Once of the best pieces of advice I ever got when first learning how to flip houses had nothing to do with which houses I should buy. It was all about which houses NOT to buy.
As much as house flipping is a great way to make money investing in real estate, learning how to avoid the bad deal is paramount to your success.
But some people take this to the extreme and let this fear of making a bad deal paralyze them from not making the decision to buy, sell or invest.
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.
Fear, Loathing and House Flipping
Without a doubt, one of the biggest things to get a handle on when you are first learning how to flip houses is to first overcome your fear. Fear can paralyze you from doing the things you need to do.
Having said that though…a little fear is not always a bad thing – because it may end up saving your skin at times. This is especially true if you break the rules, don’t follow the formulas and make irrational decisions. If you stick to the rules, then your fears should be drastically reduced.
Regardless, sometimes they do crop up – seemingly out of nowhere. In fact, I have a student who we are coaching who had this very same issue this week. He was on the brink of making his first house flip purchase and was overwhelmed with feelings of dread, negative thinking and paralyzing fear.
We got him past it, but only after talking him through it and giving him some ways to overcome his fears. He seemed to find comfort in the fact that I still have the very same fears – in fact, they never seem to ever go away. But instead of letting them dictate my decisions, I try to channel those fears in a positive way instead of making them stop me from making decisions that I know will ultimately help me.
But having said that, fear is healthy to have – it’s most likely the thing that kept the human race going in the caveman days when we were being chased by predators who wanted to eat us. So we should be thankful we have fear – or none of us would be here today!
However, you should be fearful if you consistently make the seven deadly house flipping mistakes we’ll discuss here. If you don’t make these mistakes, then re-channel those fears and make the decision to go for it. Once you realize that the rules of house flipping are there to minimize your downside risk, irrational fears start to fade into the background.
The 7 Deadly House Flipping Mistakes
1) The ARV Was Determined From Online Research
I call this type of scenario a DEAR – also known as Drop Everything and Run! Honestly, trying to gauge the after repair value of a home solely through using online tools and websites is a sure fire way to set yourself up for disaster.
Now don’t get me wrong, sites such as Movoto and Zillow are fantastic places to start your research – but not the right place to end it. To really get a good grasp on how much a house will be worth after it has been renovated, you need to meet and speak with a local expert real estate agent.
At the end of the day, a real estate agent who really knows your area will be your best bet at determining an accurate ARV.
2) Using “Eraser Math” When Figuring Your 70% Rule
The 70% Rule can help you make a lot of money, unless you start using the eraser on your pencil.
What gets some people into trouble is that they get excited about a house flip, and then try to make the numbers work by adjusting one number here and another number there. You can use the 70% Rule to determine how much you can spend on renovations and to figure out the maximum allowed offer on a property.
However you will get yourself into a bad deal if you try flexing the 70% Rule, so that the numbers “look good” on paper. Said another way, trust the formula instead of overly ambitious emotions. This is especially true for house flipping beginners.
3) You Enter a Deal With No Exit Strategy
Investing in real estate can be a fickle venture. If you purchase homes to flip without formulating at least one or two exit strategies, it will come back to nip you in the butt.
Typical exit strategies I use when a deal is not proceeding according to plan include:
- The lease option
- Wholesale to another investor
If you cannot create an exit strategy for a potential house flip, then I recommend not moving forward with the deal.
4) Doing a Deal without a House Flipping TEAM
In my experience, flipping a house is a team effort. Sure it is possible to go it alone, but in my opinion going it alone is really not the best way to flip a house. Not having a team on your side may increase your odds of failure – especially if you are brand new in the industry.
I recommend spending at least 6 months intentionally networking and establishing mutually beneficial relationships with key house flip team members. Get to know, like and trust:
- Real estate attorneys
- Certified public accountants
- General contractors
- Real estate agents
5) You’ve Put Your Life Savings On The Line
There are plenty of stories about folks who have risked it all and come out on top-but do you really want to do that to yourself? Can you handle the stress? I know I can’t…
That’s why I invest in properties using OPM – short for “other people’s money.” What I recommend you do is talk to people at REIA meetings, go to networking groups and ultimately form relationships with people who are looking to invest. Don’t expect people to simply hand over their hard earned money, but if you can present a good deal it can be a win-win for all involved.
This way you don’t put your retirement or your child’s education on the line.
6) Managing The Rehab On Your Own…Without a Clue
This goes back to #4 – establishing a house flipping TEAM.
Just because you may live in a house, doesn’t mean that you know how to renovate one. If you are not proficient in construction, then you not only risk losing lots of money during the rehab process, you also risk not renovating the home properly. This can cause major issues down the line for the future homeowner.
Fixing and flipping does not mean slapping a fresh coat of paint on the house and then selling it for profit. If you do not know how to renovate an entire home up to code, then find someone who does. Although contractors can be a challenge to work with at times, there are loads of talented contractors out there who will work with you – just have to find them.
7) Not Moving Forward Because of Irrational FEAR
Your own fear is a killer – especially when it stops you from doing things that you know are right. I may actually talk about overcoming fear in real estate investing too much here on Bigger Pockets. But I do it because its the #1 thing that stops every one of my coaching students and anyone I ever talk to about house flipping.
However if you are about to purchase a house to flip and you feel sick to your stomach fearful, then something is not right.
There is a difference between overcoming fear and simply ignoring it.
Overcoming fear is done during the months prior to purchasing a house to flip. You work on your mental game by reading books like Think and Grow Rich, and then acting upon the fear conquering advice you are reading. This way you instinctively know when the time is right for you to make the leap and purchase a home. Butterflies are good – trembling knees are not.
If your knees are trembling and you feel like you are about to throw up, then simply acknowledge the possibility that you may be in over your head. Back away from the deal and spend a little time working on your inner game.
Then come back and review this list here. Go through all the great resources on flipping houses here at Bigger Pockets. After you review this list and you’re not making any of these deadly house flipping mistakes…you should most likely pull the trigger and go for it.
Made it this far? Please leave a comment below! What do YOU think? Ask any question you want or make any sort of comment on this list…did I miss anything? Join the discussion by making a comment below.
Photo: seyed mostafa zamani