.

BTW I also believe the guy I’m talking about was just using it to get Capital Gain rates since a 1031 can be very restrictive. To avoid taxes my understanding is that you have to put all the net proceeds from the sale into the next purchase, which is great for the money you are plowing back into the business but if you have expenses you want to recover you either can’t or get taxed on anything you don’t put into the new place.
There are fairly obvious reasons why this is a strategy employed on long term holds and not on short term flips.

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Michael July 7, 2013 at 6:40 am

Thanks Shaun for that great explanation & your opinion. You bring up some great points especially the leverage part of being to do do a few or more flips rather than tying up your money into one 1031 exchange.

Karen Rittenhouse June 30, 2013 at 8:38 am

Oh, yes, number 4 – Wrath.

Things-go-wrong-on-EVERY-SINGLE-REHAB.

Fix it, learn from it, get over it.

Forget about wrath. Why? Because things-go-wrong-on-every-single-rehab.

Thanks for the great post, Michael.

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Michael June 30, 2013 at 4:55 pm

Thanks Karen- Keep improving on every flip with systems and checklists. Strive for perfection but accept excellence!

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john milliken June 30, 2013 at 9:58 am

bring though all of the 7 sins in flipping. most of them have disappear with experience though the years. #2 still gets me also since i love to do everything myself,lol.
thanks for the article Micheal.

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Michael June 30, 2013 at 5:05 pm

So true John they get better after every flip. Agreed. I had a hard time with the hands off thing still now. Even if it is minimal.

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Gary Clark June 30, 2013 at 11:19 am

Wonderful article. I’m in the middle of a rehab for a buy and hold. Got it @ 100k with an ARV of 200k. I started in October and its July now. In that time I’ve fallen victim to nearly all of these. All I can do is learn from my mistakes but the best part is to know I’m not the only one making these mistakes. Thanks a lot. You really helped helped relieve some of the doubts I had of myself.

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Michael June 30, 2013 at 5:07 pm

NO problem Gary. you are not alone. Even with all the flips I do things still go wrong.
Good for you taking action and it will for sure get easier on the next one but more important you will know what to evaluate for better.
Where is your rental?

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Tom Phelan June 30, 2013 at 1:27 pm

Michael,

A simple question, please.

Are you or to your knowledge someone else editing or blocking some of the replies to this forum?

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Sharon Vornholt July 1, 2013 at 7:23 am

Great post Mike. You nailed all of the big “sins”. These are indeed the mistakes that will sink your business fast.

Every brand new rehabber should print this list out as a reminder of what “not to do”.

Sharon

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Michael July 1, 2013 at 7:10 pm

Thanks Sharon. Good idea on printing the list of what not to do. Maybe I will print them out and hand them out at the next REIA meeting. It will be great for the new flippers. I agree.

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Jim Walker July 1, 2013 at 11:52 am

In “Failure to Launch” Matthew Mcconaughey is a thirty-ish part time boat salesman, lives with his parents,played by football legend Terry Bradshaw and fulsome actress Kathy Bates. In an attempt to motivate him to move out of their house so they can get some privacy, the parents hire Sarah Jessica Parker to tempt their son into a romance.

On the subject of renovating a house. One can try to dig up “Money Pit” either the early Cary Grant, Myrna Loy version or the Tom Hanks, Shelly Long remake.

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Melanie July 12, 2013 at 8:41 am

Well to start off, I’m not a flipper. I’ve been concentrating more on buy/rent/hold and rent-to-own so far. But I still found your article very interesting and informative. So I guess the sin I needed to learn to overcome in my situation was Lust. Gotta keep those emotion in check and make sure you are acquiring a property based on the numbers.

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mike July 14, 2013 at 4:37 am

I have been guilty of that myself and that is why I can write about it and hopefully prevent someone from making those mistakes. I think it so crucial on your buy and holds as well because the last thing you want is to own a non performing property that maybe doesn’t cssh flow and with those numbers you may not be able to sell it

Thanks Melanie

Mike

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