House Flippers: Don’t Expect Top Dollar Every Time
If there is one thing you learn when flipping houses, it’s that the process is never as easy as you want it to be. They sure make house flipping look fun and easy on the TV shows, but experienced real estate investors know it takes a lot of hard work, planning and flexibility to be successful in this business.
Don’t Set Your Sights Too High
One of the biggest mistake many first-time house flippers make is projecting too high of a sales price. It’s easy to imagine that your renovated house will attract a lot of potential buyers, start a bidding war and command top dollar. Of course, you would love to make the highest profit possible. It is just smarter to keep your expectations more conservative.
First, real estate market conditions are always changing. Housing and design trends that are hot one year may not be as big the next year. Home sales ebb and flow throughout different seasons and can fluctuate with mortgage rates, inflation rates, and various other economic factors. You have to understand it will take time to plan and complete your renovations and repairs before the house is ready to sell. The market may change somewhat between the time when you buy the property and when it can actually be sold.
We’re not saying to expect the worse. We are just saying you shouldn’t expect top dollar with every house flip. Some projects go better than others. Some bring more profit than expected. Other times, you may be lucky to break even when all is said and done. It’s a simple fact of real estate investing that there are no guarantees of a big profit.
The Importance of Property Analytics
What you should do is be very detailed when planning out your purchase and renovation budget. Run thorough property analytics to get realistic estimates of costs, as well as projected selling prices. It is usually best to set an estimated price range based on a variety of market factors. If you realistically think your property can sell for anywhere between $300,000 and $450,000 when the renovations are complete, then focus on the lower end of that range.
Give Yourself Room for Profitability
Set your purchase and renovation budgets accordingly and make sure there is enough wiggle room in case things don’t go exactly as planned. At the end of the day, you will want to keep all your costs under $300,000 to ensure some profitability. If you go in expecting top dollar ($450,000), you could find yourself spending more than you need to during the remodeling stage. Or, you might overpay for the property itself. You end up spending $325,000 and then are just hoping to break even or minimize your losses.
Setting a conservative budget and focusing on the lower end of the price range simply increases your chances of being profitable. If you do sell for higher (maybe even the top dollar of your price range—or more), then you will be in great shape. If you end up selling at a lower price, you are still in good shape. You are still making some profit.
One method you can use to avoid overpaying for fix and flip properties and overspending during the renovation process is the 70% rule. It states your maximum purchase price shouldn’t be more than 70% of the projected resale price minus estimated renovation/repair costs. This provides some cushion and keeps you from living on the razor’s edge during your house flip.
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