Overview
Flipping Houses can be a risky business. There are many things that can go wrong on a rehab project which ultimately can cause you to lose money, cause emotional and financial stress, and put your house flipping business at risk. In this lesson we are going to discuss the potential risks of flipping houses so you understand the risks before you purchase your first flip project.
What Are The Risks Of Flipping Houses?
Risk #1: Lose Money!
The most obvious risk of flipping houses is losing money. The worst thing that can happen on your flip (besides someone dying or being severely injured), is that you spend 4 to 6 months rehabbing a house only to wind-up losing money on the project.
There are a number of mistakes that can cause you to lose money on your rehab project:
- Overpaying for deals
- Over-estimating After Repair Value (resale value)
- Under-estimating repair costs
- Under-estimating holding time
- Hiring bad contractors
- Construction delays
- Market corrections/recessions
- Etc, etc, etc...
If you really want to be discouraged, checkout this full list of Things That Can Go Wrong on a Flip
<span class="lesson-quote--tag orange">Reality Check</span>
<p>Remember, If You Do Lose Money On A Project Think Of It As Tuition To The 'School Of Hard Knocks'. Failures, Mistakes And Losses Often Provide The Best Learning Opportunities. Take A Step Back And Review Your Project Mistakes & Failures To Assess What Went Wrong And How You Can Prevent Those Mistakes On Future Projects.</p>
Risk #2 Stress
Emotional Stress
There is no way around it...flipping houses is a stressful business. No matter how great of a plan you have in place, and no matter how much you try to minimize risks, things will go wrong on your rehab project. Construction will be delayed, there will be change orders and you will miss deadlines which will cut into your profit.
Financial Stress
Flipping houses requires a lot of capital. If you are using your own money it can be stressful watching your bank account shrink as you dump what feels like an endless amount of money into a property that you won't get back for several months down the road. Even worse, you are racking up huge credit card bills buying materials for your projects, which could potentially be damaging your credit score.
If you are borrowing outside funding, the pressure will mount to complete the project so you can payoff the loan and expensive interest payments before the loan expiration.
So, How Can I Minimize These Risks?
Risk Mitigation #1 Educate Yourself
Before you buy your first flip you need to have a fundamental knowledge of real estate and house flipping so you can make the most informed, best decisions when analyzing your prospective deals.
Luckily for you, we provide a completely free Step-by-Step Curriculum on How to Flip Houses that teaches you the basics of analyzing deals so you can make smart purchase decisions.
Risk Mitigation #2 Buy The Property At The Right Price
'You Make Your Money When You Buy'. Buying a property at the right price is the most important thing you can do to minimize risk and ensure you make a profit on your flip.
Learn How to Analyze a House Flipping Deal
Risk Mitigation #3 Be Conservative Estimating ARV
Optimistically over-forecasting what you can resell the property for is one of the biggest and most common mistakes made by new house flippers. When forecasting your After Repair Value use the lower-range of comparable prices to ensure you have a conservative After Repair Value.
How to Accurately Predict the After Repair Value
Risk Mitigation #4 Including Contingency In Repair Estimates
Under-estimating repairs is another very common and costly mistake made by new house flippers. It's important to include extra contingency in your repair budget to help cover any unforeseen costs and change orders that will inevitably arise on your project.
How to Estimate Rehab Repair Costs
Risk Mitigation #5 Hire The Right Contractor, Not The Cheapest Contractor
Even if you buy a property at the right price, hiring the wrong contractor can still ruin your flip project. Make sure that you pre-qualify all of your contractors and hire a contractor that is qualified to perform the work, not just the cheapest contractor. You get what you pay for!
Learn the Questions to Ask Before Hiring Your Contractors
Risk Mitigation #6 Ethical Business Dealings & Solid Contracts
One of the best ways to prevent lawsuits is to be honest and ethical in all of your business dealings. Do what you said you would do, when you said you would do it.
Risk Mitigation #7 Ethical Business Dealings & Solid Contracts
Creating an LLC business entity is a strategy that can be used to limit your personal liability and protect your personal assets if something goes wrong on your flip that results in litigation.
How to Create a House Flipping Business
Risk Mitigation #8 Ethical Business Dealings & Solid Contracts
Creating an LLC business entity is a strategy that can be used to limit your personal liability and protect your personal assets if something goes wrong on your flip that results in litigation.
How to Create a House Flipping Business
As an experienced real estate professional deeply entrenched in the world of house flipping, I've navigated the intricate landscape of property rehabilitation with a wealth of first-hand expertise. Over the years, I've encountered and surmounted various challenges, making me well-versed in the risks and rewards associated with flipping houses.
The article rightly highlights the inherent risks involved in house flipping, emphasizing the potential for financial losses, emotional stress, and the overall vulnerability of a house flipping business. Let's delve into the concepts discussed and provide comprehensive information on each:
1. Risk of Losing Money:
- Overpaying for Deals: Careful property valuation and negotiation skills are crucial to avoid overpaying.
- Overestimating After Repair Value (ARV): Accurate market analysis is essential to estimate the property's resale value realistically.
- Underestimating Repair Costs: Thorough assessment of repair needs and obtaining multiple quotes can mitigate this risk.
- Underestimating Holding Time: A realistic timeline and accounting for potential delays help in accurate planning.
- Hiring Bad Contractors: Proper vetting and due diligence when hiring contractors are imperative.
- Construction Delays, Market Corrections/Recessions: External factors can impact timelines and property values; contingency plans are essential.
2. Stress:
- Emotional Stress: Despite meticulous planning, unforeseen issues can cause stress during the rehabilitation process.
- Financial Stress: The substantial capital requirement and potential credit implications add financial pressure.
Risk Mitigation Strategies:
- Education: Acquiring fundamental knowledge in real estate and house flipping is crucial.
- Buying at the Right Price: Profitability often hinges on purchasing properties at favorable prices.
- Conservative ARV Estimation: Avoiding overly optimistic ARV estimates ensures a more conservative approach.
- Including Contingency in Repair Estimates: Anticipating unforeseen costs and incorporating contingencies is vital.
- Hiring the Right Contractor: Quality over cost; selecting qualified contractors is pivotal for project success.
- Ethical Business Dealings & Solid Contracts: Honesty and integrity in dealings, coupled with robust contracts, reduce the risk of legal complications.
- Creating an LLC Business Entity: Establishing a limited liability company can protect personal assets in case of legal issues.
Conclusion:
In the dynamic world of house flipping, success is not just about profits but also about effective risk management. By adhering to these risk mitigation strategies, aspiring house flippers can fortify their ventures against the uncertainties of the market and ensure a more resilient and successful flipping business.
