House Flipping Red Flags

13 Replies

Hi Everyone,

Newbie investor working on getting my first deal put together. I had a question I'd like to ask to some of the more experienced investors - when looking at a potential property, what are some of the red flags you have/might encounter that make you walk away from the deal? I know generally people like to stay away from "structural" issues (while some investors are perfectly fine with fixing these), but I am looking for more specific answers. If you need to replace the roof do you walk away? Termite damage? I know it ultimately comes down to the cost of the project, if the seller is willing to fix/adjust price and if the deal still fits the 70% rule. I am just curious if there are certain things that are hard stops in the process and make you walk away without any further investigation. If you have any tips for things to look out for as a newbie investor, those are always welcome too!

Thanks!

Jason

Hi Jason, I walk away from anything that does not create instant equity upon purchase.

thanks,

Matt

@Matt R. Sorry if this is a silly question, but what exactly do you mean by this? Are you simply saying that you always buy below market value?

Yes, in a nut shell you get the property at the maximum discounted price and gain equity immediately solely based on the actual higher value as is.

thanks,

Matt

There are not many things that make me walk away from a deal. Except one I can think of right off the top of my head. If I see a pipe sticking straight up out of the ground with a cap on it, that means that there is an old oil drum buried below. If you see that, run for them thar hills. You would have to dig it up and make sure the ground is not contaminated for a pretty big radius around the drum. If DHEC finds one spec of contamination they will make you do a "clean up", that could cost you several thousand dollars.

I, like Deano, don't have many things that would steer me away from a deal. The keyword there is deal. If it's a deal, it means the numbers fit and that there is room to make money. Mold, foundation issues, and fire damage are the most costly fixes I've encountered in house hunting, but all can be remediated at a price. If there is room to remediate and still come out with equity, I'm in.

@Deano Vulcano & @Scott S. , thanks for the feedback, I appreciate it. I had a feeling these were the types of answers I was going to find. I know that it all comes down to the numbers, and if the numbers work then its a good deal. I guess my question, if asked another way, would be what types of jobs/repairs carry the most risk of unexpected costs. I would assume that the more costly expenses, as the ones Scott mentioned, would carry the highest risk, but not sure if this is true.

Also, something that I was considering was projects that would make a potential buyer uneasy about making a purchase. I.e., the buyer finds out there was a mold issue, and though you have taken care of the problem, they are still gunshy and may move on to another property. Does anyone have any experience with this? How did you overcome? Thanks again for the help!

@Jason King  

 - Man, I love to see termite damage and/or those blue tarps on a roof.  It keeps the o-os and the newbies away, so there's less competition.  One thing that I stay away from are houses that have trashy neighbors/houses next door.

Originally posted by @Deano Vulcano :

If I see a pipe sticking straight up out of the ground with a cap on it, that means that there is an old oil drum buried below.

Not necessarily.  In fact, not usually.  Any house on public sewer will likely have a cleanout, which is a pipe (usually 4" or 6") with a cap on it.  And septic systems will often have pipes coming out of the ground as well.

J Scott
I think what Deano Vulcano means is an OLD cast iron or galvanized pipe (2-3" in dia.). Typically the vent will stick 12" out of the ground (unless unscrupulous seller removes it). See article from Inpectapedia: http://inspectapedia.com/oiltanks/Buried_Oil_Tanks.htm

Typically sewer clean outs are of a larger diameter 4"+ and usually made of PVC.

Originally posted by @Brian Moore :

J Scott
I think what Deano Vulcano means is an OLD cast iron or galvanized pipe (2-3" in dia.). Typically the vent will stick 12" out of the ground (unless unscrupulous seller removes it). See article from Inpectapedia: http://inspectapedia.com/oiltanks/Buried_Oil_Tanks.htm

Typically sewer clean outs are of a larger diameter 4"+ and usually made of PVC.

Yup, I knew what he meant.  But, the way he basically said to avoid a house with any pipe sticking out of the ground would have been very misleading to those without much experience.  There are lots of reasons for pipes to stick out of the ground, and they mean very different things...

Certainly the size and material of the pipe will give a lot of information...

Aside from serious structural issues (basement walls having major cracks or caving in, joist/rafter damage, termite damage to framing) or fire/smoke damage, I don't think I would rule anything out if the price is right. I suppose major plumbing might be a deterrant too, but again, with the right price in the right neighborhood, I'm sure something could get worked out. This might be something like a septic system replacement or digging a new drain field, which I have heard can get crazy expensive.

Everyone,

Thanks for the continued feedback. I think that it is safe to say that if there is money to be made, then nothing can scare away the seasoned investor.

How would you address my secondary question - which jobs carry the highest risk of hidden costs. As a newbie, one of my biggest fears is underestimating repair costs. I can obviously get quotes from contractors and do my due diligence in terms of estimating the repairs, but not familiar enough with home renovations to know what could turn a $500 job into a $5,000 job. I know this question is probably hard to answer, so if you can give some examples of where previous projects have gone considerably over budget and what caused the problem that may give me a better answer.

As always, thanks for the advice everyone, very valuable to a newbie!

Regarding hidden costs, I would say electrical and plumbing. When you start opening up floors and walls, you can easily run into issues. I just had a house where a breaker popped and the electrician figured he would be able to find the source pretty easily, but it was 3 days and $1600 later. Go figure. I'm guess issues with septic tanks/fields could also be big expenses, but luckily I don't ever have to deal with this

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