5 Common Mistakes That Sabotage Fix & Flip Profits

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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.

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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!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

32 Comments

  1. Marjorie D.

    These are great tips, thanks.

    As a newbie interesting in buying my first home to flip, I’ve been going to open houses for the past few months and have been (unpleasantly) surprised at the lack of quality in many of the flips I’ve seen listed. Shoddy workmanship (hinges that were poorly installed, doors that didn’t close properly and the list goes on…), houses that were only half-done before being listed, cheap materials (referring to kitchen cabinets that I could probably put my fist through or the kind that look like crap after 6 months use from wear and tear). I noticed a lot of these houses were made to “look good” on the outside but they really sacrificed quality and functionality. Many of the kitchens for example had new SS appliances and granite but the kitchen itself was so small and had so few cabinets that it was not functional for someone who cooks. It might work if you live on takeout or frozen dinners though.

    I understand that you can’t overspend when rehabbing, but isn’t there something to be said about doing a quality job? I would like to think that most buyers can tell whether the rehab was cheaply done or not.

    Where do you draw the line?

    • Mindy Jensen

      Marjorie,
      Unfortunately, I think a lot of buyers DON’T know the difference between a good job and a poor one. Of course they will notice that the doors don’t shut, but they may not know those cabinets will fall apart in 6 months. They see the WOW factor that Matt talked about, and it kind of glosses over the rest of the not-so-awesome stuff. At least in my experience.
      But you can use that to your advantage, by doing stellar work and getting a reputation for quality workmanship.
      There is a guy in my area who takes mediocre houses and knocks them out of the park, selling for WAY more than I ever thought he would be able to get, because they quality is there, it is very obvious, and he is known with agents for doing a great job. They encourage their clients to buy his houses, because they know he stands behind his work.

      • Marjorie D.

        Mindy,

        Now I don’t feel so bad. I’m glad to hear there are people out there who do put out quality work and are not only not losing money but gaining a reputation for quality workmanship. What a relief to hear this! If (and when) I will rehab a house with the intent to flip it, it’s probably what I will do as well. I would feel guilty knowing people paid top dollar for something that will fall apart in 6 months. It’s a huge expense to buy a house – I want the new owners to feel good about their purchase for years to come.

        Thanks Mindy.

        • Richard G.

          Marjorie,
          my only thing is home buyers are smart now a days and will not pay top dollar on a home in the first place if they know it will fall apart in 6 months. With all the online resources, and realtor input, and just personal knowledge that will be highly unlikely. Unless they are looking to rent, I agree it is a huge expense to buy a house but a smart home buyer will sacrifice over there budget to get the home they want or possibly make a low offer on your home to bring you, the investor, closer to break even. Good luck on your future endeavors —

        • Robert Allen

          I fully understand the issue of quality vs. shoddy workmanship. As a GC, I found it was easy to beat out the competition because my standards were above the bar. I didn’t even have to go that far above because the bar was set so low in the first place. I earned a reputation as being good at fixing other contractors problems after the fact, which led to my ability to maintain an excellent business on referrals only, with little to no advertising.

    • Matt Faircloth

      Hey Marjorie (and Mindy and Richard also, LOL),
      Great conversation! There is a huge difference between delivering a quality product and over improving a home. If you want to have some street cred like the flipper that Mindy referred to, you need to deliver something that you are willing to stand behind, and are proud of. Over improving is out side of delivering a quality product, it’s simply spending money on improvements that will not give you a higher sell price or quicker sale.
      I agree with Richard also – I would like to think that there are more savvy home buyers our there now. I would not be surprised to hear that the homes that Marjorie went to go see are still on the market or sold for well under asking. I also would be that if they really cut some corners like poor installation of doors it will come up in the home inspection.
      Thanks to you all!!
      Matt

  2. David Semer

    Matt thanks for the great information. I am looking to start a rental portfolio how do you know how much to rehab for putting in a tenant into the property. Are there things you would do up front to not have to worry about issues later. Example New roof, Kitchen, Bathroom (all these need work no matter which way i go flip or tenant) Would you add Central air to the house if it is already has forced hot air systems and the ducts are in place? (my example is a 600 sq ft 2 bedroom 1 bath house). Thanks for sharing.

    • Matt Faircloth

      Hey David!
      Good to see you on BP. Thanks for reading the article!
      For rentals I try and get all the potential future maintenance nipped in the bud up front. Here are some things I do on every buy fix and rent:

      inspect the roof for potential leaks and replace or repair if necessary.
      look for potential plumbing issues or electrical problems that could arise once we own.
      Paint the unit with the same colors we use in all our rentals so we can touch up easily
      if we are paying the heat, replace windows
      update kitchens and baths (but keep to a tight budget)

      On central air I would probably not install it on a rental but that’s my market. Look on craigslist in the area you are renting to see if most other listings have AC and if so if they can charge more rent for it. Then look at the bump you can get in you rent because of AC. Unless you are getting north of $1200 for a 2 bedroom I would skip the AC because it will take too long to get a return on your money.

      Speak to you soon,
      Matt

  3. Mindy Jensen

    Matt,
    These are all really great tips. It is hard to figure out which one is the most important!
    Overimproving vs wow factor is a really fine line. Since glass mosaic tile has come down in price so much, I put that up in my kitchens to really make them pop. I can usually find that tile for $6-$9 a sq. ft. and really feel it is worth the investment. Especially when competing properties are either bare walls or ceramic tile.

    • Matt Faircloth

      Hey Mindy,
      Thanks for reading and for leaving a comment. We use mosaic tile in strategic locations. It creates that WOW, of course. We have used it on back splashes on smaller kitchens but most of the time get the granite company to do the 4 inch lip on the back wall to bring the granite up the wall a bit. It gives a nice look and they can do it cheap. We do the mosaic in the bathrooms as a “racing stripe” on tiled bathrooms. We will do a 3 to 4 inch strip at about eye level in the shower or stall. It gives a nice texture and with the right tile guy it comes out great.
      Take care!
      Matt

  4. Greetings Matt,

    Definitely some lessons learned in this article, thank you! I think the biggest thing I took out of this was #3 Over-Improving the Property. In particular getting access to past sales pictures from the MLS system. Looking, reviewing, and evaluating at the living room setup, bathroom material, kitchen display, etc. can really give an investor an idea, at the minimum, of what direction to go to get that home sold. There goes your “wow” factor –

    • Matt Faircloth

      Hi Richard,
      You are correct – doing research up front by going through pics of sold houses in the area is a great idea. It gives a feel for the market and will let you know what you need to do to SLIGHTLY exceed the market to sell quickly.
      Best of luck!
      Matt

  5. Joshua Stahl

    I do think that a lot of flips are subjective. Sometimes it is much more effective to figure an ARV that does have a lot less rehab in it, just to hit a price target that you feel will sell at a much more attractive price. For example, we just bought a property that could use either $40k worth of cosmetic work, or $60k of more extensive work, but when looking at the sell price of $500k vs $520k, $500k seems a lot more attractive to more people, will cut the time we spent rehabbing the property, and will overall sell the property a lot faster.

    • Matt Faircloth

      Hey Joshua,

      Thanks for posting. I love the smaller projects – We have done very well on the houses that didn’t need a major overhaul. New kitchen, new baths, and some paint goes a long way! Also on the project you referred to it sounds like the return on investment wasn’t there – If I am going to invest another $20,000 into a project I would want to get a great return on that money to compensate for the additional risk.

      Take care,
      Matt

  6. Matt Faircloth

    Hi Lissa,

    I listed these mistakes because over the years I MADE most of them myself, LOL! Over pricing is soo hard not to do. We become so proud of the house once it’s done, right? I have made that mistake and then had the house sit for months after completion! We shook that off and now all our product goes under contract within a few weeks because it’s priced reasonably. We normally get multiple bids even in today’s marketplace!!
    Best of luck!
    Matt

  7. I’ve had bad luck with home inspections. They’re very superficial, $$$, and I ‘m sick of hearing how they can’t see through walls. I’ve also found the people doing them have no real experience in the world of construction. Now I bring in a few retired lifers who can tell me a few reasons why the ceiling is sagging without having to see through walls.Or why the tile is buckling. Or suspicions about the electrical that only guys 40 years in the field would notice.

    • Matt Faircloth

      Hey Alexis,
      We stopped using home inspectors a while ago also. You are better off taking a contractor through the house to give you an idea of rehab costs.
      With respect to home inspectors, they are a factor in fix and flips; they are an advocate to the buyer. I will rehab a home with the buyer’s inspector in mind as the buyer will typically throw their inspection report in my face and try and get a discount on price. If I address all the life safety issues and general functionality of the house up front, the inspector doesn’t have much of a leg to stand on.
      Thanks,
      Matt

  8. Ashley Harrison

    Great information! I especially love the overpricing tidbit. That information alone saves thousands. The objective is to get the house sold, make your returns and move onto the next project. The longer the property sits on the market the more its costing you.

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