This year has been tough on the housing market.
Home prices are historically high in the U.S. They are expected to rise more than 4% next year. Inventory is also tight. Zillow found that the country is short of 4.5 million homes.
In this uncertain housing market, however, investors in one segment are seeing better returns. And that is the fix-and-flip market.
Attom’s Q1 2024 home-flipping report revealed that house flippers earned average gross returns of 30.2% on their investments from January to March. This marks the 3rd profit increase in the past 4 quarters.
Hence, it’s a good time to dip your toes into the fix-and-flip market. But first-time house flippers often make some mistakes that can turn the flip into a financial nightmare. To make sure you don’t be one of them, we’ll discuss some common mistakes here.
Mistake #1: Forgoing Research
This is where so many first-timers trip up. They dive into flipping houses without understanding the market. Don’t make that mistake.
Before you buy a house to flip, you need to do your research—a lot of it. Understand the local market, the neighborhood, and what buyers are looking for in that area.
If you don’t research the neighborhood and crunch the numbers, you might end up with a house that sits on the market for months. Or worse, you could overpay for the property.
A thorough inspection of the property is also important. Just because a home looks fine on the surface doesn’t mean it’s free of hidden issues. That charming fixer-upper could be hiding major problems like a leaky roof, faulty wiring, or even structural damage. These surprises can quickly blow up your budget and timeline, turning your flip into a financial sinkhole.
Yahoo advises checking for foundational issues, roof, property drainage, plumbing issues, and termites. According to the web service provider, these are the top five expensive problems.
Mistake #2: Not Understanding Financing Options
Not understanding your financing options can sink your house-flipping dreams before they even start.
Do you know how you will pay for the property and renovations? Do you plan to use cash or obtain a loan?
Most people don’t have enough cash to buy a house outright. That’s where financing comes in, but it’s not as simple as a regular home loan. For flips, you’ll likely need short-term financing like a hard money or fix-and-flip loan.
Unlike traditional mortgages, fix-and-flip and hard money loans are specifically structured to allow real estate investors to buy, remodel, sell, or refinance properties swiftly.
Many consider the two loans the same; they are different, however. Hard money loans solely focus on the asset, but fix-and-flip loans consider both the borrower and the asset.
While you can pick either of the two, go for hard money loans if your credit score is less than perfect.
According to Source Capital, hard money lenders put less emphasis on credit scores, which makes it easier to secure a loan. As these loans are used to flip houses, lenders are more accepting of the diverse financial situations of real estate investors.
Mistake #3: Over-Improving the Property
It’s easy to fall into the trap of making your flip perfect. Fancy tiles, high-end appliances, and custom finishes might look incredible, but will buyers in your target area care?
If your flip is in a modest, middle-class area, adding a $10,000 chandelier or marble countertops won’t make the house worth more. You’ll just end up sinking money into upgrades you can’t recoup. Buyers shopping in that area likely don’t want a luxury property—they want functional, modern, and clean.
Focus your budget on fixes that add real value, such as fresh paint, durable flooring, modern light fixtures, and updated kitchens and bathrooms.
To prevent over-improving the property, real estate expert Jamil Damji advises checking out the neighborhood where the home is located to see what others are doing to improve their space. Sites like Zillow can help you see what features are prominently displayed in their accessible listings.
Mistake #4: Trying to DIY Everything
We get it—YouTube makes it look so easy to lay tile or install cabinets. But unless you’re a licensed contractor, leave some work to the pros. DIY can save money, but messing up can cost you even more.
Painting walls or installing hardware? Sure, DIY away. But when it comes to plumbing, electrical work, or anything structural, leave it to the experts. Not only do these jobs require specialized knowledge, but they often need permits and inspections to meet local codes. Cutting corners here can lead to failed inspections or even safety hazards, scaring off buyers.
Flipping houses can generate capital gains in a short amount of time. But if you go into it impulsively, you’ll make these mistakes, which will turn a great opportunity into a costly disaster. So, take your time, do your homework, and don’t let the excitement cloud your judgment.
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