House Flipping: Four Different Ways You Can Lose Money

When done right, house flipping can be a very lucrative business. Generally, the process of flipping a home goes like this: look for a home, buy it (either on a mortgage or in full), fix it up, then sell it for a profit. However, flipping a house is not as easy as it may seem; there are many variables that you need to consider, and with that, there are a lot of things that can go wrong as well.

Losing money is perhaps the worst thing that can happen when flipping a house, especially if it’s your first one. Sometimes, losing money is unavoidable. But more of then than not, the mistakes that have led to profit loss are completely preventable. That said, here are the most common reasons some house flippers lose money:

The house is too expensive

Biting off more than you can chew is the biggest mistake that many novice flippers make—whether it’s by buying a house that is too expensive or buying one that requires too much work. Either way, you are more likely to end up losing money rather than earning a good profit.

A great way to avoid this mistake is to find a reliable mortgage broker who can provide you with reasonable interest rates. Some flippers think that interest rates don’t matter much since they won’t be holding onto the home for too long. However, the interest can still add a significant amount to your mortgage payments—not to mention the fact that there is no guarantee that you’ll be able to sell the house instantly.

You’ve underestimated the costs of renovation

renovation planning

Even if the price tag on the house is low, that doesn’t always make it a potentially profitable flip. Too many beginner flippers think that just because a house is cheap, they can make a good profit on it. And the main reason for this is that the cost of renovation can easily amount to 10% to 20% of the house’s purchase price.

Obviously, the more run-down the house is, the higher the renovation costs will be. If you underestimate the costs of making the house habitable and attractive to potential buyers, you may be setting yourself up for a loss. For example, if you buy the house for $70,000, underestimate renovation costs at $15,000, and expect to sell it for $110,000, you may fall short of making that $25,000 profit if renovation costs go beyond $35,000.

An easy way to avoid this pitfall is to hire an expert contractor and a home inspector. Have them give you a clear estimation of how much repairs will cost, plus the construction needed to bring your design to life. This way, you can steer clear from money pits and find a more suitable home for your budget.

You try to repair things that you shouldn’t

Trying to do as much construction work yourself is always a valiant effort. But if you don’t have the right skills or tools, it’s probably best to leave the job to a professional. At best, you’ll waste time and money and still have to hire a contractor. But in the worst-case scenario, you’ll damage something major and end up having to pay a huge amount on repair costs.

Not only will you have wasted your time and money, but you’ll also be losing your potential profit. That said, leave the major jobs to professionals and stick with what you can do without causing inadvertent damage.

You don’t price the house right

Considering the energy, time, and money that you put into a flip can make it difficult to make smart pricing decisions. After all, you’ve worked so hard on your flip; it’s only natural to feel that you deserve a good amount of profit. But this kind of thinking can lead to you pricing the house wrong, often higher than it is supposed to be.

Understandably, you want to make a profit for your flip. However, target a too-high profit is not always going to work out, especially if the house has been on the market for too long. To avoid this mistake, hire an experienced real estate agent to help you price the home right based on the market, neighborhood, renovation costs, and other factors in between.

Making these mistakes can have you paying for your flip instead of making a profit from it. Luckily, most of these are preventable—as long as you make rational decisions, keep your emotions in check, and work with the right people, you have a good chance of making it out with a good profit in hand.