Pitfalls To Avoid When Flipping

Nine Pitfalls to Avoid When Flipping Houses Part 1

By Iris Veneracion

With the popularity of all the TVs shows, flipping houses is trending more than ever! So if this is something you are looking to get into, read on for a hit list of things to avoid as you venture into this exciting and very lucrative business.

I did my first flip back in 2003 while working my W2. Within 3 months of closing that first flip, I fired my boss and bought nine houses that cash flowed (out of state). Since then I have flipped over 200 houses in Southern California area and I still love what I do!

What I am about to share is a distilled list of many of the mistakes I did as a rehabber…so hopefully you won’t make the same…and if they happen, you just have to forgive yourself!! After all, some things you just need to go through to learn it. Obviously, this is not a definitive list.

The successful real estate investors follow these three important steps:

 1) You don’t ask for enough money/set aside enough money/estimate enough money for your renovation.

This reminds me of a recent lesson learned by a very good friend of mine. She did her first flip in San Diego and she had a good amount of cash to bring to the table to get the deal funded…AND you must also remember the next 2 very important things:

1. Your monthly payment on your hard money (assuming you are financing your purchase): Typical hard money is at 12% & 2pts @ 80% of Purchase Price

For example, if you have a purchase price of $500K, your 1st @ 80% will be $400,000. You will need to bring in the remaining 20% (in this case $100,000). Your monthly interest-only payment will be $4K a month!

2. Some hard money lenders, like Trilion Capital, will even finance the repairs for you. So in my friend’s situation, she put the $100K down to fund it and she got additional funds of $75,000, to do the repairs. What she did not realize is that the lenders work on a “draw” system. Hence the work must be done first and after it is completed, they will release a certain percentage of the rehabs funds or “draw”. What that means to you is, you will have to come up with the money to pay your contractors up front and then get your money back after the progress payment has been approved. This could mean you could be fronting an additional $10-$15K up front before you get paid back. Be very careful and have monthly reserves available.

For your first deal, my advice to take on lower-priced deals so that monthly overhead is not so high… So for example, if you purchase a $200K fixer and put 20% down, your monthly payment would be $1800, which feels more manageable.

When you are making payments every month you can go through money very fast, especially if you have more than one job going on…which leads me to the next pitfall.

2) Having a weak accounting system                                                                      

There is nothing more terrible than at the end of the project not knowing how much you spent. If you don’t know how much you spent, how will you know how much you profited? When you are on a project, be sure to set aside time every week to input your receipts and look at your numbers. You don’t have to have Quickbooks or a bookkeeper like I have, an excel spreadsheet will work too.Know your ”burn” rate! The burn rate is defined by how much money you are spending on a property every day. I’m not talking materials or contractor payments. I’m talking how much a property is costing you per day, regardless if work or no work is getting done. I usually take the sum of monthly mortgage payments plus an average of monthly utilities and maintenance (ie landscaping or pool) divided by an average of 30 days. So back to my friend’s example: $4000 + $200 utilities + HOA fees (if applicable) $80 = approx. $143/day.I want you to think about this, every day that passes that something is not being done to the property to help it get to the finish line…is like throwing away $143.   I can think of a lot of better things to spend that money on!

3) Not Checking in with your contractor enough

I am not saying to micromanage your general contractor, but you must check-in with them. This is even more important when you are subcontracting things out. Find out if they will finish in the time allotted and if not, why and what problems need to be resolved.Visit the property minimum once a week (more is better) to ensure progress is happening. Especially with general contractors, it is very easy for them to start other jobs and let yours go by the wayside if they know you will not be checking in with them.TIP: Take care of your contractors. Inspect the work. Let them know what you don’t like. You will find that contractors do want to make you happy. PAY FAST, PRAISE LOTS…it goes a long way.This is YOUR DUTY. BE the SQUEAKY wheel.

4) Forgetting to Check Licenses and Insurance Bonds                                    

Even with contractors, you have used several times, it is very important to double check their license and insurance bond. It is very easy, Google contractor state license or go to http://www.cslb.ca.gov/.Be aware if there is a claim on their bond. Now you don’t have to hire every single person with a license. I have a full staff handyman that has no license but does great work. However, I leave the major things, like plumbing, roof, electrical and HVAC to licensed guys. The point is that if you are going to take the time to hire some with a license, at the very least check that they are current, active and not suspended or canceled or have some m complaint against them.

5) Overlooking Trash Management                                                                                 

I have been pinched more than a few times with trash! There is so much trash that is created during a job that either you need to have a bin onsite (careful this attracts city inspectors) or you need to a have a hauling service throughout the job timeline.

If you have several contractors working at your job site, make sure they work clean. I make it a point that each contractor is responsible for all the trash they create at my job sites. They must keep the site clean and haul anything away that they create.

But be careful though…especially if you have several different contractors working at the site. If one trade starts a pile (or if one was left there), there is no doubt, as a matter of fact, I guarantee that the pile will grow until it becomes its own monster that no one will take responsibility for!

Again, I make sure that each contractor is responsible for all the trash they create. If it is not in the contract or proposal they give me, I will at the very least discuss it or have them add it.

It is ok to use the trash bins at the job site. Make sure they put recycle as recycle and trash in the trash and take advantage of the service by taking bins out every week.

Also in most cities, the trash companies will allow large item pick-ups – in our city, it is 4 bulky items 4x a year. This is great for disposing of old toilets, old doors, heaters, useless garage items.

When you order new appliances, usually the delivery company will haul away the old appliance.

OK, that’s enough for today. Look for the next blog that will finish out this list.   If you have questions, feel free to reach out at IrisV@REInvestClub.com or catch me at WREN LA on Feb 28th!