5 Deadly mistakes house flippers make

Renovating and reselling a property for profit is alive and well in Kelowna’s accelerating market. It is by far one of the most profitable short term strategies an investor can employ, offering returns over 30% per project in many cases. With that said, I want to shed some light on where "flippers" go wrong. Here are the most common, often costly mistakes made by amateur home flippers.

 

1. Renovate to their tastes

Most people start with the idea that they have great taste, therefore people will want what they create.  Usually this starts with someone who has tastefully decorated their own home and has spent years perfecting their sophisticated style and friends constantly affirm what they know to be true; they’ve got great taste.

The problem with this is that when you start to look at your renovation project as an extension of your personal style, you start making the wrong kind of decisions.  Impulsive buys on $300 vessel sinks, and $1500 vanity sets are fair game in your own home but chances are you will never know what percentage of that you will recoup should you sell.  In a flip however, these kinds of things only add up to a blown budget.  You don’t get to simply raise the price because the fixtures budget was blown by $3000.  

The same person will find it hard to put down laminate flooring in their reno project because they would never settle for this at home, again the ego creates a costly mistake.  A tasteful and cost effective laminate flooring will translate to the same eventual sales price as the much higher priced hardwood.  The huge savings is in the labor as many people can lay the click together laminate themselves or pay a handy person a few hundred bucks for a day's labor installing them for you.  This is much more cost effective than paying a professional flooring installer three dollars per foot to install your exotic planks.  

The key is to keep perspective.  The idea is to rescue an outdated home and make it shine like new. Its neighbourhood and price range should dictate the finishing.  The only time you should venture into luxuries, is when you find them on sale for prices that are as good or better than the perfectly adequate supplies you can get from Costco or Home Depot.

 

2. Lose track of time

The old saying that time is money is a truism you cannot lose sight of in this current market.  In 2007 you could take forever and the consequence would only be that the market went up another 10% while you doddled along. Bring that same lack of urgency to a present day project and you will find that mounting carry costs like interest, insurance, utilities and property taxes gobble up your profit making you nothing more than a pro bono contractor for your future buyer.  Cosmetic renovations should take 3-6 weeks depending on square footage.  This will be the difference between doing one reno per year with a marginal profit and three efficient flips per year netting you a six figure profit. The latter is something you could do full time, the former is something you will likely only do once and write off as an “experience”.

 

3. Blow the budget

A blown budget is by far the single biggest reason for failed flips.  There are many ways this can happen from misguided spending as suggested in number one, over estimating one's abilities to DYI. Many amateur flippers think that they will be doing all the work themselves and then the reality of their limited time, talent and tools leads them to hire a contractor that was never budgeted for. 

The other big reason for blown budgets is a lack of due diligence prior to purchase.  Things like having to replace plumbing and electrical when it wasn't expected can be devastating. Sewage systems and mechanical also add to costs without the opportunity to recoup the money when you sell.  Simply put, the 5k spent on replacing the aluminum wiring won't translate into a 5k higher sale price.  Getting a thorough professional inspection and sending your realtor to city hall to check on permits are ways to safe guard yourself against buying a money pit.  You don't have to run from properties that need these things done, just make sure that the purchase price reflects the costs.

 

4. Too much DIY

I love the satisfaction of a job done on my own. It’s a proud moment when you step back and see what you’ve accomplished. These feelings are wonderful, but if we are to treat this like a business we must take a good, hard look at the facts. Firstly; how long did the job take us? The time spent on YouTube watching how-to videos, the days of prep, the unforeseen hurdles to jump mid project, and the seemingly endless finishing touches. When you factor time into the equation, the six weeks it took to do your own drywall might outweigh any savings you found by not calling a professional. Secondly, how was the finished product? Was it “really good for someone who isn’t a dry waller?” or was it perfect, professional craftsmanship? Obvious “DIY” jobs give buyers that uneasy feeling and will often cause you to lose thousands on your sale price.

When you factor in time and quality of work, having a team of skilled trades that can finish a job in a couple of days and do it perfectly, is rarely more expensive than going it alone.

One quick tip; I always ask a contractor how long the job will take them. Then we establish the best hourly rate -  say 30/hr. With this I now have their “day rate”.

If they say they can have all the tile work done in three days then you now have a price $240/day x 3 = $720.00. How long would all of that tile take you? And let’s be honest, would it look as good?

 

5. Approach the venture backwards (without the secret formula)

This is the cardinal sin of flipping.  It goes something like this.  A person buys a fixer upper because they were told it was a deal.  All sorts of ideas came flooding in on how they could rehabilitate this home to its former glory and with their knack for picking colors and materials, someone was sure to love their finished product.  So off they go doing their best to control costs and work quickly, but a couple of complications came up that led them to take a little longer than predicted. Oh well, this is normal right?  They spent a little more than they'd originally estimated on a napkin the night they closed the deal. Obviously they couldn't say no to that stunning fireplace insert that ran them a pretty penny.  The flipper believes that their finished product looks great and works through this common process to arrive at a price to market the property to the public.

They start with what they paid, and then add up all the costs. “Wow did we really spend that much?”

$250,000 purchase

$  41,000 renovations

$  13,000 selling costs

$    6,000 interest payments

$    3,000 utility bills

$    3,000 ppt

$    1,500 property tax

$    1,500 legal fees

$319,000 total costs+ Desired Profit

= Sales price

 

Then based on how they feel about all the hard work over the months, as well as the risk and stress they’ve had to take on, they add a profit that feels "worth it".

“I’d like to make at least 30k” they often say.

Adding the profit to the cost they select a list price of $349,000. Their realtor obliges, hopeful at first, but they soon become frustrated as the property sits for three months with few showings, while comparable homes sell for $325,000 around them. “Well they're not as nice,” the amateur says while they wait…

This is the wrong way, in fact it's completely backwards. The good news is there is a secret formula that you must use BEFORE you buy your reno project. It’s simple and it looks like this.

 

Start with the eventual price and work backwards from there:

$325,000 Eventual Sale price (Comparable avg less 5% quick sale factor).

 

Subtract the following:

$ 30,000 Profit margin (10% of the value of property)

$ 40,000 Renovation Costs ( budget plus 10% )

$  9,000 Carry Costs (Monthly interest + monthly bills x projected timeline)

$ 15,000 Professional fees (Realtor+Lawyer+Accountant)

$   3,000 Property Transfer Tax (1% on first 200k, 2% on balance)

= $228,000 Buy it now price

 

This buy it now price tells you exactly what the most is that you can pay for the property to protect your pre-determined profit margin.

 

Follow this strategy and you take most of the guess work out of flipping. This is the formula I have followed on dozens of successful flips and the exact formula I consult my clients on today. Avoid all of the costly mistakes above and the world of flipping can be an exciting and rewarding business. It’s not as hard as one might think as long as you have the right information and a team of great professionals behind you that specialize in this kind of thing. Happy flipping!

 

For more details or to reach AJ Hazzi, please visit: www.vantagewestrealty.com
Contact: [email protected]
Cell: 250.864.6433 

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.