Flipping a house for profit may look like an easy thing to do, though it is anything but. While this business model has been extremely successful for many real estate investors with acute financial acumen and a sound understanding of the market trends, house flipping is also full of minefields that can sometimes be a little hard to navigate, especially for beginners.
So, if you don’t want your venture to flop and suffer a huge loss, you should try your best to avoid the common house flipping mistakes most people tend to make. These tips will not only help you successfully flip a property but also provide you with some insight into the industry.
Biggest House Flipping Mistakes Most Beginners Make
Here are the top mistakes to avoid when flipping a house in Pakistan.
Buying a Property That Is Too Expensive
Flipping a property refers to the process of buying an old or distressed-looking house for a low price, fixing it up, and selling it for a high profit. Usually, fixer-uppers are listed for a lower value than other homes in the same neighbourhood. However, just because a property is relatively less expensive than those around it, doesn’t mean you are getting the better end of the deal.
More often than not, beginners end up paying too high a price for homes that need a lot of work. To avoid this mistake, consider inviting an experienced real estate agent to tour the property and quote a justified price. You can also get a professional home inspection to determine if the house has suffered any structural damage. It will give you a clear picture of the condition of the property, which will help you determine the right price.
As a rule of thumb, investors should never spend more than 70 percent of the estimated post-repair value when purchasing a property to flip – and this includes the cost of repairs as well. In other words, if you think you will be able to sell a property for PKR 1 crore after fixing it up and estimate the total renovation costs to come up to PKR 10 lakh, then you shouldn’t spend more than 60 lakh on buying it.
(6,000,000 + 1,000,000 = 7,000,000, which is 70 percent of 10,000,000 or 1 crore)
On a side note, the costs of house repairs can fluctuate with time. Therefore, investors must always be prepared for unexpected expenses when flipping a property.
Choosing the Wrong House to Flip
Just because a house is available at a low price, doesn’t mean you will be able to flip it and make a profit. Unfortunately, one of the most common mistakes house flippers make is buying the wrong property. They sometimes underestimate the cost of renovations or miscalculate their budget, which results in them losing money instead of making any.
However, there are a lot of things one must take into consideration when putting together their house flipping business plan. If you are a beginner, please note that flipping a home is not cheap by any means. This business, just like any other, requires a significant amount of capital along with hard work, time, and patience. You must also keep an eye on the latest market trends and determine if the location, orientation, and layout of the property add to its value.
Now, you may be wondering how to find houses to flip. Well, the best way to go about this would be to hire a real estate agent. These professionals not only know the market conditions but are also well aware of the area they work in, which means they can guide you to the properties that are relatively cheap, easier to renovate, have market value, and are located in a sought-after neighbourhood. Sometimes, you can make a big profit on old houses simply by giving them a fresh coat of paint and polishing the floors. Other times, you may have to install new cabinets or replace the tiles in the bathroom for a more contemporary look.
Working with the Wrong Contractor
One of the biggest house flipping mistakes you can make is working with the wrong contractor. Although the problem may not seem that serious on the surface, the truth is that a bad contractor can turn your potentially profitable venture into a bad financial move. If an investor ends up hiring a professional who does not use quality products, rarely shows up on time, cuts corners, fails to pull permits, and overcharges for their inferior work, the chances are that they will lose more money on that property than they are likely to make.
Therefore, the first thing house flippers need to realise is that many contractors don’t care about such projects unless they are splitting the profit with the investor. Meanwhile, as the person who has invested their hard-earned money into a fix-upper, the investor must make sure to ask the right questions before hiring a contractor and have a basic understanding of how to read construction blueprints. These skills will help them navigate the previously unchartered territory of home repairs and renovations with relative ease.
It is also important to add that taking on major home improvement projects without hiring a contractor could be a bad decision, particularly if you don’t have any experience fixing houses. Common home renovation mistakes can turn into a rather expensive nightmare, thus putting a sizable dent in your bank account.
Over-Improving a Home
Over-improving is perhaps one of the most common mistakes house flippers make. It is really easy to get carried away while renovating a house and eventually making it too high-end for the local market. Though it may sound a little funny, the truth is, it happens very often with beginners. Being new to the house flipping business, novice investors spend a lot of money on improving the condition of the house in a bid to attract buyers. However, sometimes, the ultra-expensive features of the house make it stick out like a sore thumb in the sea of similar properties with a far lower asking price.
The best way to avoid such house flipping mistakes is by adhering to the 70 percent formula mentioned above. Once you have purchased a property, consider working with an experienced real estate agent to determine its post-repair value. It will give you a fair idea of how much you should further invest in the house to be able to sell it for profit.
It is also a good idea to visit other houses for sale in the area and take a stock of their features. This will prevent you from making costly additions to the home that likely won’t pay off. Personalised décor is also something investors must stay away from when giving the property a makeover. Instead of letting your personal taste get in the way, choose quality material that will add value to the property without making it too expensive. Otherwise, you won’t be able to make much of a profit.
Overpricing a Property
Last but not least, one of the biggest mistakes to avoid when flipping a house is overpricing it.
Prospective homebuyers don’t care about how much money you have invested in a property or how much profit you would make from the flip. All they care about is the current market value of the house. Moreover, many homebuyers don’t like to pay extra money for a house, even if it has been recently renovated.
As a result, many flipped houses continue to sit in the market for long periods before investors are forced to reduce their prices and lose a chunk of their profit. In some instances, they may even take a loss.
So, how can one overcome this pitfall of flipping a home?
To avoid making this mistake, investors must first understand the conditions of the market. Those who are unfamiliar with the house flipping business plan should know that there are two types of markets in real estate: buyer’s market and seller’s market. These trends and forecasts play an important role in the process of pricing a property.
A seller’s market occurs when the demand exceeds the supply. In other words, when the number of buyers exceeds the number of houses currently up for sale, the property prices go up as the buyers become more competitive. This situation is beneficial for the sellers, as it drives up home prices. Meanwhile, a buyer’s market occurs when the supply exceeds demand, or the number of houses currently up for sale exceeds the number of buyers in the market. Such conditions force sellers to lower their asking prices to appeal to more buyers.
Understanding these two concepts will keep investors from overpricing the properties.
To conclude, if you are planning to flip houses to make a fortune, it is important to understand the risks involved. You should refrain from buying a house that is too expensive and must supervise the renovation yourself to ensure the contractor does not cut any corners. In addition, choosing the wrong house to flip, over-improving, and overpricing it are also among the most common house flipping mistakes beginners tend to make.
You can also check out our guide on the proven benefits of house flipping for more information.
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