Pitfalls To Avoid When Flipping A House Part 2

Nine Pitfalls to Avoid When Flipping Houses Part 2

By Iris Veneracion

In the last article, I dove into the first five pitfalls to avoid when flipping a house. If you didn’t read it, go do it now.

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.

Ok, let’s get started…

 6) Forgetting to Order a Title Binder During the Purchase Escrow

As a flipper, the goal is to fix up and resell a house within a year (or less). During your closing escrow, you can request to purchase a title binder from the title company that is issuing title insurance on the transaction. This can save you literally hundreds, sometimes thousands of dollars when it is time to re-sell the house on the retail end.

A quick example. Say my purchase price for a property is $500,000. In California, the seller is typically responsible for paying title insurance on the property. A policy on $500,000 will run about $1500. If I request a title binder when I purchase the property, I will maybe have to pay an extra $125.

Now let’s say I turn around and sell the property at $700,000. As the new seller, I am now responsible to pay for the new owner’s title policy. If I didn’t not get the title binder, my new title fee would be around $2100. But because I purchased a title binder, I would only have to pay the difference of the old purchase price and the new selling price…so my new owner title policy will be based on just the $200,000 (say about $600) instead of $2100 (based on the $700,000)!

Remember to get a title binder. This must be done at the purchase escrow.

7) Failing to Plan Ahead                                                                   

Take time, in the beginning, to plan and decide on what to do. Not that you can’t change your mind later but you can ask any contractor, plan changes are often the costliest! There is a famous saying in woodshop class, “measure twice, cut once”. I take the same approach when scheduling my timelines and planning my rehabs.

TIP: Take lots of pictures in the beginning – from every angle, in each room. Usually, I take them at each corner. Not only do they make for good B4 and after pics but a picture is worth a 1000 words! Sometimes it won’t hit me that there is popcorn on the ceilings…looking at pictures are very telling. Take pictures of anything weird… ie soffits that can be removed and unnecessary closets that can be expanded into bigger closets. Weird holes or stains from leaks, large cracks…this can be telling.

If you know you are closing next week…call utility companies this week! If you are scheduled to stage next week, better be buying appliances this week as delivery needs to be scheduled. Be mindful of things that need to be special ordered and plan accordingly. One good example is windows…I use a great custom window guy. He has great prices for custom windows but it still takes up to a week to get all the windows cut and ordered.

8) Not having a Contingency Plan

As flippers we all like to believe we bought right, we hired right and that we are cool but sometimes bad things happen to good people. Always have a contingency plan. Ask yourself, what is the worst case scenario and are you prepared for it?

Are you willing and able to make payments to your lender? If it goes longer than 6 mos? A Year?

Is your lender willing to give you an extension?

Do you have good credit? Will you be able to refinance it in your own name if need be?

Do you have a financial friend that can refinance it or de-finance it for you?

Are you willing to sell it for no profit? Even a loss?

I always like to tell new flippers to start at lower-priced homes. Think about this, if you start with a $200K condo, the repairs will be much less (don’t have to do exterior either) and if for any reason you cannot sell for a profit, you can hold for a rental…breakeven on your monthly payments, or if you’re lucky, even cash flow.

Know your Contingency Plan.

9) You are a “desperate buyer”                              

Desperate buyers make wrong choices. They tighten budgets too much. They over speculate on after-repair market values. They pay too much just to get in the game.

Like a heated bidding war at a trustee sale or ballroom auction, desperate buyers get screwed.

Stick to your numbers and understand the ebb and flow of the market.

For example, buying in the beginning of the year puts you selling at peak spring to summer season…this may give you an extra push in price because of the hot buying season. However, buying in October may put you in Holiday / December selling season. Account for longer hold time and less availability from contractors, escrow officers and workers.

Instead of working on increasing your offer prices, work on creating a better relationship with the sellers and agents. In the past my offers were accepted not because it was the highest but because it was the most trusted.

On the other hand, I have accepted offers from retail buyers not because it was the highest but because they were the most qualified and I fell in love with their family.   It works on both sides.

Know your numbers!

Conclusion: Just remember, flipping is a JOB! You can grow it and systemize it and flip a 100 houses/year if you want. Or you can be like my friends Jimmy and Susie who enjoy flipping just 4 houses a year and make a cool $50k-$100k per house!

Also, you don’t have to do this alone. Get with someone who is experienced to help diminish your learning curve. You can share profits and learn along the way. Just be sure you are bringing value to the table: you can bring the deal, bring the funding, bring the time…etc.

The biggest pitfall of all… is believing that you are not good enough, don’t have enough money, and are not finding the right deals. Instead, know that people are doing this everywhere around you. Aw heck, they have enough TV shows to prove it!

Go for it…and just know there is always help around the corner…just ask for it!