There’s so much trouble you can get into as a newbie property developer. So much you need to know about closing costs, tax rules for flipping, current mortgage rates, and a keen (often inborn) sense of what sells and what doesn’t.
Avoid the following 5 common mistakes listed below, or it’ll cost you!
1. Buy with your gut, not your heart
This is a common problem that destroys many a newbie developer. Using your gut and not your heart pertains to falling in love with a property – a beautiful space you can see yourself settling in and raising a family, but instead buying it for a flip or rental property. Looks and interior space do matter, but always use the “3L’s” of retail when buying a flip: location, location, location!
Buying a property because it gives you a warm, fuzzy feeling, without considering the area it’s located in is a big mistake. Houses close to transit points, schools, restaurants (ie., essentials and amenities) will generally sell or rent the fastest.
Don’t be tempted to jump right into buying in cozy, growing rural areas that may hold the promise of a future boom either. You can get stuck with these properties for a long time, tying up your investment and creating a situation where you may have to lower the price substantially just to break even and move on.
If you have the capital, or plan to take advantage of a capital gains tax exemption by living on such a property for 2 – 5 years, the risk MAY be worth the potential future reward.
2. Low-budget reno? Plan to lower your asking price too – considerably!
There’s so much detail that goes into renovating a home. Most all flips require some presale updating. After all, it’s hard to find a great opportunity in a home that’s completely modernized and ready to move into, right?
An overly money-hungry, cost-cutting mentality often leads to buying the cheapest fixtures, trim, paint, and other finishing materials. The end result is a house that doesn’t sell, or receiving bids from home-buyers who consider the cheaply finished house as a “fixer upper” – ie., people who would have bought from you without the bargain-basement renovations you invested in. Factor in the cost of installation (contractors or your time) for the cheap materials and you have a great recipe for zero end profit.
3. Don’t be a rapacious seller
This problem can be as much the fault of an overzealous realtor, as it is that of the greedy flipper. Over-valuing a house – like so many newbie mistakes can leave you holding the bag – on the hook for various fees, holding taxes and renovation costs indefinitely.
HouseHop.co.uk suggests getting a minimum 3 separate valuations before deciding on an initial asking price for any property. Taking it a step further, the property acquisition firm suggests when searching for the best realtor to sell a property, always ignore the high-ballers in favor of those with the more modest assessment of a property’s value. Agents who overvalue houses end up under-delivering when it comes time to close a deal, if they manage to sell the property for you at all.
4. There’s a season for everything
Timing is everything when it comes to getting top-dollar. Houses that sit on the market for long periods are prime targets for frugal homebuyers and thrifty flippers to swoop in with low-ball offers. For a variety of reasons, this reality can make you vulnerable to being, or feeling forced to sell at a discount.
Most realtors will tell you spring and autumn are the best times of the year to sell, but you really have to put some of your own research into the area the property’s located in. In many areas of Florida, for instance, peak selling times are November – April (winter through the start of spring).
Thursdays are a prime day to list: when Saturday rolls around in a couple short days, the property is far more likely to attract a high closing price because of the short listing time. Fresh listings pull hungry house buyers in way more than a marble countertop or functional wood fireplace.
This Time article warns that January is the worst time to be a seller in most places, but may well be the best time to find depressed or otherwise under-valued properties.
5. Forget the personalized touches
Just as you’ll rarely find a good flip with your heart, you probably won’t sell one when you dress it up the way you’d want it if you were to live in the home. You can read current decorating trends until you’re “blue in the face” but bright white walls (which are easier to paint over) will fetch far more eager buyers than turquoise or mauve ones will.
Personalized touches often cost you (much) more than they add in value. Leave buyers with a blank canvas to work with, and they’ll be able to visualize the end result they’re looking for in their home much easier.
Where to Start?
Before tycoon Donald Trump came his real-estate mogul dad, Fred Trump. Without his dad’s extensive teachings, “The Donald” may never have graduated from flipping houses in Cincinnati to luxury penthouse apartments and corporate skyscrapers in NYC.
Find a mentor. Someone who’s lost and made a few dollars flipping properties already. Learn how they identify properties, negotiate closings, secure affordable financing, determine a renovation plan, set budgets, find contractors and realtors, etc.
Real estate flipping isn’t an industry you want to jump headfirst into!