Flipping houses can be an extremely lucrative business but inevitably some flippers fail.
They rarely fail because they don’t know how to renovate a property.
The cause of their flipping hell is usually another f-word – finance.
There are many finance-related pitfalls when it comes to flipping.
Funding a flip may not be the hardest bit – finishing the project with a tidy profit takes a lot more preparation.
And if you fail to prepare, prepare to fail.
Here is a closer look at some of the biggest traps for flippers to help you avoid becoming a flopper.
Underestimating total cost of project
Doing your sums and getting them right is a critical component of any flipping venture.
Every successful business lives and dies by its business plan and budget.
Get it wrong and you can’t win.
One of the most common pitfalls flippers make is underestimating the total cost of their project.
Identifying the purchase price and visible renovation costs is relatively easy.
But it’s the soft or hidden costs which can quickly mount up and erode profit margins such as:
- Finance costs
- Insurance
- Property taxes
- Permits
- Utilities
- Selling costs
Flippers fail if they don’t incorporate all these extra costs as well as an overrun or contingency of between 5-10 per cent into their budget.
Sometimes, things don’t go to plan.
It may be because of bad weather, market downturns or other unforeseen delays in the project.
Every day you hold a property beyond its anticipated selling date costs you money.
A porch.com survey revealed 63.5% of flippers underestimated their total costs with 36.2% working from budgets that were too small.
ATTOM found 31% of flips in the US had gross profit margins under 20% – often due to underestimated costs.
Poor cash flow timing
Mismanaged cash is another extremely common reason why flippers fail.
Timing is everything and it is never more important than when buying and selling property.
Flippers live or die by getting that timing right.
But sometimes, even the best laid plans run off track with unforeseen building delays, inspections or bad weather.
These delays quickly chew up profit margins and can even force flippers to dump a property unfinished.
When delays strike and flippers find themselves in a bind, they’ll either have to rely on enough working capital reserves or take out expensive bridge funding.
That’s unless they have partnered with a lender who allows them the flexibility to renegotiate.
Remember, it’s not just about the money – it’s about the right money at the right time.
Cash might be king but cash flow is the emperor.
Not understanding lending structures
More than 60% of flippers fail because they choose the wrong kind of loan.
They don’t understand the differences between hard money loans, construction loans, private capital and mezzanine financing.
Choosing the wrong option means higher fees, misaligned repayment terms and potentially rigid draw schedules that don’t match the reality of their project.
Some flippers fail because they lock themselves into a high-interest, short-term loan and don’t or can’t refinance when they sell their property.
Borrowing too much money is another common mistake.
It can kill a flip much faster than poor workmanship.
Over-leveraging or getting greedy
In hot markets, the temptation to leverage multiple projects has brought many flippers down.
Problems arise if even one deal stalls.
Without cash reserves, a big enough contingency line or bridging finance, it can trigger a domino effect that can collapse an entire portfolio.
In economic downturns, over-leveraged flippers are usually the first to default and walk away from their projects.
In recent years, rising interest rates have added greater risk to flipping ventures causing a fall in flipping projects by as much as 32.4% over the last two years.
That’s why it is essential flippers have a clear plan (selling or refinancing) and build not just equity but a profit margin into every deal.
Not having pre-approved exit finance
Some flippers naively assume they’ll simply sell a property when it is completed.
But if that doesn’t occur in time or the market shifts, they’re in big trouble.
Without a sale or refinance plan, flippers are left with expensive debt, forced to discount or even fire sale their property.
Experienced flippers always get pre-approved for exit financing before they even close on a property.
Remember, you need capital to get into a flipping project but you also need a clear strategy to get out of it!
Weak relationships with finance partners
First time flippers often make the mistake of financing with anonymous lenders or online platforms.
If something goes wrong, there is rarely any room for negotiation.
Real estate professionals will tell you that successful flippers partner with an experienced and trusted advisor who mentors them through the process, while providing them with flexible terms to guarantee the success of their projects.
These relationships are often the difference between profit and loss, success and failure.
You don’t just need a loan – you need a strategic financial partner.
Get flipping finance support today
If you visit the graveyard of failed flipping projects, you’ll discover financial issues is the common thread in their demise.
Experienced flippers work with experienced lenders that offer flexible terms ideally suited to their flipping projects.
They work with lenders who ensure they don’t underfund their projects, build ample contingency margins into their budgets and have pre-approved exit finance ready to go when they need it.
Equidy is both a private money lender and finance strategist for flippers in California.
Equidy has an intimate and personal history with all aspects of property development in California and has done so for more than 40 years.
They work closely with their clients to ensure they don’t make rookie errors but instead maximize the return on their investments without putting themselves at unnecessary financial risk.
They do this because they know the business backwards and advise their clients every step of the way to help them eliminate costly delays.
Equidy is a hard money lender who will finance flippers and developers in as little as 48 hours.
They stand by their core belief that anything is possible and they are determined to prove it every single day.
Even in difficult economic times, they love to reward entrepreneurship and strive to help their clients realize their wealth creation dreams.
Contact Equidy today, apply in just a few minutes below and you can also book your free strategy call.
