Flipping homes can be a profitable and enjoyable experience – when done the right way. Without proper planning and execution, real estate flippers risk losing some or all of their investment and could wind up underwater on their finances.
However, identifying a potential bad flip can be challenging for new flippers just getting started in the industry. Aside from the challenges of coordinating contractors and managing the renovation process, identifying a potential bad flip involves many different components.
Keep reading to find out the best strategies to identify bad flips so you can focus your time and energy on the most promising deals this year.
Signs of a Bad Flip
Luckily for new flippers, bad flips have several warning signs that should raise red flags during your research process.
Purchase Price
In today’s seller’s market, it’s not uncommon to see homes selling for higher than market value. Unfortunately this means many homes that would be in your budget for a flip now exceed what you’re willing to pay.
It’s crucial for real estate flippers to purchase homes at a price that leaves room for renovations and healthy profit margins in case unexpected expenses arise.
Hidden Maintenance and Repairs
Flippers often target distressed properties or older homes that may have hidden maintenance and repair issues not visible on the surface.
While some flippers prefer to buy homes as-is, it’s always a good idea to conduct a thorough property inspection to avoid hidden problems like foundation issues, HVAC problems, plumbing complications, and hidden roof damage.
Overly Optimistic Market Projections
If the deal is based on overly optimistic market projections involving assumptions about the future market, it could spell trouble. There’s no guarantee that the market will improve or remain at current levels, which means flippers run the risk of relying on future appreciation for a successful sale.
Instead, real estate flippers should primarily base their decision on the location, purchase price, renovation costs, after repair value (ARV), and market analysis.
Overestimating ARV
Speaking of after repair value (ARV), flippers must not overestimate the post-renovation value of the property. Doing so leads to unrealistic profit expectations which can impact future flipping opportunities.
Real estate flippers should use a comparative market analysis (CMA) to research recent sales of comps in the neighborhood or surrounding area. Look for properties with similar square footage and features while also paying attention to both the sale price and any unique selling points of these properties.
High Holding Costs
Holding costs like property taxes, utilities, insurance, and loan interest can add up quickly if the flip takes longer than expected. High holding costs can eat into your potential profits and cause you to miss out on potential deals in the future.
The Bottom Line
Identifying a potential bad flip is crucial for anyone involved in house flipping. Whether you’re a beginner or seasoned pro, the ability to create financial projections and conduct market research will be the keys to your success in this industry.
Are you looking for a real estate agent in Massapequa? The Kim Holland Homes team is the #1 real estate team on Long Island. Contact us or call Kim today at 516-236-6303 to start the process of finding your dream home.
