Following on from previous challenges on short-term property strategies, we are going to look at the top 5 mistakes that investors make when flipping a property. Fixing and flipping of properties is a common short-term strategy used to make short-term returns in property when the deal is not suitable for longer-term investing. It has also become a full-time business for many property investors.
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As flipping property is a key strategy for property investors, we are going to explore the top 5 mistakes that property investors make when flipping properties. Some of these mistakes have been personally made by The Property Collab Team and other from partners of the team.
We know how these mistakes can hurt but financially and emotionally, so we thought it important to point these mistakes out.
When looking to purchase a property for renovating and flipping, it is critical to perform due diligence before making any offers. One of the most critical parts to this due diligence phase is knowing what you can sell the property for once the renovations are complete.
During the excitement of finding a desirable property, investors often look to online portals to see what prices properties in the area are currently listed for. This is a massive mistake. The listed price and the eventual sales price can be substantially different.
Looking at property reports and actual sales is a much better form of establishing a sales price, but it is important to note that these sales price can also be outdated.
It takes 3 months to transfer a property in South Africa. So, a property that has been recently transferred, the price is already outdated by 3 months.
It is also recommended to call and discuss this property with 3 different estate agents and obtain an estimate from each of them. Discuss with them what renovations you intend to do and what they feel they can sell the property for.
Do not ask an agent how much they can sell the property for.
Ask them how much they could sell the property for in 30 days.
This could be one of the most common mistakes that happen when flippin’ a property. Always remember that this is a business decision, not an emotional decision. The numbers that result from the due diligence process are invariably what will result from this deal.
If the numbers do not make financial sense, DO NOT proceed with the deal. You may think it looks nice or maybe the ideal property that you might want to live in, but if you want to flip the property, follow the numbers only.
“Buy with the calculator and not with your heart”
It is very important to look at your exit strategy before entering into a property. Many times investors are so concerned with purchasing the property that they fail to consider all exit options.
What are the different exit options? If you are flipping the property, to sell the house would be your primary exit strategy. Do you sell this by yourself privately or use an agent?
What if the market changes? Do you have a backup strategy? Can you rent it out for a year to see if the market changes? If you rent it out, are you going to cover your costs or is it going to cost you more money every month?
These are important questions to ask, and important answers needed for your due diligence.
Always have 2 different exit strategies that make financial sense, before you enter a deal.
We all know this won’t happen, but somehow we think that this time will be different.
This time the builder will come in on budget and on time.
Or better yet, do the work yourself so that you can stick to your budget and your time frame.
It won’t happen. Period. Allow contingencies in your budget for extra material, extra quantities and unknown’s that may arise.
It is also worthwhile adding extra time on whatever the builder has told you. This is important as holding cost will still need to be paid.
Key Take Away:
Always make provisions for extra materials and extra time.
The due diligence phase is the most important part of any flip. You need to ensure that you have covered any possibility that may arise. Yes, this is impossible, but from mistake 4, if you are not sure, make a contingency for it.
An investor once told me that it was too expensive to have their property inspected before purchasing. When they started renovations, the damp that they found in the ceiling ended up costing 3 times what the property inspector was charging. They should have known this cost upfront.
Always make provisions in your due diligence for any problems that may arise. Take the time upfront to be thorough.
Whilst this list is not exhaustive of the mistakes when flipping houses, we believe these cover the most common.
Have you made some mistakes when doing a flip? Why don’t you share these with the community and help prevent these from happening in the future? We would love to hear your stories.
Let us know if the forum and we will organise a special prize for whoever has the most creative story!