5 Big Problems of Flipping Homes and How to Overcome Them
By Ethan Roberts
Home flipping is a lucrative and fulfilling way to make thousands of dollars within a short period of time. But it can also be a difficult and frustrating endeavor when things go wrong. And things will go wrong.
When investors talk about the various obstacles in their way, my usual response is, “Look, if flipping were easy, EVERYBODY would be doing it!” Flipping homes requires hard work, persistence, and a great deal of patience, because you’ll inevitably encounter problems along the way.
Here are five of the most common problems investors face when flipping, along with ways to prevent or deal with them more easily:
Flipping Problem #1: Bad Weather.
No matter what part of the country you live in, sooner or later bad weather is going to throw your rehabbing schedule out of whack. Maybe it’s too windy and the paint you’re spraying is going everywhere but on the house, or maybe it’s raining when you planned to install the new siding. Maybe it’s 95 degrees when you need to landscape. No matter what, you need to be prepared with Plan B.
Plan B means you have a backup plan in case the weather is bad. It could mean you work inside all day, or start the exterior work at 7:30 a.m., before the afternoon showers come. It could mean you roll paint on instead of spraying. The core idea is to be proactive, and always have the flexibility to do something else when Plan A goes awry.
Flipping Problem #2: Theft.
Sadly, theft occurs during rehabbing, and it can wreck havoc on your budget. I know investors who’ve had outside air conditioner units stolen. One investor neglected to change the bank-installed front door lock and had all his tools, a pressure washer, and a few hundred dollars of tile stolen from the garage. Sometimes even the people you hire to work on the home steal from you.
But there are ways to prevent theft. Here are a few:
- Always install new door locks first before any other work begins
- Secure your backyard with a locking gate and fence
- Don’t leave valuables around when workers you don’t know are around
- Install an alarm system and motion detectors on empty properties.
Sometimes, you might even have to forego a For Sale sign to avoid people letting people know that the property is empty.
Flipping Problem #3: Delays.
Nothing is more frustrating to the average investor than delays on a flipping project. Service providers may get delayed on prior jobs, especially when they’re doing roofing or other exterior work. Other delays can include materials that don’t arrive on time, machines that break in the middle of a job, illness, personal problems, irresponsible workers, and a host of other factors. I once had a carpet installation delayed because the only installer available had to leave town for a funeral.
The problem, of course, is that one delay can prevent you from performing other work. If your painters are delayed, you can’t install new flooring until they finish their work.
Even after you finish rehabbing the house and have a contract with a buyer, there may be delays in the closing process.
- Have flexible back-up plans
- Never rely on just one company or person to perform the work
- Always select the best possible people to work for you.
And last but not least, understand that some delays are inevitable in a big project like a home flip. Don’t let it get you down.
Flipping Problem #4: Government regulations.
At one time, nobody cared if investors were making money by flipping homes. But home flipping got a black eye when the real estate market crashed in 2008. Politicians and the media chose to unfairly scapegoat home flippers and a few unscrupulous mortgage lenders for the whole market meltdown.
In the wake of the crash, the government put a slew of new regulations into effect, many of them simply to discourage home flipping. For example, the Federal Housing Administration (FHA) has a rule that you must own a home for at least 90 days before you can go into contract with a buyer who’s using an FHA loan. They may suspend this rule when the market is soft, but as soon as the market picks up, the rule is reinstated.
Also, if you sell a home for more than twice your initial purchase price, the FHA requires two appraisals, and the seller must pay for the second one. The lower of the two appraisals is the one the buyer’s lender must use.
Other agencies, such as Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development (HUD), have rules that prohibit investors from bidding on their foreclosures for the first few weeks of listing. Only buyers who will occupy the home may bid during this time.
Since time is money when flipping a home, try to find a buyer with cash, conventional, or Veterans Administration (VA) financing within the first three months. If possible, list the home for less than 100% of your purchase price when you re-sell. For example, if you buy a house for $50,000, list it for less than $100,000.
Flipping Problem #5: Unforeseen Expenses.
When you’re remodeling a home, chances are that you’ll have unplanned, unbudgeted expenses. That’s just the nature of the beast. Maybe you didn’t expect to find mold behind the shower wall when you removed the tile. You didn’t expect the water heater to leak or the pipe in the wall to burst. Any of the issues I mentioned earlier—delays, bad weather, or theft—can also trigger higher costs.
These things can and will happen. All you can do is try to budget for unforeseen expenses in advance so you’re not caught by surprise.
Here’s the bottom line: The difference between having fun with a flipping project and letting the process aggravate you depends on you being flexible and keeping a level head at all times. There’s no way that a real estate project will ever go according to plan from beginning to end. So relax, take a deep breath, and see each problem as simply a challenge to be overcome. Visualize that big pile of cash that will eventually come your way at the closing table. Feel better now?
Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace.com, and his work has been featured on Money.msn.com and Reuters.com. He’s also written for SeekingAlpha.com and MarketGreenhouse.com, and was one of five contributing editors to TheTycoonReport.com. He’s been investing in real estate since 1995 and has been a Realtor since 1998. He also teaches classes on investing in residential real estate.