Ten House Flipping Blunders

IN THIS CHAPTER

check Falling prey to con artists

check Playing hooky from your homework during the purchase process

check Waffling your way to a lost opportunity

check Doing too little (or too much) work on a property

Many eager, ill-informed investors become overenthusiastic about the big picture and lose sight of the critical details that can make or break a deal. They pay too much for a property, underestimate the cost of repairs and renovations, fail to inspect a property or research the title, or sign contracts that they don’t fully understand. In this chapter, I present ten common house flipping blunders to help you avoid costly mistakes and maximize your profits from the start.

Falling for a Scam

Money attracts entrepreneurs, but it also attracts thieves. When you flip a house, you stand to earn tens of thousands of dollars on a single transaction, but being successful requires determination, diligence, and hard work. Don’t let anyone convince you otherwise. Don’t be a sucker. Be on guard for the following threats:

Get-rich-quick schemes, cash-back-at-closing schemes, no-money-down deals, and anything else that sounds too good to be true
Partnerships, especially those that require you to take on all the risk, supply most of the money, or do most of the work
Anyone who offers to take care of everything for you

Speculating on the Housing Market

Like the stock market, the housing market has its ups and downs. In a hot market, investors often become infected with irrational exuberance — the belief that current appreciation rates are an accurate representation of future rates. They overpay for properties, expecting them to appreciate, and when the market flattens or takes a dive, they’re stuck with a property they need to sell at a price no buyer is willing to pay. Don’t bank on double-digit increases in housing values, and be prepared with plan B. Chapter 20 explains a few options for plan B, including holding a property and leasing it out to tenants until the market recovers.

Waffling on an Obviously Good Deal

Some investors experience paralysis by analysis. They overanalyze a great deal and can actually talk themselves out of it, or they waffle until another investor shows interest, and then it’s often too late.

When you see a good deal, act quickly. You don’t necessarily need to buy the property right away, but by making an offer on the property, you can tie it up for several days, so you can research the title and inspect the property (I cover these tasks later in this chapter).

Backing Yourself into a Contractual Corner

Very rarely do people hand you contracts to sign that protect your rights or interests. They hand you contracts that protect their rights and interests. Before you sign a contract or purchase agreement, read it carefully and make sure that it has a weasel clause — a legal back door through which you can make a graceful exit. See Chapter 13 for a complete discussion of conditional (weasel) clauses.

Failing to Inspect the Property before Closing on It

Don’t rely on the seller’s claims and disclosures. The real estate community has a saying: “Buyers are liars, and sellers are worse, and sellers by owner eat their young.” Have the house inspected. A city inspection is best because it provides you with an inspection team consisting of a professional plumber, an electrician, a heating and air conditioning specialist, and a builder (for structural features). In some areas, however, city inspections are unavailable or are performed only on new construction; if that’s the case, have a trusted contractor inspect the property with you.

If you’re buying a house at a foreclosure sale, obtaining a thorough home inspection before handing over the cash may not be an option, but you should inspect the home yourself as thoroughly as possible. Drive by the house, inspect the outside, and do what you can to get inside to take a look around. The less you know about a property, the higher you should set your margin to cover unexpected costs. Check out Chapter 13 for additional information about house inspections.

Do a final walk-through a half hour before closing to be sure that the house is still in the same condition you bought it in and that what you’re expecting to be included in the sale is still on the property. I’ve walked through homes before closing to discover that the seller took all the appliances when they were included in the purchase. It’s better to resolve any issues before you close; you have no recourse after.

Assuming the Title Is Clear

Anyone can sell a property. Even people who don’t own a property can sell it. Some con artists wait until the owner takes an extended vacation. They move into the house, pose as the owner, print out a fake title, and sell it to an eager but clueless buyer. Sometimes, they sell the house to several buyers!

Another possibility is that a homeowner may try to sell you a house without telling you that the property has multiple liens against it. Unless you research the title and have the title company perform a title search (see Chapter 4 for details on hiring a title company), you can’t be sure that the title is clear or even valid or that the person selling the house really owns it. And if you’re not 100 percent certain, don’t buy the property. See Chapter 10 for guidance on how to research properties and their records.

Underestimating the Cost of Repairs and Renovations

When a contractor tells a homeowner that a complete kitchen remodel costs about $30,000, the homeowner acts like one of those old geezers who grew up during the Great Depression, when you could buy a candy bar for a nickel. Beginning investors often experience that same sense of sticker shock when they hire contractors to perform repairs and renovations. Just make sure that you have your sticker shock before you buy a property, not after you own it — when it’s too late to do anything about it. For necessary repairs and renovations, you should have an accurate estimate of all costs before you buy a property. You can jot down notes while you’re inspecting a property and then consult repair and renovation services to obtain estimates. See Chapter 11 for more about inspecting a property and drawing up a budget for repairs and renovations.

Doing Shoddy Work to Save Money

Sellers have all sorts of tactics to cover defects in a home. They may carpet over a floor that has extensive water or termite damage, pump out a septic tank that’s gone bad so the toilets keep flushing for a couple more months, or install wood paneling in the basement to hide defects in the foundation.

As an investor who wants to remain in business, you should treat these tactics as taboo. Don’t sell your soul for a few thousand dollars.

Over-Improving a Property

Transforming a bungalow into the Taj Mahal may be a noble vision, but it ultimately lands you in the poorhouse. Know the housing market in your area and routinely visit open houses to remain abreast of current trends and market demands. Gauge repairs and renovations to meet or slightly exceed what’s currently selling in your area. Your renovated home should be more appealing than comparable homes in the area, but not excessively more appealing.

Forgetting to Pay the Taxes

In the flurry of flipping, taxes are easy to overlook, especially property taxes. Forgetting to pay your taxes, however, can further complicate your flipping operation, and back taxes and penalties can take a big chunk out of your future profits.

Set aside a certain percentage of your profit from each flip in a separate account, and pay your taxes out of that account. This separate account reduces the temptation to spend the money you owe to the government. If you fall behind on taxes, catching up can be tough. Check out Chapter 23 for additional information about taxes and tips on trimming your tax bill.