As a San Diego hard money lender that has been involved in over 750 fix and flip projects throughout California, I have had the opportunity to witness, and in many cases experience, nearly every mistake a real estate investor can make when flipping a home. From underestimating the renovation budget to overestimating the completion value, many of the mistakes that I have witnessed as a hard money lender funding fix and flip loans can be avoided.
Many new investors are excited to immediately jump into the home renovation business. They see shows such as Flip or Flop, Flipping Out, or Flip this House and think they can easily locate a house to purchase, fix up, and sell. Unfortunately, what these dramatizations do not show is the amount of effort that goes into identifying a good investment opportunity, planning and executing the renovations, and quickly selling the property for a profit.
I have compiled a list below of common errors that I see as a hard money lender funding real estate investors that flip houses:
Most successful real estate investors will tell you that making money in real estate happens at the time of purchase. If you purchase a property at too high of a price, no matter how much money you throw at it, you will not make a profit.
Experienced real estate investors approach each transaction as a business opportunity and do not get emotionally attached to any one transaction. They set a ceiling to their purchase price because they know the cost of repairing a property to obtain its highest value are static. Therefore, the only reason they would be willing to purchase a property at a higher price is because they are willing to make less profit at the end.
Many real estate investors purchase a real estate investment opportunity without understanding the actual cost of the renovation. They may think the property simply needs new flooring and a coat of paint. However, what they actually find is the plumbing and electrical needs to be replaced, the roof needs repairs, and the foundation has issues. What was supposed to be a $20,000 budget quickly turns into a $50,000 budget.
Hiring the right people is critical for a successful transaction. Many new investors hire family or the cheapest contractor to complete the work. What they find is that they cannot effectively manage their family member, especially when the work is subpar, or the cheapest contractor disappears halfway through the project.
I recommend getting at least 3 bids from contractors that are referred by other local investors. Never pay before the work is complete and always have a contract in place that specifics a scopr of work, budget, timeline, and progress payments. Lastly, I highly recommend confirming their contractor license is active and they have the appropriate insurance.
Too often I hear real estate investors say that they have found a good deal on material or a contractor just to find out that they are delayed because the material didn’t arrive on time or the contractor didn’t show.
If you are using a hard money loan to fund the purchase and renovation costs of the project, it is important that you take into consideration the cost of the money. If you are delayed by one or two months, the money you saved on the material or contractor will probably be lost on the interest payments of the loan.
There are a lot of hard money lenders in the industry that say they can fund quickly or at a cheap rate and terms, but when it comes to executing, the loan structure or pricing is significantly different from what you were originally quoted.
Don’t get stuck with the wrong hard money lender. Contact several hard money lenders in your area and get pricing beforehand. I would also suggest that you get pre-approved with hard money lender before you identify a real estate investment opportunity. That way you are not rushing to submit your loan application or other diligence material after your offer has been accepted.
Flipping homes can be a very profitable business if done right. I was once told that all the work when painting a room is in the actual preparation. Once the preparation is complete, the physical process of painting is easy. Just like painting a room, create a design and budget, develop a timeline, select your contractors and hard money lenders, and then execute on the plan.