Avoid Costly Mistakes When Flipping Houses
All you have to do is avoid costly mistakes when flipping houses and you are good to go!
New to flipping houses or a seasoned veteran?
Either way, I think you will enjoy reading about some obvious mistakes I made in my fix and flip business.
If you want to make easy money you flip houses, right?
10’s of thousands of dollars and farm out the work?
It’s as easy as:
- Buy a fixer-upper.
- Put in a new kitchen, bathroom, and some paint.
- Get it done on budget and on time.
- List it.
- Sell it
- Count the profit!
Rinse and repeat.
Flipping houses is that easy, right?
Hello, My name is Shaun.
I have been investing in real estate for about 18 years. Primarily I am a buy and hold investor. You know buy a house, fix it up to rent it out, rent it out…
That said in 2016 I began dabbling in the world of flipping.
Since then I have bought, rehabbed, and sold houses in Tampa, Denver, and Indianapolis.
I have had successes and certainly made many mistakes. You can see a graphic of these below, it’s rudimentary but I try…….
My biggest win (I’m not bragging just giving you an insight into who I am and I know a lot of people can talk much bigger numbers) was a $75,000 net gain over 97 days. This on an all-in budget of $267,000. This was an SFH in Denver in Aurora back in 2018. I considered this a home run!
My biggest loss to date. Single Family House in Indianapolis. All in budget was just north of $300,000. On this property I lost $17,384.44.
Yip I counted it all and every cent hurt.
So with that said are you interested in 3 mistakes I made?
My math could be off, the point is you can lose money when flipping houses
3 Mistakes I Made that Cost Me Money When Flipping Houses.
3 Mistakes I Made that Cost Me Money When Flipping Houses.
- These lessons are not new but you must heed them.
- These lessons are easily recognizable in hindsight.
- The mistakes I made I have kept on the down-low until now. I am a little embarrassed.
However, I want to share these mistakes I made during some renovations so you don’t do what I did.
So here we go.
Table of Contents
Costly Mistake to Avoid When Flipping Houses Number 1
Please remember I didn’t start my first flip until I had been in the real estate game for 9 years!
I had a ton of experience in the real estate industry including:
- Buying houses
- Selling houses
- Small renovations
- Large rehabs
- Renting out properties
- Vetting Contractors
Yet for whatever reason when I entered the flipping market my common sense went out the window!
Truth be told I was blinded by the money.
I wanted the home run. AND I was vocal about it. This attracted all sorts of people willing to help me. Some offer better deals than others… Deals too good to be true maybindustry
When flipping houses know who you are dealing with
Paperbag says its an awesome deal so it must be, right?
Lesson Number one: When flipping houses know who you are dealing with, AND trust NOONE!
So this led to me making deals with people that I didn’t really know purely based on how well they could talk it up. AND because they were saying what I wanted to hear I went with the flow.
So let’s talk about a couple of examples. No names and no locations.
I wanted to do x number of deals, I had x amount of money. I went on Facebook, and search engines. Joined wholesale lists and welcomed any and all communication. Sooner than later I was contacted by a group and these guys had all the answers. They talked the talk, they had all the contacts. They were shakers and movers for sure! (is this sounding like a bad movie?)
Pretty soon they were sending me killer deals, but I kept missing out on them (in hindsight and on further research they actually never had the deals). Clearly, they were getting me on the hook. Then finally if I committed to earnest money they had a home urn single-family house (this is the one I lost 17K -ish on). More talk, a little more pressure, and we bought the place. You know the important part. I lost money.
As I write this there are so many mistakes.
The lesson here in my head is fast becoming verification of the facets (and that’s something we can discuss in the future) but when it comes to doing business I like to build trusting relationships that make transactions easier.
I jumped in and trusted these guys too quickly.
So lesson number one to avoid costly flipping mistakes is as stated make sure you know who you are working with. This goes for:
- Who you are taking advice from.
- Who you are buying deals from.
- The people helping you renovate.
- Finance people.
- Absolutely everyone.
It takes time and effort to do the research. Start on Facebook, and local REIA’s. Talk to the quiet people in the back and get their thoughts too. From my experience, this pays off!
If you are smarter than me (many are) and more patient than me, especially when starting out in the fix and flip arena, you will avoid working with the wrong people and save yourself a lot of money.
Don't Make this Mistake...
House Flipping Mistake #2
Costly House Flipping Mistake to Avoid #2.
Never ever pay upfront for anything, ever, never ever FULL STOP!
So, once again let me remind you I came into the fix and flip arena with years of experience yet it all went up in smoke. Until this point in my investing career, I had never paid for anything upfront. I always paid for services that had been rendered. The bigger the job, the more draws were scheduled.
Enter lesson number 2 on Flip number 2.
On day 1 I paid the contractor a lot of money for materials and to get the job started.
Do you know what happened?
I couldn’t get these guys to show up and do anything. So the lesson and insight here?
LESSON: When flipping houses don’t pay for anything upfront…. EVER!
The lesson is don’t pay for anything upfront…. EVER!
I don’t care how honest they look. It doesn’t matter what they say. Never pay upfront.
Think about your own job. Do people pay you before you have completed any work?
What about the “I need cash upfront to pay for the materials” argument?
So the contractor needs money for materials. Here is my advice. Tell them you will pay for the materials directly. The GC can pick them up with a picture ID. This happens all the time!
The benefit here is 2 fold:
- You will get something for something
- You will sleep way better!
If you pay for the materials you own the materials. At least then you know you got some lumber and pipes etc for your money.
If you give the cash directly to the contractor (especially if you don’t have a working relationship with them) and you could be staring down the barrel of many sleepless nights wondering if you can or will ever get anything for the money you just paid out.
Not all contractors are bad!
Before you think I am out to bad-mouth contractors I am not. There are a ton of really good electricians, plumbers, builders, GC’s, etc ready to help you on your next flip project.
However, just like in any industry there are always a few bad eggs you have to look out for. That’s all I am saying, OK?
Now back to house flipping mistake that I made #2
My Insight into never paying upfront for renovation work.
INSIGHT: My feelings are that a company or contractor that is financially stable is able to work on a job week to week. At the end of each week, an invoice is submitted, or evidence of work completed, and I make a payment in that amount. SERVICES RENDERED, VALUE ADDED TO PROPERTY, I PAY MONEY OUT.
It is so simple, right?
But let me tell you especially if you are new to this. You will be put under a lot of pressure to pay upfront r before the job is completed. DO NOT DO IT!.
If you feel this pressure reach out to an experienced investor and ask them to talk to the contractor as your associate. It just takes a small amount of confidence to make everyone understand what needs to be done to get paid.
Which is a great segway to lesson 3…
3rd Costly Mistake to Avoid When Flipping Houses.
So here is the 3rd Costly Mistakes to Avoid When Flipping Houses.
More is better when it comes to the scope of work detail. The more detail you include then the higher chance you will avoid costly and mistakes.
The first flip I ever did was really easy for me to create a scope of work.
In-fact remember the fellows from lesson one. They put together the first scope for me.
It basically reads:
Create a flagship home in the neighborhood with new bathrooms, kitchens, paint, and flooring. Once it’s completed sell it and make tons of money.
That was about the extent of it…. UGH (I am so embarrassed)
So more detail is better. It just is. It takes time but it will save you on the back end.
Once you have put together a detailed scope be sure to have it signed by the person that is in charge of getting it done. Make them responsible (and liable) for it.
Now I know you are all out there laughing at me but I do know I wasn’t the first, and won’t be the last to fall into this.
So what did my latest scope look like?
It’s not fancy. In-fact I just wrote it up as a word document. Here is a portion of it for a bathroom.
(please note this is a contractor I have worked with for 3 years now so I have got a little relaxed)
Demo – demo/remove/dispose of the following properly
All light fixtures and attached accessories including wiring and switches, extractor fan, all drywall and lumber, all flooring (vinyl tiles), all vanities and accessories, all shower tub and surrounds and accessories including shower curtain, rod, tile, copper, or PEX supplies or any drain pipes.Toilet too.
The contractor is responsible for all permitting and abatement as required. (by this they are responsible to ensure proper permits pulled etc – they build in the cost in the bid)
To specifications per attached drawings.
Including but not limited to all electrical, plumbing – supplies, vents, and drains
the building of walls/drywalls studs/walls, drywall, Any missing code requirements are to be identified by the contractor (any good contractor will be happy to do this but to get a good contractor you do have to pay a fair price) pay nothing… to some degree, you get what you pay for).
Flooring: LVP installed properly (with necessary underlay)
Paint: prep and paint properly (SW-7008)
Electrical: 4 canned Lights, 1 vanity light, 4 x GFCI’s, 1 extractor fan, 3 switches
Fixed items: Install properly tub, tub surround, vanity toilet
Plumbing: Shower, vanity and tub, handles, faucets, head, drain cover, and other necessary finishes so that bathroom is properly functional.
Bathroom Hardware: Install properly towel rails, toilet paper holder, hooks, curtain rail, and curtain
Owner to supply all materials.
Draws to be paid weekly after evidence of item completion (He just sends me a few photos of each item).
Timeline: 10 business days.
You will note this could be more organized and there are a ton of online options. Simple excel spreadsheets are awesome. If it’s a new contractor (and I typically start them with small jobs) I do define light bulb types even e.g. LED 60 Watt light bulbs.
This way if I am told the job is done but some of the light bulbs are not LED, well simple, the jobs not done. AND when the lights bulbs are LED then I will pay.
More detail makes it simple (in theory).
There we have it. 3 costly mistakes I have made in my flipping career.
Costly Mistake Number 1:
I didn’t verify who I was working with.
Flipping mistake to avoid number 2:
Don’t pay for anything upfront. It’s just not worth it.
Costly Mistake number 3 to avoid.
Make sure you really define the detail of the scope. The less you know someone the more detail you require.
I hope this helps a little.
Please leave your feedback by way of comments. Or if you have any questions happy to answer to the best of my ability.
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