The Biggest House-Flipping Mistakes Newbies Make

Glorified by HGTV shows and personalities, house flipping is as tantalizing an idea as it's been since the 1980s, when the combination of 24-hour cable channels, a recession, and real estate mania made renovating homes for quick sale seem like a smart idea. While experts debate whether profits overall are in a boom or bust, there's no question some markets remain ripe for the flipping — take Hickory-Lenoir-Morganton, North Carolina, for example, where the real estate investing site Millionacres cites an average return of 124% and gross returns up 64% year over year on homes bought and sold within a 12-month period. No matter where you are, you can still profit from a good flip by avoiding some major beginner's mistakes.

Related: The Most Expensive Neighborhood in Every State

Even pros work with a team. There is no way a single person, no matter how experienced, can know everything about flipping a house. "If you've found a house, but you haven't formed a business entity, identified contractors, found three to five lenders you would use, added an agent to your team — or another way to access accurate sales data — there is no way you're prepared to quickly make an offer and compete with other investors who already have all of these things lined up," says Debbie DeBerry, who coaches beginners as The Flipstress. You need to know how your contractor bids and have an idea of what the property will sell for when renovated, or you can't analyze whether a deal is a sound investment.

Related: 5 Projects That Boost Home Value — and 5 Cheap Alternatives

Looking for a mortgage lender that works for you? Click here to compare rates. [Sponsored]

One of the biggest reasons a house flip will flop is lack of funds. There is a tried-and-true calculation in the real estate industry called the 70% rule that starts with a sense of what a house should sell for in its given market. "This rule states that you only pay 70% of the difference between the after-repair cost minus the actual purchase price … take 70% of that number and you have your purchase price to turn a profit," says Eric Nerhood, owner and president of Premier Property Buyers. Don't ignore this rule and pay more for a property; it helps ensure a profit, even with unexpected costs.

Related: 17 Low-Cost Home Renovation Ideas With the Biggest Payback

It's easy to get caught up in the excitement of a potential flip and skim over estimated costs, but you'll end up paying for every bit of imprecision. "The flipper needs to write an actual budget of all costs," Nerhood says. "The budget needs to be in writing so that they can see if they are on target or moving into left field." It's dangerous to either avoid a budget altogether or forgo one halfway through. Even seasoned flippers might find themselves rationalizing that "it's okay if you blow your rehab budget, because you can just raise the sales price to make up for it," DeBerry says. "It absolutely 100% does not even come close to working like that. Buyers do not care."

For more great real estate articles, please sign up for our free newsletters.

A huge part of a budget — and therefore of the 70% rule — is estimating the cost of renovations, which many people lowball by relying on their own judgment instead of consulting a pro. "The total cost the average newbie has in mind for repairs is often two times or three times less than the actual cost," says Andrew Wilson, a home improvement contractor at Contractor Advisorly. "A common home repair for house flippers is fixing slanted floors. Many people mistakenly think that for uneven floors, they just need to replace them. However, a lot of the time, uneven floors are caused by the home foundation instead of the home itself. The cost difference between replacing floors and fixing a home foundation is thousands of dollars."

Check sites like HomeAdvisor and Thumbtack for general cost estimates for common renovation projects and compare prices from local pros.

There are houses out there that just need too many major repairs — and the amount of work needed won't earn a return on investment. A good flipper eyes homes that need just a few updates, and this is an especially good approach for newbies. "I targeted properties in good neighborhoods that only needed a few things updated," says Ralph Severson, owner of Flooring Masters. "I always look out for houses that just need new flooring, siding, and/or a kitchen and bathroom remodel."

Related: 12 Ways to Save on a Bathroom Makeover

In the excitement of finding the perfect house, newbies fail to look beyond to the neighborhood, neighbors, and street it's on — what DeBerry calls the "sniff test." No matter the home, "you have to look at everything going on all around it, and on the way to it," DeBerry says. "Do the neighbors have cars parked in the yard? Does their house have a ton of deferred maintenance? Are the streets immediately leading up to the subject property well maintained? Is there a ton of highway noise? Is there a fire or police station nearby? Does the street have double-yellow lines, as in it's a busy street? Is the street a cut-through that tons of cars use each day?" All can affect a sale price no matter how much beautiful work you do.

The longer a flip takes, the more you pay in mortgage, interest, insurance, taxes, and more. "Budget for a timeframe much greater than you expect," says Tomas Satas, founder and CEO at Windy City HomeBuyer. "TV flips happen fast and appear to sell quickly. It doesn't happen that way in real life. The renovations always cost more and take longer than planned," and even a fast sale in a hot market should be considered a bonus, not the plan. Nerhood notes that work will take much longer for a part-time flipper, and more money to complete, while DeBerry finds it useful to warn herself of wasted time by estimating the cost of a project by the day. "I'm out of my typical flip in three months or less, from the purchase to the sale. I see a lot of DIYers in deals for nine months or longer, which also gives the market a lot more time to shift. Long holding times are dangerous and costly," she says.

Related: 13 Little Home Improvement Projects That Make a Big Impact

There are repairs people can do on their own to save on labor costs, but most flippers shouldn't be doing rewiring or plumbing — which can become hidden costs that add up quickly, Wilson says. That bug can spill over into every aspect of a flip. "Don't skip investing in the right things for your business," she says. "I see people forming their own entities but then missing the important step of creating an operating agreement, or people who don't want to invest in education and want to just figure it out as they go. The problem here is that this often ends up with somebody losing money, whether it's the beginner or the people who have loaned them money." Any DIY approach has risks, whether it winds up in the electrical system or the courtroom.

Related: 20 Repairs to Leave to the Pros

While you do need to know when to call a professional, don't expect to hire out for every job. One big area flippers can do mostly themselves to save money: demolition. "The best flippers do a lot of the work themselves, especially the demo," Satas says. "If you think you're gonna just hire contractors off the street to do all the work, all the profit will find its way to their pockets, not yours. The best flippers do some of the work themselves or have a deal with a contractor prior to purchasing the home."

Contractors can make or break a project. DeBerry believes there is only one way to hire the right one: word of mouth. "If you can't talk to others who have used this contractor, they aren't the one to choose," she says. Avoid this pitfall with proper vetting through reliable references, the right contracts signed, and by not paying upfront — never pay for work until it's completed.

"If the work is being done by a licensed contractor, they will pull the permits for you," Nerhood says. Newbies often try to skip this part because of the expense, but it's a massive risk of the ultimate penalty: "Incorrect permits could, in some municipalities, have the building Inspector hand you a hammer, sit back, and watch you take whatever it is down."

It's easy to get caught up in trying to make a flip perfect, but don't blow a budget and timeframe on high-end upgrades. DeBerry likes to focus on the kitchen, bathroom, and master or main bedroom, which make for the biggest returns on investment. It also helps to stage the house to sell, and to get good pictures of the upgrades. Likewise, Satas reminds that profit on a flip is more about what you pay to begin with than what you put in. "I call it 'big eyes,' when a new flipper looks at all the possible renovations instead of the minimum amount of work to get the maximum return on investment," he says.

Related: Home Improvement and Decor Trends for 2021

Not all the work on a house has to be big-ticket. When it comes time to sell, the next owners will flip on lights and open doors — so make sure the little things are all oiled and greased to perfect working order. New doorknobs, light switch plates, and simple working lights contribute to buyers' overall "wow" factor with little impact on your budget or timeframe.

Related: 13 Steps to Painting a Room Like a Pro