5 Common Mistakes That Sabotage Fix & Flip Profits

5 Common Mistakes That Sabotage Fix & Flip Profits

6 min read
Matt Faircloth

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, N.J., is a developer and owner of commercial and residential property with a mission to “transform lives through real estate.” DeRosa creates partnerships to finance select real estate investments and has a proven track record of providing safe, profitable investment opportunities to their clients.

Experience
Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to hundreds of units in residential and commercial assets throughout the East Coast. Under Matt’s leadership, DeRosa has completed tens of millions in real estate transactions involving private capital, including fix and flips, single family home rentals, mixed-use buildings, apartment buildings, and office buildings.

Matt is an active contributor to the BiggerPockets Blog and has been featured on the BiggerPockets Podcast three times (show #88, #203, and #289). He also regularly contributes to BiggerPockets’ Facebook Live sessions and teaches free educational webinars for the BiggerPockets Community.

Matt authored the Amazon Best Seller Raising Private Capital: Building Your Real Estate Empire Using Other People’s Money. The book is a comprehensive roadmap for investors looking to inject more private capital into their real estate investing business and is a must-read for anyone looking to grow their business by using private lenders and equity investors. Kirkus, the No. 1 trade review publication for books, had this to say about Raising Private Capital: “In this impressively accessible introduction to a complex subject, Faircloth covers every aspect of private funding, presuming little knowledge on the part of the reader.”

Matt and his wife Liz live in New Hope, Penn., with their two children.

Education
Matt earned a B.S. in Industrial and Systems Engineering with a minor in Business from Virginia Tech. (Go, Hokies!)

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Hi, everyone! I hope you all had a great turkey day and are back in business, ready to complete 2014 with a bang!

Today, I am doing a tribute to my fellow fix and flippers (and aspiring ones also). Fix and flips are a major part of our investment strategy and can be a good way to either make a living or raise cash for buy and hold deals. That being said, there are some things that we all need to look out for that will suck your deal dry!

This article is dedicated to talking about some things that can throw off your fix and flip project — and how to avoid them.

5 Common Mistakes That Sabotage Fix & Flip Profits

1. Taking Too Much Time

Sounds pretty obvious, but time can kill your deal. Odds are, you borrowed money for your fix and flip and have a monthly payment. Unlike rentals, where you get paid once a month when you have a tenant, you only get paid once on a fix and flip — when you sell. Every month you carry that fix and flip, you ring up more interest. Whether you are financed with a bank, a private lender, or a hard money lender, the interest can start to pile up.

The same goes for those other expenses that are time based. The usual suspects are real estate taxes, insurance, and utility bills. It’s simple math: the more you hold a property, the more of these things you will have to pay.

Related: It’s Entirely Possible to Fix & Flip 10 Homes at Once: Here’s How

The way to avoid time sucking down your bottom line is to create a timeline for your project, and stick to it. The timeline should go hand in hand with your project budget and include all phases of the project: from the time you buy the property to the time that you sell it. Then you need to revisit the timeline and make adjustments.

As we will discuss later, there is no way you can know everything that will come up on a fix and flip. There are just too many variables. That shouldn’t deter you from making one, though. Avoid the urge to “jump in and figure it out” — and take that from me because I am a recovering “jump in and figure it out” guy. Make the timeline anyway, and keep making adjustments when things come up. The timeline will hold you on course and, along with your budget, will stop the project from getting too far off goal.

2. Not Having/Sticking to a Realistic Budget

Along with projecting the expected timeline for your project, you need to keep the project in line with your expenses. I’m sure this goes without saying for most of you, but creating a budget you can stand behind up front is the first step in keeping your project expenses in line.

There are two ways that your fix and flip can fall apart due to the budget. Here they are and how to avoid them:

Budget doesn’t cover everything: You want to make sure your project budget covers all the costs you will incur. This of course includes all improvements you plan to make, so be sure that all activity in the house has a line item (from demolition to final cleaning).

Also, make sure that the “soft costs” are included. These would be things like loan interest, taxes, utilities, permits, architect fees, etc.

Budget is unrealistic: If you plan on replacing the roof on your flip, be sure to budget more than $100 for it. I am being a bit extreme, of course, but I am trying to make a point. You need to make sure that the line item expenses in your budget are achievable given what you know about the property going in.

Run the numbers by someone – either another rehabber or, even better, call someone who will actually be doing the work for you. Instead of making up a number for the roof repair or the new bathroom, call a contractor to give you a bid. You can use their number in the budget and then get two more bids when it’s time to cut a check to make sure it’s a fair price.

3. Over-Improving the Property

It’s hard to know when to stop improving on a fix and flip, especially if you have the resources. There are things that really make a fix and flip pop, like granite countertops, crown molding, tile, hard wood floors, landscaping, and the list can go on. Every house needs these things. I call them “wow factors.” Every house should have a few things that make people say, “WOW!” when they walk through your property. These things make your house stand out and will help you sell quickly.

Related: Why I Pay More for Fix and Flips than the 70% Rule States I Should

That being said, you need to know how many of them you need to sell in your market. There is a law of diminishing returns in fix and flips, meaning that people will only pay so much for your house, regardless of what you do to it. The trick is finding out what you need to do to get your price — and not doing anything more than that.

Everyone should be doing market research to validate your target price, but do it to validate condition also. Be sure to surf the internet to look at other houses for sale in your area, or better yet, walk through some of them when they are having an open house. If you can get access, look through interior pictures of houses that sold recently through your local MLS. All this should give you an idea of what condition will yield the price you are looking for in your area. Your end goal should be to SLIGHTLY exceed the market’s expectations for improvements in your area.

4. Not Preparing for Unforeseen Issues

This is by far my least favorite part of fix and flips. As I said before, there are just too many variables in a fix and flip to anticipate all of them. You just can’t know everything. I haven’t done a fix and flip yet that didn’t have some sort of surprise that came up during the project. I have had it all: from unforeseen termite damage to the local township giving us a hard time, things come up.

The first way around these issues is to do your best to minimize them while understanding that you won’t eliminate them altogether. You do this by doing as many inspections and as much detective work before your buy as you can. Call the local township before closing, do a termite inspection, have someone get up on the roof and look for damage you can’t see from the ground, have the furnace inspected, etc. What you find out may not prohibit you from buying the house; you may consider asking the seller for a discount. The key is to be aware of as many facts on the house as you can, so you can make preparations to handle them in your budget.

The second way around unforeseen issues is to have a line item in your budget for “contingencies.” This is intended to cover the things that come up on a project that were outside your budget. It’s money set aside as “just in case money” to cover those inevitable things that can arise during a project. I normally use a contingency line item of 10% of my construction budget and have found that most things that arise can be covered with that.

5. Over-Pricing the Property

Don’t get too greedy when you go to sell! An overpriced house will not get the attention it deserves when it first goes out for sale. The first time a house is listed is when it’s on most people’s radars. If you are priced right, you should be getting interested buyers as soon as it gets listed. For a variety of reasons, you want your house to go under contract within a few weeks of getting listed. The obvious reason is that you want to sell and get your hard earned profits. The second reason is that you don’t want it to sit on the market.

The kiss of death for a fix and flip is your house getting stale. It’s hard to get attention from buyers once you’ve been on the market for a while, even if you drop your price. The problem is that savvy buyers will see that you have been out there for a while and that you’ve reduced your price at least once. You may get offers, but odds are, they will be well below asking.

We price most of our listings right at the average of the market and have gotten multiple offers within 30 days of listing, even in today’s marketplace. The key is to create a bit of frenzy up front with some well-placed marketing, and a fair price on a house that slightly exceeds the market’s expectations. Remember the “wow factor”? The buyers should say “WOW! I can get granite countertops and all these other improvements in this house for just a few dollars more than the house down the street!”

Final Thoughts

So, all that being said, I am still a huge fan of fix and flips, especially in this market. They can be a great way to make some capital to grow your business — if you execute them properly.

I hope you got some good ideas here – let me know your thoughts! Any tips you have from your fix and flips?

Don’t forget to leave me a comment below!