Top 5 Newby Mistakes
Throughout my career in hard money and real estate investing, I have seen a few common mistakes made by the majority of new investors. The list of important things to look for and analyze during a typical fix and flip are endless, as we all know every deal is different. However, here I will try to outline the top 5 mistakes I see.
Shooting for the top of the market: all too often, investors bet on appreciation and acquire property based on estimated after repair values (ARV) that are too aggressive. While analyzing deals, it is important to check all possible limiting factors, such as price per square foot and sales price caps. For example, sometimes the adjusted $/sf makes sense, but it results in an ARV that is $50k above the next highest sold comp. Remain conservative when analyzing investments.
Not checking your Realtor’s opinion of ARV: this may be the most common mistake I see, investors will argue their estimated ARV based off the 4-5 comps sent by their realtor. The problem is that the investor never checked the legitimacy of the comps and the full range of other comps. In other words, while their Realtor’s comps may support said ARV, there may be an additional 5-6 comps suggesting a much lower ARV. And this ties back into mistake #1, when a large range exists, don’t bet on the highest end of the range.
Under bidding rehab estimate: contractors can be off, too. Always get multiple estimates to compare and always air on the side of caution. You never know what's on the other side of the wall you demo. Plan for the worst and anything better is a bonus. Get in the habit of including a contingency in your budget, a buffer that will help when issues arise. Also, make sure you can float the job with your own reserves, to ensure smooth project progression.
Miscalculating holding cost: time is money, especially when you're paying higher hard money rates. Underestimating the timeline for permits, rehab, market time, and closing time can eat into your projected profits quickly. Once again playing into mistake #1, over priced houses sit longer, eating into profits and therefore the higher list price becomes no longer worthwhile very quickly.
Cutting corners for cheaper rehabs: most agents will be able to agree, when showing prospective home buyers a newly renovated home, the buyers expect perfection. They will be laser focused on areas that show craftsmanship clearest and will be quick to walk when they see areas not lining up. If the budget was underestimated, do the right thing and FIX the issues rather than hoping the buyer doesn’t notice.
Real estate investing is a hands on learning process. Successful investors make plenty of mistakes, but they learn from them and plan better in the future. Don’t reinvent the wheel, join a team and learn from local experts in your area. One serious mistake on your first couple flips could throw you out of the game all together. Remember, the majority of investments aren’t great ones, don’t bend the numbers in your favor. “The difference between successful people and really successful people is that really successful people say no to almost everything.” - Warren Buffett.