First of all, I have to say, there's nothing more rewarding than taking a beat up or run down property and transforming it into something that anyone would be proud to call home. I've been involved in a couple of dozen of them over the years and I know first hand the incredible sense of accomplishment I felt on each of them.
As anyone who has done a few renewals or flips will tell you, it's not quite as easy as the snippets on HGTV or Flip this House would lead you to believe. Over the years, I've helped many people make good money doing this type of work. On one hand you have the pro's, who turn out a wonderful product that sells quickly. On the other hand, you have the amateurs, who, without the right guidance could end up with a house that sits on the market forever, and eventually they walk away with little or no profit.
So, here's my list of the top 5 traps to avoid.
1) Avoid overbidding on Power of Sales & Estate Sales: Before you jump on a Power of Sale or an Estate Sale, make sure you look at it's MLS history. With Power of Sales, it's not unusual that the house may have been on the market 6 or 7 months prior to the current Mortgagee in Possession listing. If it was listed for $120,000, and didn't sell, then paying $120,000 for it when you're faced with competing offers may not be the wisest financial decision. Have your Real Estate representative do the research for you...and look it over carefully.
2) Avoid over optimism in certain residential areas. Location, Location...Location. It holds true with flips and renewals. Every location has a ceiling in prices. It's easy to think that you may be able to push it to a new high with a wonderful product, but it's a huge risk. Check with your Realtor to find out what area of the City is experiencing the most sales and what the ceiling is in that area.
3) Avoid the "It's not that big of a deal" syndrome. Viewing a home that needs a lot work can be overwhelming, and many people just look at the obvious. Roof, hydro, plumbing, kitchen,furnace,bathroom and flooring. And these are important elements that can be easily cost out, but its going to be the ones that you don't care about when you originally view the home that may cost you your profit. A good example of this buying a home with a low basement. You are concerned over everything in the basement, except for it's height. It's not that big of a deal because everything in that price range has a low basement, but then you improve the home and all of a sudden you're in a price range where people are expecting a higher basement. The same holds true for the driveway situations. No drives or mutual drives are ok in one price range, but quite a deficiency in another.
4) Avoid putting the wrong grade of product in the home. Divide your local market into 3 parts. Low, Middle and Upper. If the house is in the Low market, don't chew up your profits with high quality hardwood floors and granite counter tops. In the Upper market, don't loose your profits by putting in laminate flooring and lower end light fixtures.
5) Avoid overestimating and underestimating. Overestimating the work that you're going to have to do will hinder you in the bidding process, resulting you being apprehensive about bidding enough. Underestimating will result in you possibly overpaying for a property and not making your desired profit. It's best that you know your prices before you look at properties. You not only have to know the prices for updates such as furnaces, windows and bathroom fixtures, you have to also know how much a tradesman would cost you if you can't do the work yourself.
Making sure you're organized, prepared and educated will go a long way to increasing your profits!