Making good cost projections is integral to your success as a house flipper. When you don’t predict your numbers accurately, you run a major risk of loss on your investment and the loss of your investor’s money as well.
For me, predicting accurate costs are so important to my house flipping business, as they predict all my profits and losses on every flip… and unfortunately I have learned the importance of doing this accurately by not doing it accurately!
So whatever you do, make sure you accurately pay attention to the costs you predict for your house flip projects.
As Dad always said: “Do as I say not as I do”.
Financial predictions are critical to your profitability as a real estate investor, and these are an important variable to include in your total expense analysis.
Beware of All the Success Stories
Every so often I hear about other house flippers who buy, rehab and flip all in less than three months. If you can do this, then more power to you. In my experience, this is the exception to the rule.
But seriously… how possible is this to do on a regular basis?
Think of a scenario where you buy a home and you are prepared to get going on the flip. So assume you have a GC lined up and are ready to get the rehabilitation going.
You have all your plans in order and you feel confident you can get the house rehabbed and sold in three short months.
The truth is that you really should have extra time and cost overruns “baked into the cake” of your financial and time models. These are for all kinds of unexpected events, including repairs you had not predicted and costs you never could have envisioned. The truth of the matter is that a lot goes into rehabbing a house and if you have unforeseen issues such as environmental reports you never even thought of, it can throw off your rehab for weeks, if not months. Or in some worst case scenarios, for years.
You Team Will Assist You
As hard as it may be to admit… when it comes to the repair end of the house flipping process, there are times when things are just beyond your control. This is why it’s so vital to have a competent team when you start flipping houses. Yet even with the best team unexpected things that are completely out of your control can still happen-which can require timelines to be adjusted and projects to be started later than planned.
In fact, it’s more common to see costs rise over time instead of decrease from your initial forecasts. It is certainly important to remember that this could happen when planning out your house flip time-line.
Thankfully, I have been fortunate enough to have assembled a team of experts that help me minimize this risk. Nonetheless, I always put in four to six weeks for the rehab, then even add a few more just to be safe.
A best case scenario is having the good fortune of getting an offer the first day you show the property at an open house. Sometimes you just get lucky and this happens. Even in this market, it does happen. You should aim for this kind of happy scenario, but don’t rely on it for your profitability.
The Biggest Obstacle: Banks
There is no way to predict how long the bank takes to process the loan. They are frustrating and slow at times, so assume it will occur. Obtaining signatures, faxing, documenting…they all take time, as silly as it sounds, but it’s true.
Another thing to think about is that even though it may take three months to get it all completed, the financial institution will hold things up with their corporate procedures. The frustrating part is that all these things are far beyond your control. So don’t be surprised by it. When it happens you should not be shocked.
Whatever you do, make sure that you factor all these things into your house flip timeline. It’s essential to making sure you lock in profitability.
I recommend predicting six months from start to finish, but still aiming for 3 months. Whatever you do though, make sure you consider the worst case scenario of nine to even 12 months. If you can handle 9 to 12 months of holding on to the property, then you should definitely do the deal.
So make sure you take a hard look at your holding costs of holding the flip longer than you expect. This includes soft costs like utilities, property taxes and insurance and hard costs like finance charges and points. Then factor into your numbers. If you still make money, go for it. If you don’t, then you may want to reconsider and look for other properties to flip.