Is Your Flipping House Really a Flop?
Flipping homes is becoming a popular form of short term investment. Turning a profit in real estate, however, is harder than it looks. A lot of things can go wrong when purchasing a home to re-sell and even small mistakes can make or break your profit line. Here’s a list of red flags that will help you avoid turning a flip into a flop.
Out of all the potential problems on this list, structural issues are the most expensive. If the home’s foundation is cracked, then it probably needs a full rebuild or at the very least to be gutted. For those on a small budget, this is definitely something to avoid.
Flooring can often cover up major flaws in a home. Always look down when inspecting a potential flip and examine how the flooring was installed. If the installers butted the flooring up to the molding and door jams instead of underneath, then there’s a good chance they cut corners in other areas of the home as well.
A bad kitchen design can add a lot of cost to a flip and might even hurt your chances of re-selling. Look for homes with a triangle kitchen design, where the appliances and sink offset each other. Also, keep an eye out for gaps where the backsplash meets the countertops and for poorly constructed cabinets.
You never want to cut corners on electrical work. With modern safety codes and potential hazards, it’s always a good idea to rewire a home whenever you come across faulty wiring. Before you purchase a house, look for lighting and outlets that shouldn’t be on the same circuit, overcrowded circuits, and outlets in awkward places.
A good air conditioning, ventilating, and heating system is essential in creating a comfortable home. Unfortunately, replacing an entire HVAC system can really burn through your profit margins. A quick inspection for dirt and grime on blower fans can tell you a lot about how the units were maintained over the years and whether or not they need to be cleaned.
A roof replacement can be a deal breaker when deciding to purchase a home. Luckily, there are several ways to determine the wear of the roof. Apart from asking when the roof was installed, check the gutters for dry rot and look for missing or damaged shingles. If the roof needs replacement and that isn’t in your budget, steer clear.
Gauging the after repair value (ARV) of a home is critical in determining the profit margin. Relying solely on an online ARV number can lead to a lot of problems, especially given how markets fluctuate depending on location. Talk to a real estate agent to get a more accurate idea of how much you can re-sell the home for after renovations.
Plumbing problems are another costly pitfall when flipping a house. Inspect the drains throughout the home for clogs and look for water damage under sinks. Check the water pressure from the faucets and make sure the toilets flush properly. Also keep an eye out for sagging floors and water stains, which are good indications of previous leaks.
It’s easy to let emotions get the best of you when flipping a house. For most investors, fudging the numbers on paper is an easy way to get upside down on a house. As a rule of thumb, use the 70 percent rule to determine how much you should pay for the house. Take 70 percent of the ARV of the home and deduct the repair costs. This number is what you should offer on the home in order to make the most profit.
When flipping a house, you are going to encounter repairs that need to be completed. This includes cosmetic issues, like holes in the drywall, chipped paint, damaged carpet, and more. These smaller repairs won’t break your budget on their own, but coupled with a major issue, they can cut into and decrease your overall profit.