5 Pitfalls to Avoid if You are a New Rehab Investor
Successful flippers (real estate investors) employ strategies and standards to become successful and more importantly to stay successful. While you are bound to make a few mistakes along the way, save yourself money, delays and headaches by learning from the mistakes of successful flippers. Read on to find out what the most common pitfalls are and how to avoid them.
Payment Issues with Contractors
Every investor has different preferences when it comes to a payment schedule. However, no matter the details, make sure you’ve agreed on the payment schedule beforehand in order to avoid any issues later. Go over the schedule in minute detail with your contractor so there are no nasty surprises later. At the time of payment, get lien waivers from the contractors, stating that they have received the payment and that they waive any future lien right to the property for the amount paid.
Make sure you’re not paying too much upfront. Your down payment should generally be as little as you are able to negotiate with your contractor. A smart contract will tie the major portion of the payment to the work that has been done to complete the project. Generally speaking, 10% to 25% can be considered acceptable according to the scope of the project (larger projects tend to involve smaller down payment).
Avoid going down the 50-50 route, where you pay half the money upfront before any work has been undertaken at all. And you’ll want to evade contractors who demand a down payment for preliminaries like meetings or checking the site for a large home improvement project. Preliminary tasks like these are just fundamental aspects for the job. Similarly, never go with a contractor who demands money upfront for materials; this is something any decently run operation should be able to cover itself. As a rule of thumb, pay a small amount upfront to get the job started, and keep the equivalent of that amount on hand for when the job is finished in order to keep the contractor interested all the way.
As an investor, you need to find the best scenario that suits your particular financial needs. Consider your finances when deciding whether you should buy materials to avoid the contractor marking them up, or just pay the contractor labor or let the contractor take care of everything for one price.
Not Having or Not Using a Profit-Building Formula
You need to determine the maximum purchase price you can offer for a property that you plan to rehab/resell or wholesale. Not doing so could cause you to go overboard on the expenditure, or even keep you from spending more where it is appropriate. One often used formula is:
Maximum Purchase Price = Sales Price – Fixed Costs – Desired Profit – Rehab Costs
Once you have your formula down, you stick to it like glue. Deviating from this could cause your expenses to soar in the long run. And do consider other factors other than price as well: location for example. If the house you bought was on primo estate, you should factor in how much more desirable that would make it to customers.
Failure to Research
Research is the bedrock you need to start on. Your research should be thorough, and factor in comparables as well as market time to determine market vitality. The first thing you need to look at, of course, is location, location, location. This is the factor that will have the most effect on your house flip. You begin with a list of most desirable cities, gradually moving on to the neighborhood, and then a particular location within that neighborhood. The closer the house is to public transportation and stores, the better. Try to find an area that’s further away from noisy places like airports and highways.
Of course, this also depends on what kind of purchaser you are expecting to get. Do you expect to sell to a family? Well, that would make proximity to a good school district an important factor. A good piece of advice is to do the same kind of research that your buyers would tend to do. Figure out the demographics of your target market: do they tend to own cars, making public transport less of a factor and good parking spots (or better yet, a garage on the property) more of one? Not knowing the area or what buyers want in a home is one of the worst mistakes you could make.
Don’t forget to research the physical characteristics of the house you’re trying to rehab or resell. Look for a place that has some unique traits, but still blends in well with the rest of the neighborhood.
Do not fail to consider all the possible and unknown factors that could affect the budget. Think about the things that could adversely or positively affect the house purchase, upgrade costs, carrying costs and selling costs. Do not make the mistake of becoming too emotionally tied to the project, as this could cause you to carry false expectations of getting more than the market price. Talk to your agent and have them go over every factor you need to consider so you know exactly what you should expect.
Of course, the house itself is what will make or break your investment. Again, research is extremely important here; you need to look into what designers and contractors will give you top quality and professional results. Find an experienced designer who is able to see the potential within each unique rehab project, and can thus execute it within the budget. Additionally, steer clear of excess customization, which is more likely to be indicative of your own tastes and preferences than those of your customers’. Always keep your customers’ likes and dislikes in mind; those are the priority. By doing so, you will be able to cater to the widest possible potential market. As mentioned earlier, give the house some unique flourishes, but make sure it’s able to blend in as well.
Being a Rehab or Fix and Flip Investor can be a worthwhile and profitable wealth building strategy if you avoid the pitfalls mentioned above, do your research, and have the right team by your side! Consider Alexis Hart McDowell, the Enterprise Esquire, as your legal counsel to help you avoid legal pitfalls on your road to success. We have Business Formation and Legal Counsel Packages specifically created for Real Estate Investors, such as yourself. Schedule your free 15 min. phone consultation today!