The Top 10 Fix & Flip Deal Destroyers
I love real estate and I really love to fix up houses and flip them to other investors. Sometimes I have multiple buyers for a single house, and I'm just cleaning up the site and taking my profit to the bank! But, and this is a BIG BUT, make one or more of these top 10 deal destroyer mistakes and you'll regret it. By destroy, I mean either keeping the deal from closing out, and/or wiping out a chunk or all of your profit.
DESTROYER #1 - Putting the Cart Before the Horse
Don't have one or more buyers on your list that you know would have a more than passing interest in the property BEFORE you cut a deal to buy it. I can't tell you how many times I've received calls from panicked new investors who got themselves into a deal by buying a property, but then they couldn't get a buyer on the hook. The best case is that they just lose their earnest money; the worst would be a fixed-up house with nowhere to sell it and a pile of funding debt.
You always want a strong buyer list first, then you scope out deals and match them to potential buyers based on what they want, where they want it, and how much they'll pay.
DESTROYER #2 - Where did that Lien Come From?
You're working your butt off to find real bargains that you can flip at a profit to a rental investor. You are climbing over trash in foreclosures, talking to distressed homeowners to see if they have some equity, and whatever else you can do to find that great deal.
Are you doing thorough due diligence before you pull the trigger? Is there an abstract with documents of public record, or a title company commitment to provide title insurance with exceptions that would point out liens. Let's not even talk about IRS liens that take precedence over the entire world. What about that roof they had replaced five years ago and never paid for? A mechanic's lien must be paid before you or your buyer can take full legal title. If you don't get the information you need before signing a purchase contract, shame on you.
DESTROYER # 3 - Exercising the Savior Complex
We're all nice people. We hate to see others suffering distress, financial or otherwise. We didn't celebrate the massive foreclosures during the crash. However, we didn't cause them either. Now that there are fewer foreclosures out there, we're doing more marketing to locate homeowners in distress.
They may have tried to sell their homes but can't because they don't have time because of a new job offer elsewhere. Or, they may not have enough equity to pay closing costs and real estate commissions. They may have a home in poor condition. Whatever the reason, you are delivering a solution, the sale of their home. It is not for you do help them out and pay more than your number-crunching tells you the home is worth to YOU.
DESTROYER # 4 - Will Rents Support the Price?
It may be a great deal on the buy-side, and you may know some buyers on your list who would like a home with these features. But, if it won't rent in the current market for enough money to generate great cash flow, you're in trouble. Analyze it like your buyer will to be sure that the numbers work for them. If they do, pull the trigger. If they don't, move on.
DESTROYER # 5 - Who is Giving You the Scoop on Condition?
I'm not pushing the home inspection industry here, as you may have a trustworthy resource for getting to the REAL condition of a home. This is really important, especially with foreclosures sitting empty for a year or more. If you have a really nit-picking contractor on your team, then they may be fine for inspecting the home. If you're not sure, get a licensed and bonded home inspector you can fall back on liability-wise if they miss something big.
DESTROYER # 6 - Fixing it Now or Taking the Hit Later
Your buyers are investors who know what they're doing. Are you leaving things with deferred maintenance that could come back to bite them later? If so, you're counting on them not noticing; a poor plan. Sometimes this can happen when you're beginning to go over your initial rehab budget and you're looking to cut some corners to get back on track. Leaving some things that you don't think are a big deal may not be, but your buyer may think differently. Or, they cost them repair money their first year of ownership and you may lose the buyer's future business.
DESTROYER # 7 - Being the Easy Mark for Funding
Transaction lenders, hard money and private lenders provide value to fix & flip investors. But, do your shopping. Interest rates, origination fees and terms can vary a lot. Talk to many lending sources and do it again every now and then. Just because you have been getting good deals from one for a while doesn't mean that the market hasn't changed and better deals may be out there.
DESTROYER # 8 - Over or Under Renovating
You've located a great foreclosure deal, and it needs a lot of work. You're getting it for a really lowball price and you have run the numbers proving there's a pot full of profit in this deal. But, be careful to keep the home inside the feature set of the neighborhood. The top end of that feature set is fine, but don't over-renovate. Throwing in a fancy stone deck with a hot tub or even a small pool may seem like a great feature, but if it's costly, you may be throwing your money away. Your buyer may not pay for it because he/she knows the tenants will not pay up in rent enough to make it a good investment.
DESTROYER # 9 - Busy and Contractor Careless
You have a good team, but they're all busy because you're rocking the fix & flip world in your area. You find a great deal opportunity and you know you have more than one buyer who will want to scoop up the home as soon as you're finished with the rehab. Don't get careless in vetting your new contractor because you fear losing the deal. You could be putting yourself at great risk. Better to lose the deal than to have a botched job.
DESTROYER # 10 - Getting Those Lien Releases
This is just good business sense. Sure, you may be acting as your own general contractor and you know you're paying your subs in full. But can you prove that if one of them files a mechanic's lien later? Every check should only change hands when you're getting a written lien release. If you're using a general, make sure they know to bring individual releases from their subs to get the check(s).
There you have it. Avoid those top 10 deal destroyers and you'll enjoy those trips to the bank!
Have you found success in real estate investing by implementing different approaches? Have you struggled to take that first step? Let me know what you think by leaving a comment below, or by finding me on social media: