There are a great deal of new investors looking to get into the fix and flip business. We do rehab loans for these types of transactions, and work with new investors on a regular basis. While we have a lot of successful investors we have worked with, one pitfall they must avoid is using an overly aggressive after repair value for their base assumptions.
A good after repair value, or ARV, should give an accurate representation of what the property is actually going to sell for once the rehab is complete. This value needs to be accurate, as all other numbers will be based upon this assumption. Having a great real estate agent certainly helps these investors wrap their hands around this all important number, but it is important that they do not rely only on their agent, but rather roll up their sleeves and do their own research as well.
One very simple thing that can be done is for the investor to actually drive the comps for the property. It surprises me how often people are willing to walk into a deal without looking at the properties they are using as a basis for their after repair value. Even if no other research is done, actually looking at the properties in person, seeing the neighborhoods and considering any differences between sales comps and their subject property will certainly bring a quality perspective on the true after repair value. Looking at comps on paper is a great place to start, but if buying, fixing and flipping property is to be a business, you must get out and see the properties you are comparing in person.
Another item that seems to get overlooked a lot is the days on market. Investors who are working with me are paying interest on their loan. It's not cheap money, and every day the property is held is another day of interest that must be paid. That debt service is something that can easily be overlooked. Pricing a property properly so that it will sell quickly and reduce the amount of debt service that must be paid is incredibly important. Knowing this going in and adjusting your after repair value estimate accordingly can really payoff.
There are a lot of other potential pitfalls, and I will be writing about more soon (so check back in!). For more information about hard money lending, please visit our California hard money page on the web!