“If anything can go wrong, it will…”
– Murphy’s Law
When you’re flipping houses, one of the most important things to know is how to establish solid cost projections. When you flip houses, aside from the purchase of the property, your costs are probably either your second biggest or in many cases, your biggest costs in the entire project. And if you get too cavalier with your financial projections, you can get into major trouble very fast.
Like our friend Murphy once said, when you flip houses . . . whatever can go wrong, will go wrong.
The secret to combatting Murphy’s Law when house flipping is to: expect it, anticipate it…and have a plan for it.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Time: NOT On Your Side
Having accurate projections when house flipping are so vitally important. In fact, I oftentimes will add in unanticipated costs in my projections to make absolutely certain I come out with a profit.
I urge you to do the same.
With so many good deals out there right now, you can afford to be choosy. So don’t make the mistake of being too aggressive in your projections to make it work. As they say — there’s always another deal.
Especially important to your financial projections is how long you end up holding onto the property. The longer you hold a property, the larger your finance soft costs, and if you hold onto the property too long, these holding costs can really eat you up. When you have hard money lender payments, real estate taxes and insurance payments, the longer you hold a property, the more these costs will be. And the longer you hold, the quicker your profit starts to go up in smoke. This is why it’s so important to estimate your holding time accurately when you’re house flipping.
Murphy’s Law and House Flipping
Let’s picture that you’ve just closed on a house that you plan to fix and flip. Lets’ also assume that you have a reliable and proficient general contractor lined up to begin work immediately on the property. Although the house has lots of work to be done, you feel confident because you have a solid house flipping team that can get it done quickly so you project it all to be done in four months.
My guess is that you are probably too aggressive on your timeframe and have not factored in Murphy’s Law.
This is where Murphy’s Law of house flipping comes in. Things go wrong when flipping; there’s no denying it. And with every project, there will be unexpected repairs as well as unexpected costs, so build extra time into your projections to handle things you may not have forecast.
The truth of the matter is that a lot goes into rehabbing a house and if you have unforeseen issues such as lead paint, mold, holdups at the building department, environmental issues, extra framing, and so on, your projections can be thrown off by weeks, if not months.
Sometimes, It’s Just Beyond Your Control
The amount of time invested rehabbing a home is, as much as I hate to acknowledge, in many cases, out of your control. While assembling a killer team of contractors, lawyers and real estate professionals is crucial to your success, sometimes even they cannot predict certain unanticipated costs and repairs. Stuff comes up that is so out of your control at times, it is frustrating.
However, it is just a part of the business, so instead of sticking your head in the sand and hoping it doesn’t happen, expect it to happen and have a plan in place when it does happen. I have found through experience that it isn’t unusual for the scope of work to increase during the project. This can and will happen to you, so get ready for it and count on it. It’s all a part of the plan.
I am very fortunate to have assembled a team of pros who know the business very well, and who assist me in locking in profits, even when things go south. Even so, I usually project a 4-8 week rehab process just to be safe. If the rehab comes in on the lower end of the range, great. If it comes in on the higher end, not too bad.
Banks: One of the Bigger Time Wasters
Although you may not use banks to fund your deals, chances are pretty good that your buyer will. Having said that, one of the biggest time wasters are the banks, because they simply take a long time to process funds.
The most frustrating part is when you have to wait on a single signature from some elusive bank vice president, and he holds up the whole process. Or maybe it’s an important or not so important bank document that gets lost in transition…believe me, it happens.
Sometimes, the financial institution will hold things up simply with their corporate procedures. The most aggravating part of all this is that there is literally nothing you can do about it. So instead of fighting it, count on it. Prepare for the worst and expect the best – expect banks to hold up the sale, so factor it into your projections.
Be Conservative in Your Projections
Start each flip projecting six months for it to be finished – but still shooting for three months. In worse case scenarios, be sure to run your numbers as if you had to hold onto the property for 9 months and even 12 months. If your numbers still work, then pull the trigger. If they don’t, then you’ll want to reconsider.
Remember, there’s always another deal.
Although Murphy may not have been a house flipper, use his law to make sure all your deals turn out to be profitable for you. So, expect the best but prepare fully for the worst. That is how you use Murphy’s Law to flip houses.
If you made it this far, please leave me a comment below! I’d love to hear about what you think of “Murphy’s Law” and flipping houses or any questions about anything at all relating to real estate!