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Fix & flip investing has become an increasingly popular strategy for those looking to generate healthy returns with real estate. Today’s competitive, low inventory market environment has created a prime opportunity for investors to convert older and neglected properties into desirable homes, while also making a tidy profit. As a broker or lending partner, you play a key role not just by connecting your clients with suitable financing options, but also as an advisor, helping investors focus and refine their strategies in order to find success.
Read on as we cover 8 of the most common mistakes fix & flip investors make, and how brokers and lending partners can help guide their clients in navigating these challenges.
1. Underestimating Rehab Costs
Unless you have experience with renovation or construction work, it’s likely that you aren’t going to get your rehab estimate right when flipping a property. This error can easily cut into profit margins when unexpected costs arise, so it’s better to leave this task to the professionals.
How Brokers Can Help: Encourage clients to hire experienced appraisers and contractors to get accurate estimates before securing financing. You can also help investors secure loans that allow for contingencies in the case of unexpected repair costs.
2. Rushing the Due Diligence Process
Investors may skip key parts of the due diligence process in the pursuit of trying to complete their deal quickly. Skipping the home inspections can be a fatal error, as homes sometimes have hidden issues like structural or flood damage which are very costly to fix. Failing to check for liens, zoning restrictions, or permit requirements can also cause significant delays.
How Brokers Can Help: Always advise your clients to get a thorough inspection before closing on a property. Also, conduct a title search and check permitting requirements in the property’s local jurisdiction. You may need to work with financing partners to adjust loan terms when due diligence reveals major issues.
3. Overpaying for the Property
In today’s competitive real estate market, acquiring a property at a fair price can be difficult, but it’s a crucial part of a successful investment. Paying too much upfront reduces the potential for profit after renovations and resale. Additionally, new investors tend to get caught up in bidding wars and don’t account for market fluctuations that can ruin profit margins.
How Brokers Can Help: Help clients analyze market trends and comps before committing to a purchase. Educate them on the 70% rule, which states the purchase price of a property should be less than 70% of its after-repair value (ARV) minus renovations. This helps ensure there is enough of a profit margin built into a deal to ensure a decent return, even when things don’t go exactly as planned.
4. Choosing the Wrong Loan Type
Investors often choose to go with conventional loans for their real estate projects, but the longer timeline that comes with a mortgage doesn’t suit a short-term investment like a fix & flip. These loans are also typically only for acquisitions, which means they don’t cover renovation costs. Additionally, investors fail to compare different loan options which can help them secure more favorable interest rates and terms.
How Brokers Can Help: Explain the benefits of private lending, including hard money and bridge loans which are backed by the property being financed as collateral. They have shorter loan periods, can provide additional funds for renovations, and are often easier to qualify for. It’s also the job of a broker to secure financing with favorable terms that fit the specific needs of your client’s budget and timeline.
5. Miscalculating After-Repair Value (ARV)
First-time investors tend to be too optimistic and overestimate the ARV of their projects. They often fail to account for local market conditions like supply and demand, as well as comparable properties in the same market as their investment, which can lead to financial losses.
How Brokers Can Help: Encourage your clients to get multiple opinions on ARV from appraisers, real estate agents, and more experienced investors. You can also provide your own insights on market trends, and conduct a comparative market analysis (CMA) to give them a better idea of what their ARV may look like.
6. Poor Budgeting & Cash Flow Management
Investors often overlook the importance of cash flow management while they’re completing work on a property. They fail to account for carrying costs like property taxes, insurance, and utilities which can add up over time, affecting the final return. Additionally, unexpected delays can extend the project timeline indefinitely, leading to higher carrying costs.
How Brokers Can Help: Educate your clients on how to calculate the total cost of holding a fix & flip property, including all related carrying costs. Then, stress the importance of communication and active project management; the more involved they are, the quicker they can work around delays and the faster the project can be completed.
7. Hiring the Wrong Contractors
In the pursuit of lowering costs, investors tend to go with the cheapest bid instead of the most qualified contractor for completing work. This mistake can lead to several issues, including delays or having to redo the work, which can reduce profits. Most of the time, it’s better to go with experienced contractors even if they charge a premium rate.
How Brokers Can Help: Encourage your clients to take time to vet multiple contractors, checking references and examples of their past work. Additionally, ensure they are working with licensed, insured professionals to avoid liability. Quality renovations can be costly, so help your clients secure fix and flip financing that provides additional funds for this work.
8. Failing to Have an Exit Strategy
Another common mistake investors make is failing to create a well-thought-out exit strategy for their fix and flip. Investors will often focus only on the “fix” portion without dedicating much time to the “flip”. This means market downturns or delays can cause serious difficulties selling, leaving borrowers stuck with a property they can’t sell.
How Brokers Can Help: Advise clients to have multiple exit strategies planned, including renting the property out for a period of time to recoup costs. It’s also crucial that they dedicate an appropriate amount of time to research and planning so that their strategy can be executed correctly. Encourage clients to look into market data, comparable property sales, and marketing strategies in order to ensure a successful exit with their investment.
RCN Capital
The best way to save on a real estate investment is to obtain financing from a lender that can provide you with the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are looking to finance a fix & flip project, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.