Let’s call him John. A bright and hard worker just trading time for dollars at his regular job. His first house flipping experience could have been a lot better.
John was watching “Property Ladder” on the A&E network one day and got the bright idea to flip a house himself. After all, those people were making money. A complimentary show “Flip This House” confirmed that money could be made, lots of money.
If you haven’t seen Property Ladder, it’s a television show that features first time home flippers. Usually in that show the inexperienced flipper, egged on by Kirsten Kemp, make almost a year’s salary or more by fixing up an old house and selling it. Kirsten Kemp is a veteran of flipping houses and is a bit too pretty to be mistaken for Bob Vila.
John figures that the people featured in these shows are not all that bright and certainly he could do as well. With a bit of nervousness John put a 10% down payment on a home that needed repairs and begin the repair process. Or did he?
The first thing John did was to ponder what really needed to be fixed and if he needed a contractor to do it. Two weeks went by.
After getting several bids, John chose a contractor to come in and totally renovate the property for $11,000. That included paint, carpet, appliances, and a new wall to turn an open area into another bedroom. Once it was agreed, the contactor was to start working. As luck would have it, the contractor had some unfinished jobs and couldn’t start for another two weeks. John was patient, after all it was going to be a great flip and he was going to make money. It was just another $800 for an extra month, no big deal.
Once the contractor started he stared with a bang. Just like on the show “Flip this House” a big yellow dumpster was deposited on the lawn and a crew started ripping out wall paper and junk from the house. That demolition lasted about two days.
The next thing this “go getter” contractor did was to disappear for another two weeks. The excuse: Men had quit and another job was pushing them behind.
To make a long story short, the contract took 8 months to get nearly complete, and then John pulled the plug and fired the contractor.
John paid others to come in a finish what was started. He had now 9 months of house payments into the project, 10% down, and construction costs.
After the house was ready, John listed it with an agent, and it sat another month. John lowered the price a bit with the prompting of the agent, but got cold feet after two weeks and wanted to raise it again. Too late! The house had a full price offer. Good news, sort of.
All said and done John made a little money and got a whole lot of experience. It was a flop, but at least he didn’t lose money.
Let’s review what John, now wiser, could have done differently on his first flip.
Firstly, putting 10% is ok, but not ideal. John should have used private money or have financed the property at 100%. That money could have been used for fix up rather than being tied up in the property.
Second. John waited too long to decide what he was going to do. He should have known before he bought the property what his plan was. This would have saved two weeks at least.
Third. While John got a referral for the contractor, he should have gotten more bids. A deadline for the completion of the job, with penalties, should have been written in the contract.
Fourth. John waited too long to fire the contractor once he knew there was a problem. He was afraid that he would still owe the full amount if he terminated the contractor before the work was done. A proper contract would have prevented that fear.
Sixth. John listed with a realtor too early. The property should have been for sale by owner from day one and John should have tried to market the property himself.
Seventh. The price was set, and then changed too quickly. Better marketing would have netted John with a nicer profit. John should have known the selling price even before buying the property.
A lot of mistakes were made, but John still made a slim profit. All is well that ends well, but you don’t need to make these same mistakes. Learn from John.
Scott Ames is publisher of BirdDogCity.com a website dedicated to those interested in flipping houses for profit, either retail or wholesale. You may visit the site at http://www.birddogcity.com
Tags: flip houses, flipping, investing, real estate, real estate investment
In my profession I get to see a lot of homes that were bought for investment purposes.
Many of these homes will bring a profit for the Owner. Some on the other hand, will be a huge liability for their Owners because the Owner did not do his/her research.
Many flippers only think about the cosmetics of a home when purchasing it. Failure to have a thorough inspection of the structure, electrical, mechanical and plumbing can lead to repairs equalling what they paid to rehab the home.
I had a buyer purchasing one of these homes from one of the large corporations that purchase “anyone’s home for any reason”. They’d done a pretty good job of fixing it up cosmetically, however there were serious issues concerning the framing and electrical.
I found undersized braces in the attic as well as cracked and broken rafters. The electrical system was outdated and looked like an amateur had wired the home, including the breaker box.
Long story short, my Client walked away and the Coroporation had about $10,000 more dollars to sink into the home to make it safe.
Sadly, it’s usually the first time investor who get’s stuck with these homes. For whatever reason they fail to have the home inspected by a Professional Inspector. Only when the Buyers inspector shows up are they aware that there are major issues with the home.
Even on smaller homes less than 2000 square feet, it doesn’t take many structural repairs to eat through 10 to 20 grand.
Before deciding on purchasing a home for flipping, have a competent home inspector look it over. Expect to pay between $300 and $600 for a 2000 square foot home. Consider it money well spent. Beware of cheap inspectors. Like any profession, if a company is dirt cheap there is a reason. You get what you pay for!
Donald Lawson is a Professional Real Estate Inspector licensed in Texas (#5824) and Oklahoma (#454). He currently owns and operates V.I.P. Home Inspections, a multi-inspector firm in Houston Texas. To find out more about home inspections in Houston Texas or about Houston Real Estate, just click any link in this resource box.
Tags: flipping, flipping homes, investment real estate, investment tips, real estate