Dealing with hard money fix and flip loans has allowed me to see a number of transactions, both successful and unsuccessful. To buy a profitable fix and flip property with hard money takes more leg work than it does for those able to purchase with cash. Today we are going to look at three of the biggest pitfalls I see when new investors are getting into fix and flip transactions. Avoid these pitfalls and your chances of being profitable on your fix and flip will be much better!
The first issue I see is an over estimation of the as completed value of a property. This is huge, as all of your numbers are dependent upon this value. It is not enough to have your realtor tell you what the property could be worth. Neither is it enough to simply log on to Zillow or another similar site and use their value. It is crucial for you as the investor to do your homework with regards to value. Getting information from your realtor, Zillow, Trulia, etc. is a great start, but then you have to go out and drive the comparable properties. See why some sold for more than others. Look at the neighborhoods. See how long listings are sitting on the market in the immediate area. When you are done with your value homework you should be able to explain your anticipated list price, the lowest price you would take for the property, how long it will take to sell and why this information is accurate.
The second issue I see is an underestimation of the cost of the work to be done. Taking the lowest bid is not always the best option. Getting only a single bid can be just as bad. Get to know your contractor. Call references, find out whether work was completed on time and on budget. This is really important as it is almost always less costly to get it done right the first time as opposed to doing it twice.
The third issue I see is investors who do not calculate their holding costs. If you are taking a hard money loan for rehab, chances are the money is going to cost you around 1% per month, plus points/fees/insurance/utilities/etc. This can add up to a substantial amount, especially if the work takes longer than expected and the marketing time is longer than anticipated. Be sure to buffer in enough time for unanticipated issues, and include the extra holding costs that time will cost you.
If you get these items right you are going to be in a much better position to be profitable with your fix and flip transactions. If you would like more information about our lending programs, please call today at 877 462 3422. You can also visit our California hard money loans page and browse our loan programs, requirements and calculators.