Flipping houses always comes with some financial risk. If you do it right, though, you can decrease your risks without decreasing your potential profits. In the real estate business, the more research you do and the more solid relationships you have, the better off you’ll be.
If you’ve been watching our show, you know that Tarek and I recently paid $332,000 on a house that we thought would only need about $30,000-40,000 in rehab costs. As we got into the project, though, we kept finding more and more unpleasant surprises. Not only did we find a prosthetic leg in one of the bedrooms (really!) and roaches, ants, and mice in the trash that the old tenants had left behind, but we kept finding new costs to add to our rehab, too.
Our project manager started our estimate off at about $47,000. Then he found a DIY plumbing disaster in the garage that added another $5,000. And then he found electrical tape-covered wires spliced into the wiring all over the house, adding another $4,000. With another $5,000 in necessary upgrades, before we knew it, our costs had jumped to almost $400,000. With market prices in the area around $430,000-440,000, we were pretty nervous.
So, how did we get in that crazy situation? Well, with this house, we couldn’t actually get inside to look around before we bought it because there were still tenants living in it. And even though we closed in just two weeks, we still had to wait a full three months to get them moved out. By the time we got into our new house, we thought we were prepared for the worst, but you never know what will happen when you buy a house sight unseen.
Start with Houses You Can Walk Through
If you’re nervous about getting into the same kind of situation that Tarek and I had with this nightmare house, you can start with safer investments in your first few months of house flipping. If you stick to only investing in houses that you can get inside and get an inspection of first, then you’ll minimize the risk of getting bad surprises like we got with this one.
Build Relationships with Multiple Investors and Lenders
That said, if you don’t ever consider sight-unseen houses, you’re cutting out almost the whole foreclosure market. You won’t ever get the opportunity to do a walk-through or an inspection on a foreclosure auction property, and those can be some of the most profitable properties you’ll find if you know what you’re looking for.
So, instead of cutting out opportunities for good investments, always do as much research as possible. Then, when you have your projected budget planned, look at how much room you have for plumbing, electrical, and/or structural disasters. Finding out that you need to spend an extra $10,000 on a rehab can be really hard to hear, but if you can still make $40,000 on a job that only takes a month or two, it’s definitely worth it.
Of course, that means you need to make sure that you’re going to have enough money to cover your overages. That’s why we’ve worked hard to build and maintain relationships with multiple lenders and investors who can help us finish the job and make everybody some money.
Always Keep an Eye on the Market
Finally, don’t forget to keep an eye on the market in your area, and not just what it’s doing right now. Looking at the trends over the last year to eighteen months can help you make the best house flipping decisions for your real estate business. If the market’s been stale for a while or it’s really volatile, you’re looking at more risk and should take some time to weigh your rewards, too. Follow these tips, and you’ll feel more secure with more protection against financial risks with your flips.