We’ve also seen new home flippers tank their deals due to rookie mistakes. Here are 6 terrible tactics used by new flippers that should avoid
Over the years, The Investor's Edge has seen it all. We’ve seen seasoned investors make a killing with our flipping tools and resources. We’ve also seen brand new flippers completely tank their deals due to rookie mistakes that are 100% avoidable. If you are a newbie to the fix & flip game, now is the time to pay attention because I’m about to share the six terrible tactics used by new flippers, leading to inevitable deal doom.
The biggest profit-killing mistakes include investing your entire life savings, going at it alone, relying solely on online calculators, not having a backup plan, ignoring your instincts, and letting your math and facts change throughout the investment lifecycle.
You won’t have to write these down since I’ve broken them down for you below. Trust me; you want to keep these tips handy as you execute your first real estate investment deal. If you avoid these tactical traps at all costs, you’re guaranteed to make an excellent profit on your next flip.
Terrible Tactic 1: Investing Your Entire Life Savings
When you’re first getting into real estate investments, avoid relying on the old “You’ve got to play big to win big.” Like all investments, fix & flips are a risk, but you don’t want to risk everything. The smartest solutions are two-fold:
- Play with a Portion: It’s wise to have a cash reserve of $3-5k set aside for your fix & flip investment. This contingency plan can cover any needed cash-to-close or other costs. Also, the portion is small enough not to break you financially if the deal goes south.
- Play with Other People’s Money: One of the best things you can do as a new investor is to partner with the right professionals and leverage their money to your benefit. A great way to do this is by starting as a wholesaler. Wholesale deals are a far less risky investment than retail deals, plus they require less time and effort. If you find a property and then sell it to a rehab professional for a profit, everyone wins. Your rehab professional walks into instant equity, and you walk away with a nice sum of money. You can then use that money as a down payment for a more lucrative deal later.
Terrible Tactic 2: Going At It On Your Own
If you’re brand new to this industry, one of the worst things you can do is go it alone. Many rationalize isolation with the attractive notion of saving money, but you’re losing money in the long run. House flipping is a team effort, and a successful flip will have a dream team of industry professionals behind it every time.
The most important thing you can do is create and develop relationships with the right people. These will be hard money lenders, general contractors, real estate agents, and real estate attorneys.
The best hard money lenders go above and beyond the call of funding. They provide unparalleled customer support and various tools and resources that will increase your skills and knowledge in the world of real estate investments.
Phenomenal general contractors will help save you money by doing the job correctly the first time. Real estate agents save you money by professionally marketing and listing your house, so it sells as quickly as possible. Also, real estate attorneys help you find deals by keeping you apprised of foreclosures or probates before they hit the market.
Terrible Tactic 3: Relying Solely on Online ARV Calculators
Far too many novice investors attempt to calculate the after-repair value based on information found in a Google search. This is a quick way to lose money on a deal. If you don’t obtain accurate property values, you can easily overpay on the purchase price and shrink your profit margins down to nothing.
To properly calculate the ARV, work with your hard money lender and real estate agents. They perform evaluations to give you the most accurate estimation of what the home is currently worth and how much it will be worth after repairs are made.
Do Hard Money has a convenient tool to determine the ARV of any deal, plus calculate an estimated net profit. It’s called the Advanced Deal Analyzer, and you can try it for free for five days! This tool saves investors thousands of dollars with their deals and dramatically increases their profit margins. Give it a spin – I guarantee you’ll fall in love with it.
Terrible Tactic 4: Having No Concept of a Plan B
You need a contingency plan with every investment. Although real estate deals are very lucrative, some issues always spring up in the process. Be sure to stick with the facts and the calculations determining your property’s profitability.
Suppose the property purchase price is set for $90,000, but you can only make a profit with $80,000 or less. What do you do? Pull out of the deal before you’re past the due diligence deadline and lose your earnest money deposit.
Also, it’s possible for unexpected (and unbudgeted for) problems to spring up during the rehab. If this is the case, you need to have an exit strategy to cope with any losses.
In case the worst-case scenario comes to pass, follow these exit strategies:
- Wholesaling the deal instead of retail fix and flipping.
- Renting out the property for more profit in the long run.
Terrible Tactic 5: Not Listening to Your Instincts
It’s a very good idea to trust in the numbers and your team as you invest in real estate. However, the most important thing you can trust is your gut feeling. Fix & flip investments are scary, especially if you’ve never done them before.
That said, there is a BIG difference between a fear of the unknown and that uneasy feeling in your gut because you’re about to do something wrong. If the numbers don’t make sense to you or if you don’t feel right about the deal, don’t do it. Ultimately, your hard money lender, your realtor, or your contractor isn’t the person in charge; you are.
If you feel the deal is wrong, get out of it. Move on to the next deal. There are plenty of profitable deals out there, and you don’t have to waste energy fretting about any one of them.
Terrible Tactic 6: Changing the Facts and Math as You Go
This is one of the BIGGEST mistakes new investors make. First, they find a deal where the numbers and risk factors are barely profitable as-is. Then, as the rehab continues and the costs increase, they start to erase and re-write the initial numbers they came up with to compensate for added expenses. Ultimately, they try to change facts to force a deal to turn a profit, which honestly never works.
The best practice is to find a deal that can remain solid with mounting expenses. Overestimate your costs and underestimate your profit if you need to. It’s better to end up pleasantly surprised than scrambling to break even.
Real estate investment comes with unique risks that every investor needs to understand before getting into their first deal. But there are ways you can significantly lower the number of hurdles you’ll need to get over if you set yourself up for success. Start by learning how to actively avoid these six newbie mistakes, and you’ll be so much closer to turning a profit than those who had to learn the hard way.
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