(This post was done in both text and video format (at the bottom.) Take your pick!)
When I first decided to flip houses, I was a bit arrogant.
I thought, “How hard could this really be? I mean, it’s just like the TV shows, right?”
I’ve spent the last decade buying both rental properties and doing house flipping, and I’ve learned a LOT. Sometimes I wish I could go back and give myself some advice. But I can’t. However, I can do the next best thing: I can share that advice with you.
Therefore, in this post I give you seven things I desperately wish I had known when I started flipping houses.
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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.
1. The Flip Doesn’t Begin When You Buy It
The first thing I wish I had known when I started flipping houses is that work doesn’t begin when you buy the property. It actually starts before that.
No, I’m not talking about breaking into the house and removing walls.
I’m talking about the prep work.
You see, what most people do (and I did for many years) is wait until the day after closing and then start planning for the flip.
Sure, that works, but you are missing out on some valuable time that could help your entire flip move faster!
During this “due diligence process,” you can use the time to line up contractors, create an incredibly detailed scope of work, open up a checking account for the property, pick out materials (though I would wait to actually buy them until closing), and more.
2. The Scope of Work is Unbelievably Important
Perhaps the most important document you’ll use during the entire flip process is known as the “scope of work.”
Essentially, this is a detailed list of every single item that needs to be rehabbed in the home.
When I started flipping houses, I would jot down some notes as to what needed to be done — but it was far from complete.
I figured, “Eh, what’s the purpose of getting too detailed? Whatever problems we find are going to come up anyway, and I’ll just have to fix them. So who cares if they are written down? It’s not a big deal, right?”
Wrong! It’s a huge deal!
Because the more detailed your scope of work is, the more smooth and on-budget your entire flip will be. When you know everything about the property, you can get more accurate estimates from contractors, schedule people at the right times, reduce the number of “change orders” the contractors will try to charge you for, and reduce your stress considerably.
The scope of work is like a road map — it’s easier to follow when it’s detailed.
3. Cheap Doesn’t Mean Good Deal
Many of the houses I have flipped I should not have.
Because I bought them because they were cheap, not because they were a good deal.
There is a difference — and understanding that difference is the thing that separates the winners from the losers in house flipping.
Some cheap houses are cheap for a reason. Perhaps it’s in a bad neighborhood. Perhaps it needs too much work. Perhaps there are environmental reasons for its price, such as lead-based paint or asbestos.
Whatever the reason, remember: Cheap doesn’t necessarily mean it’s a good deal.
4. You Make Your Money When You Buy
Once you’ve purchased a house, your profit is already capped at a certain point, and it’s not going any higher. Therefore, if you pay too much for a property going in, it’s unlikely you’ll ever get out with the profit you wanted.
You can’t magically make the house worth more than it’s going to be worth. The after repair value isn’t going to change no matter how cute the paint is.
Therefore, always do your math CAREFULLY when buying a flip. Never buy on emotion, but buy because the math shows you are going to make a profit.
5. Dealing With Contractors is the Hardest Part
I firmly believe the most difficult part of flipping is dealing with the contractors.
You might find a great deal, might have incredible financing, and it might be in a great neighborhood.
But if you have horrible contractors or simply don’t manage your contractors correctly, you’ll struggle and maybe even lose money.
Therefore, don’t think of “finding a contractor” as a quick and easy task. Put an incredible amount of time, effort, and due diligence into hiring the best contractors.
The more work you do up front finding and vetting contractors, the better your flip will go.
For more on my best tips for finding contractors, be sure to check out my post, “The Ultimate Guide to Finding an Incredible Contractor.”
6. It’s More Expensive Than You Think to Rehab a Property
One of the most painful lessons I’ve had to learn over and over and over in my business is this: It’s far more expensive to rehab a house than you might initially think.
This is especially true for people who are “handy.”
I mean, I know that it would take me about four hours to paint a big room, including trim. So when I think about hiring a contractor, I think “OK, so if they are around $30 an hour, then I should probably budget around $120 for paint.”
Then I’m shocked when all the bids are north of $400! Why? There are a lot of reasons, including:
- Me being optimistic on how long it really takes to do a task
- Me believing good contractors ever work for $30 an hour
- Not counting for the contractor’s “overhead”
- Greedy contractors
Now, when I estimate how much work something takes to get done, I always overestimate everything — and then add even more.
I’d rather estimate too high than underestimate and lose money.
7. Flipping Houses is Not Easy — But It’s So Worth It
I first got into house flipping because of the TV shows.
It just looked so fun and easy. And it IS fun — but it definitely ain’t easy!
Flipping houses successfully requires a lot of patience, practice, skills, negotiation, dealing with people, budgeting, guiding, managing, and more. It’s a lot of work!
Honestly, in the beginning, had I known the truth about how much work it would be, I don’t know if I would have had the guts to do it.
But I’m so glad I did.
Every flip is unique, but each time I get better. Each time I learn more, and my “mental toolbox” is filled with more skills, more ideas, and more strategies for reducing my stress and improving the process.
If you are looking to get into house flipping, don’t let the fear of the unknown stop you. But don’t walk in blindly either. Learn all you can, ask a lot of questions, and find out about the mistakes others have made.
Then, go out there and crush it!
[Oh, and come join me for the next BiggerPockets Webinar, “How to Analyze a Fix and Flip Deal (And Avoid Getting Burned)“!)]
Flippers: What harsh lessons have you learned through your flipping experiences?
Let me know with a comment!