Avoid These House Flipping Budget Breakers
Decisions & Elements of a Flip that Destroy the Best Financial Plan
Oct 16, 2009
It is said that the road to hell is paved with good intentions. Any real estate investor who has had a flip go bad and watched helplessly as the budget spiraled out of control can attest that this adage holds many truths. The reality is that although there are situations that an investor cannot control such as bad weather that delays a project, and unforeseen damage that is uncovered during the demolition phase; the hard truth is that in every other situation, a budget can be controlled with a little diligence and a lot of self control.
There are 101 or more reasons that a budget can go awry. However, there are a few common reasons that many inexperienced house flippers fall into that balloons the project budget and erodes the profit margin.
Overbudget and Underspend
Creating a credible financial plan for any house flip in the first place is the surest way not to go over budget. Many novice investors under budget and then over spend on a project. Getting this step right does take practice and comes with experience dealing with suppliers, contractors and home supply stores. With the frequency of properties purchased, a good investor will negotiate volume discounts to save money.
It is important to research each step of the project and cost all materials ahead of time and then stick with those figures. Subcontractor work should be in writing, with each contractor providing a written quote of all charges. Use a detailed checklist that outlines all materials needed and the work required, creating a realistic budget. A novice flipper with a small budget must work twice as hard to stay on track.
Know the Neighborhood and Purchase Accordingly
Contrary to what the popular property flip shows on television imply, it is not necessary to always purchase high end materials and appliances. Keep the quality of the materials in line with the value of the property. In other words, a home that will resale for $150,000 in a middle class neighborhood does not need granite countertops and a whirlpool bathtub because the local market will not support it on resale. This is also an excellent way to either stay on budget or come in under budget. In this kitchen example, quality laminate or tile will work just as well, and aesthetically still give the desired result.
Repurpose Instead of Replace
Often times, it will suffice to resurface bathroom fixtures and fittings instead of replacing them. Every house does not need a new bath tub, vanity and toilet. A bright, clean resurfaced look will give the same effect as new. Similarly, in the kitchen it is not always appropriate or cost effective to rip out the cabinets and replace them with new, custom made or high end cupboards. Sand down the existing cabinetry, refinish with paint or stain, and update the look with trendy new hardware.
Always Stick to the Flip Project Budget
Never switch gears part way through the flip. One of the costly errors that investors make is deciding to upgrade appliances, carpets, or even putting on an addition half way through the project. If it was not in the budget at the beginning of the project, then it is certainly not in the budget now. Remember that the property is being flipped to realize a profit.
Not all upgrades and additions will be repaid. In fact, it is common knowledge that the majority of money is made in the tangible assets that buyers can see and relate to – a great kitchen, a well appointed bathroom, or a spacious master bedroom. Do what is needed to make the house wonderful but don’t go overboard. All the extras erode the budget and guarantee that any profit margin will be slim to none.
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