House Flipping: Setting the Right Expectations
House flipping is an exciting business venture. If you are thinking about exploring this real estate investment opportunity, there are many factors you need to consider. It is important to do your research and develop a sound business plan before you jump into such a major investment. Real estate is not cheap, and flipping houses isn’t all fun and games like they make it look on TV. A bad fix and flip investment can be financially devastating, so you want to avoid common mistakes that many first-time house flippers make.
Unrealistic Expectations = Lost Profits
Perhaps the biggest mistake we see at PropertyLark is fix and flip investors coming into the situation with unrealistic expectations. They think the process is going to go easily and they expect to make a huge profit when they sell the house. The truth is many first-time investors actually lose money—or, at the very least, don’t clear a ton of profit with their first attempt. The first investment often turns into a good learning experience. Even the most experienced house flippers know that something new can be learned from each new investment journey.
So, how do you set proper expectations when approaching your first house flip?
Success Starts with a Plan
The first thing you have to remember is that this is a business. If you approach the investment as just a fun thing to try on the side, you will probably not get the results you are hoping for. You should have a plan that involves a detailed budget for the purchase of the property and the renovation of the house.
It’s a great idea to be ultra-conservative when projecting your budget and renovation expenses. Complications and delays almost always arise during the remodeling phase. If that cushion is not built into your budget, you will fall behind quickly and this is how you lose money when the deal is all said and done. You have to expect the unexpected and budget for the worst-case scenarios. If you end up coming in under-time and/or under-budget, then that’s great. Just don’t go into the investment with razor-thin margins. That is often a recipe for disaster!
Projecting a Realistic Resale Value
You should also be very conservative when projecting the resale value of the the house. You may see a hot seller’s market in the area where you are buying and renovating, but market trends can turn on a dime and there are so many variables involved. Build your investment plan based on the low end of the price range you expect the house to sell for once it is fully renovated.
If you think the renovated property will fetch somewhere between $500,000 to $700,000, then project your sale at the $500,000 price point. Use this when planning out your renovation budget and also when setting your ideal purchase price. Let’s say buying the house will cost you $300,000 and you conservatively estimate the renovation will cost you $50,000. That leaves you plenty of meat on the bone with a minimum $150,000 profit. If you get more, even better!
However, if the low end of the home sale is $500,000 and your purchase price plus renovation costs add up to $475,000, then there isn’t any wiggle room and it’s probably not a good investment at all. You can hope that you get closer to $700,000 from the sale, but that’s a huge risk based on hoping that you hit the high end of your projection.
Make the Right Investment Decisions
There are never any guarantees in real estate investment. This is why you want to be conservative in your estimates and projections. This is why you want to set your expectations accordingly to avoid disappointment and prevent a disastrous outcome.
Qualified members of the PropertyLark home buying network have access to exceptional home search tools, off-market property listings and cutting-edge analytics tools. We can help you run the numbers and determine if a house is a good fix and flip investment or not. To join our exclusive network, apply on one of our home buyer pages.