4 Things You Must Know Before You Flip a Foreclosure

January 4, 2012
It's easy to jump into the pool that is the house-flipping business, but will you sink or swim? There are a lot of things in the industry that are, well…simply more than meets the eye. There's a lot of money to be made in flipping houses, but only if you keep your eyes open and realize what's what.

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1. Money is made in the purchase

One of the biggest misconceptions among first-time investors is that making some kind of unbelievable physical change to a property is going to increase the property value by tenfold. Adding rooms, removing bearing walls, finishing basements, building garages, are not a typical part of our business but do need to be done in extreme cases. Generally the more we improve a property (spend) the more we lose. If you buy right, the rehab will take care of itself and ensure future profits. Be picky and buy right!

2. Property rehab will take twice as long as originally anticipated

As long as we have been flipping houses, I am still waiting for a property to be done exactly on time. I have been ridiculed for this over the years but the truth is property rehab always takes longer to get done than originally anticipated. When things begin to take longer than you thought… don't freak out! Stick to your game plan and push forward. Also, don't get to the point where you feel like it's not even worth setting a "time goal/deadline." Deadlines must be in place to work towards. Set them. Work towards them and let your contractors know the sky will be falling if it isn't done it time. You will be amazed at the level of productivity that starts to happen.

3. Property rehab will cost twice much as originally anticipated

Meth happens, floods happen, gangs happen and rocks get thrown through windows so plan for it in your original budgets with a large contingency amount set aside for surprises. "I had no idea it was going to end out costing me this much to finish the rehab," is a common statement out of frustration. We have been at this a long time trying to get rehab costs slammed into a construction budget, and it isn't an easy thing to do. A question I find myself asking everyday is, "If if decide to incur this expense, will I get more money for the house? If the answer is "no," then don't make the improvement and move on.

4. This is an investment property… this is not your primary residence

Comparing the improvements made to your primary residence to the recently purchased investment property is an absolute no-no. They are not the same: one property is being used for you to live in personally, while the other is being used to sell or rent. Improve the property to the immediate surrounding market place not to your primary residence. Learning to say no to granite countertops, designer carpet and name brand appliances may be the key to staying within budget and making profit.