When we started flipping houses, Tarek and I were pretty confident in our real estate and rehab skills. While we started out with a good amount of knowledge, we learned a lot about how much you should pay and where to spend your money on your flips in those first years of running our own real estate business.
As we’ve continued growing our business, we’ve learned even more about what to expect when you first open the door on any flip. For example, we know that there’s going to be a pretty huge risk with any house that we buy sight unseen.
When we can get one of our contractors or project managers out to a flip property before we commit to buy, we can usually get a pretty accurate estimation of what we’re going to be spending to get the house back up to market value. Without that pre-sale walk-through, though, we have a lot of unknowns to deal with. And we never know, with properties like these, if we’re going to walk in and immediately realize that we’ve made a huge (and expensive) mistake.
While I always encourage new investors to do as much research as possible, sometimes you just can’t get the full lowdown on a property until after you buy it. So what can you do if you find out you’ve just made a really bad buy?
Understand Why It’s a Bad Buy
First of all, you should know why this isn’t a good deal. Is it a bad buy because the house needs to be totally demolished and rebuilt, but you don’t have an extra $80,000 in your rehab budget? Is it a bad deal because the market in the area has gone flat and is about to fall any minute? Does it have a lien on it that completely eats away your rehab budget? Are there so many vacancies in the area that selling it is going to be a challenge, even if you stay under budget and get everything done perfectly?
Knowing why you’ve made a bad deal is the first step in knowing what to do next and how to get out from under it. Of course, knowing about different types of bad deals can also help you avoid them, too.
Never Neglect Your Homework
First of all, what do the last three questions I asked about your bad buy have in common? They all could have been answered with a little bit of research before you bought the property, and none of them required you to get inside the house first. So don’t ever skip your house flipping homework, or you’ll end up with a bad deal that could’ve been easily avoided.
The Rehab Is Out of Control
On the other hand, if you walk in and you can tell right away that this is going to be a nightmare rehab, you have a choice. You can bet that a good market and the right rehabs will still make this a profitable flip, or you can decide not to gamble and call a wholesaler or another house flipper to take it off your hands.
The Market Is Dead
Even if you thoroughly researched the market before you bought the property, there’s no guarantee that it won’t turn around and start falling while you’re rehabbing. If this happens, the best thing to do is lower your asking price as much as you’re comfortable with. This will attract buyers, and you may even get a bidding war going to drive the price back up.
If you stay in the real estate business long enough, you’re going to have a few bad buys. It’s okay. Flipping houses is a learning process, but you can still make a good living while you learn.