Wednesday, March 3, 2010

Avoid These Ten Common Mistakes When Flipping A House

Experienced home flippers know that there are pitfalls to any promising piece of property, and they need to avoid the most obvious ones. You must too. Learning from the mistakes of others can result in huge rewards if you find you are ready to start a business that focuses on flipping homes. The following are pitfalls and mistakes to avoid and how to work some of the situations to your advantage.

1. If your financial situation is not healthy, don't start flipping just yet.
If you do not have the following necessities in place, put flipping homes on
the back burner for now:

* Full-time job.
* Income that allows you to put away 10% of your monthly income for savings.
* Six months of income already put away in either a savings account, CD or
some other form of liquid holding that draws interest.
* Account separate from your savings or CD with $10,000 for repairs on your
future investment.
* Potential investment partner or partners.

2. Don't use a stated income loan, better known as "fibber loans."
Stated income loans were created to help individuals with variable income qualify for home loans - e.g., small business owners or those who work sales commission jobs. Very little or no proof of income is required for stated income loans. It should also be noted they typically charge a slightly higher interest rate to cover the risk.

3. Don't be untruthful on your loan application.
It is a federal crime to lie on a loan application. You may get the loan, but if you are caught, you face charges of bank fraud and possibly others. Common fallacies submitted on mortgage applications include an overstatement of income, understatement of debts, and a commitment to live in the home as the primary residence.

4. Don't start without a business plan.
If you don't have a personal financial budget, create one. Then, create a business financial budget that indicates how much you have set aside and what you can allocate out of every paycheck for repairing future properties. If your business plans falls short of savings for repairs, wait to flip until your finances are healthier.

5. Don't take on too many projects at once.
Start with one property. Once you get your feet wet with a successful flip, go on to the next. Don't get in over your head with too many properties at once.

6. Don't buy a home sight unseen.
Never, ever, buy a home sight unseen. It doesn't matter if it is located in the classiest part of town, the asking price is lower than half of what area homes go for and the seller is willing to pay your closing costs. Simply don't do it.

7. Don't buy a home with structural problems.
Structural problems, like a leaky basement or cracks in the foundation, are an invitation to huge out-of-pocket expenses. Even if you have an expert assess the situation and a licensed contractor who is willing to do the work, but still allow you a healthy profit, you don't know that the job won't still turn south on you once you sign on the dotted line.

8. Don't buy the property unless you can afford to carry the mortgage if doesn't sell quickly. Unless you have monthly income that covers all your expenses and can pay for another mortgage, ignore that one for now.

9. Don't quit your day job.
You find the home that is going to net you a great profit, one that will pay your salary for a year, and you think, "I can quit and do this full-time!" Think again. You just may net a year's salary from the flip yet you may not be able to do it consistently. Wait until you prove that you have the knack for turning properties at a significant profit before ever considering quitting your day job.

10. Don't start without a good exit strategy.
Good intentions don't necessarily develop into cash at closing. Even if you've done all your homework, followed the ten steps to successful flipping and received a great interest rate on your financing, the situation still has the potential to go south.
If so the question becomes do you have an exit strategy? Maybe you can rent the property out, rent it out with the option to buy or have someone else assume the loan with little or no money down. Whether you run into remodeling that will cost you more than you anticipated or other unforeseen problems, you need to consider all the possibilities that could occur and have a good exit strategy.

Follow these ten basic steps and it will help increase the probability of success.

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