Common Problems with Flips
Common Problems and Mistakes to Avoid when Flipping Houses
#1 Pitfall to avoid: Not managing your expectations.
Managing your expectations in terms of time and profits is an important factor for success.
The reality is that house flipping is not a get rich quick scheme like a lot of seminars and shows portray it to be. It takes a lot of planning, time, work, and money to flip a house. All of these factors contribute to the others also, for example minimizing costs by doing more of the work yourself can extend the timeline, while a lack of upfront planning can balloon time, work, and costs.
#2 Pitfall to avoid: Not knowing how to spot large dollar renovation issues when house shopping.
Learn as much as you can from mentors or online research before shopping for your first property so that you can spot and avoid big ticket items.
Recognize mold issues, foundation issues, asbestos issues, roof issues, etc., and know if your budget allows for these more costly renovation items. These issues should not always be deal breakers, but if you don’t have a good idea how to budget for them then they could derail your project.
#3 Pitfall to avoid: Making emotional decisions instead of data based decisions.
Rely on logic and research, not emotion for investment decisions.
When selecting a house to buy, deciding when and if to sell it, selecting contractors, or choosing floor plans and finishings, every decision you make should be based on the data you have about the market and your budget, not about your personal preferences or any attachment to your properties after finishing them.
It’s also important to remember that you are running a business, and your business goals may run contrary to what your tenants or buyers want at times. While you will definitely want to provide quality properties that are safe and habitable, and treat people with kindness and respect, as a business owner, it’s not important that you please everyone. Some people are unreasonable and will try to take advantage of you.
Tenants often assume that landlords are wealthy, when in reality many small landlords are actually making less than their tenants in annual income. You will have to be comfortable with conflict at times, whether over small issues, such as deducting damages from a security deposit, or large issues such as an eviction. Working with a property manager to manage your rental units and a real estate broker for purchases and sales can help minimize direct conflicts with buyers, sellers, and tenants.
#4 Pitfall to avoid: Not knowing the law when it comes to accepting money from investors.
Regardless of whether it’s family, friends, or business associates, speak to a real estate attorney before accepting investor money.
Review the interstate commerce laws with your attorney if you are working with out of state investors, and discuss options for how to structure your corporation or entity to accept funds. Have a contract with terms that work well for you and don’t just get distracted by dollar signs. It’s important to understand how accepting investment money can create outside pressures and legal responsibilities in addition to the already stressful task of renovating a property and managing contractors. Some investors and business developers say to never use your own money for a project, but this is not advice for every scenario.
#5 Pitfall to avoid: Cutting corners to save costs.
Do quality work and don’t cut corners so you build a good reputation and have buyers lined up to buy your properties, and so that you avoid lawsuits from buyers.
We’ve seen some low quality house flips where the investor chose to cut corners such as skipping the insulation, permits, licensed contractors for plumbing, electrical, and structural work, skipping foundation repair, adding more bathrooms than historic sewer lines built for one bathroom can handle, using cheap, toxic materials, or not reinforcing second floor joists when adding a second floor bedroom and bathroom to a previously unfinished attic. This sort of thing is more terrifyingly common than you’d think, and it can lead to serious legal properties, and terrible reputation in your market, and serious financial or physical harm to your buyers. If you can’t afford to do quality work, you should NOT be flipping houses.
#6 Pitfall to avoid: Violating Fair Housing Laws
The Fair Housing Act protects against discrimination for renters, home buyers and those securing financing for any housing.
The Fair Housing Act specifically addresses discrimination because of race, color, national origin, religion, sex, disability and the presence of children. It covers most housing and most circumstances for licensed real estate brokers, as well as several specific state and local laws, prohibiting landlords from choosing tenants based on certain criteria. If you are not familiar with these laws and following them carefully, you may find yourself in big legal trouble. Even though it seems like any decent and fair person would not run into trouble with these laws, they are very specific, and you may find yourself in violation if you do not know exactly what the laws require.