What Makes or Breaks a Flip — Financing or Construction?

Question

For active flippers, which causes more issues: unexpected rehab costs or poor financing structure? Would love to hear lessons learned from recent projects.

Ken M. · Answer

Your Question: "What Makes or Breaks a Flip — Financing or Construction?"

Neither, The flipper.An improperly trained flipper will make all kinds of mistakes during the process. There are so many things that can and do go wrong. A flipper learns the right things to do either by making the mistakes or having a mentor. As an old friend used to say, "It's not like baking a cake".

Stuart Udis · Answer

What makes or breaks a flip is the purchase price. With flips, the money is made when you buy. You can have perfect construction, finish fast, and even get cheap debt and still lose money if you overpaid on the purchase.

Frank Pyle · Answer

Construction surprises kill more flips than financing in my experience, because one busted sewer line or a two week permit delay can wipe out your margin fast even if your rate is decent.

Financing still matters, but it is usually predictable. The make or break is buying with enough spread and running a tight scope, bid, and draw schedule so the job does not drift. Quick numbers check I use is if you do not have at least 10 percent of ARV as a contingency plus holding costs baked in, you are one surprise away from working for free.

On your recent projects, what was the single biggest budget blow up you did not see coming, and was it in the walls or outside like sewer, roof, grading?

Andrew Lee · Answer

There are many lenders out there and different liquidity requirements. What I recommend for all flippers is that they have 6 month of interest payment liquidity so there are no issues in the flip process (even if the lender you go with does not require it). Keep in mind, you do not get to tap into your rehab budget until the scope of work is completed and inspection.

Fred Shatzoff · Answer

Could be both  If you don't do a good construction budget and a contingency you could run out of funds  On the financing if the property does not appraise or the lender comes up with a higher construction budge then what you submitted.

Chris Seveney · Answer

@Ken M. - this is a great answer. I know people who will pay 15% interest on a loan because they can get the money quickly and they know they're going to be in and out of the property within a few months and that extra percentage you're paying has very little impact on the bottom line. For the good flippers, it's rare for them to have a serious mishap on unexpected cost. Yes, it does occur but experience allows you to pick up a lot of the costs and know what you're doing upfront

Kenneth Garrett · Answer

@Tracy Thielman

There is no one thing that kills flips, but rather a combination of things.  Of course everything is relative to a certain degree.

1. Pay too much on purchase of property.

2. Under estimate the rehab amount.

3. Over value the ARV.

4. Construction surprises.  There are always things that up that you didn’t anticipate.  Water line leak, sewer collapse, major electrical issues, etc.  Not going to talk about roofs and hvac units.  Those should have been calculated originally.

5. Contractor delays or non-performance.

6. Poor market conditions.  Market value decreased while renovating.  Selling in the winter versus spring early summer will impact sale price.

7. Lack of funding for budget changes.

I find these to be the major issues on flips, but clearly there an unlimited number of things that can happen.  All in all flipping can generate a decent amount of cash if done correctly.

What Makes or Breaks a Flip — Financing or Construction?

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