The biggest house flipping mistake most real estate investors make is so simple to avoid, yet so devastating when it happens. Experts and beginners alike fall victim to it and sadly, they rarely recognize it as a mistake at all. Instead, house flipping investors tend to blame the economy, the real estate market or just plain, bad luck when it occurs. The reality is that this mistake can effect any property owner looking to sell his/her property and it has nothing to do with outside factors like the market or the economy. The reason why so many investors make this mistake is because they don't know any better. In this article, you're going to discover how to avoid the biggest mistake investors make when house flipping.
House Flipping Fundamental Truth
Studies show that some 60% of signed real estate contracts never make it to closing. In fact, this figure was taken from a period of time when the real estate market was booming, in the mid 2000s. That means that less than half of the buyers who make offers on houses ever actually close. That should be a wake up call to anyone who earns any income from selling real estate, especially those who specialize in house flipping. If any of your money is ever dependent on a prospective buyer purchasing your house and statistics prove that in 60% of cases, that buyer won't make it to closing, wouldn't you like to know how to ensure that the deal closes and you get paid?
How to Avoid the Biggest House Flipping Mistake
The most successful house flipping investors have at least one technique in common. Wait for it. The moment you've been waiting for is here. Drum roll please....The way to avoid the biggest house flipping mistake is to control the buyer, always, on every deal. What does that mean, "to control the buyer"? When you control the buyer, you are the one calling the shots in the deal. The problem is that most sellers of real estate are so scared of losing a prospective buyer that they let the buyer and his/her agent run all over them. This is especially true with house flippers because oftentimes, they are a twinge desperate to get rid of the property so they can realize their profits. Every day that the property is not sold is either costing the investor money from holding costs or at the very least, is not putting any money in their pocket. Real estate investors are notorious for allowing buyers to take control, call the shots and push them around because they are so scared of losing that buyer. Fascinatingly enough though, the more desperate you are, the more you need to control the buyer. If you don't control your buyer, you will experience the 60% failure rate that is the norm. The only way to prevent it, is to control the buyer.
Top 3 Ways to Control the Buyer
My mentor is the one who introduced me to this concept of controlling the buyer when house flipping. I vividly recall being apprehensive to such a concept because I wasn't keen on the idea of controlling anyone. I don't like the idea of forcing anything upon anyone. I far prefer letting others make their own decisions. My fears subsided though, when he shared with me that applying this technique actually helps all parties involved. It helps the buyer purchase a home that they truly want to own. It helps the buyer's agent representing the buyer get their commission. It helps the closing company get their fees. It helps the mortgage company originate a loan and it helps you get your property sold. Plus, you flush out the tire kickers and time wasters so that they don't waste your time and you don't waste theirs. So rather than feeling like you are being manipulative when you control the buyer, you are actually creating a better outcome for all parties involved. Here are the three main ways to control the buyer.
#1 - Pre-Approve the Buyer with Your Preferred Lender
Controlling the buyer starts before you ever get in contact with a Buyer. It starts with the listing remarks. We have our students add a sentence into the Realtor remarks on the MLS listing of any house flipping deal that reads, "Buyer may use their own lender to purchase this property but Buyer must get pre approved with Seller's preferred lender upon submission of offer." Why? Because a pre-approval letter from a buyer's lender is not nearly as powerful as one from your own. When your preferred mortgage professional reviews the buyer's ability to get a loan, you will then have a much more accurate and reliable picture of the likelihood that the buyer will actually close. Plus, for many house flipping deals, if you are not the owner of record for at least 90 days, other lenders may not be able to get the buyer a loan due to title seasoning restrictions whereas your mortgage person can. (and if you haven't developed a relationship with a mortgage banker who can get no title seasoning loans closed, if you are flipping houses right now, you best get that fixed real quick!)
The scary thing you will actually experience out there is that Buyers' Agents will drive prospective buyers around for days, weeks, even months, showing them houses and once they get knee deep into a deal, discover that the buyer can't even qualify for a loan. It sounds crazy but it's the real world. Some buyers' agents are so desperate for a commission, that they will throw up a Hail Mary pass hoping for a miracle to occur in the end zone. You don't need to tie your property up with these wing-and-a-prayer buyers. Instead, verify the buyer with your mortgage person.
What if the new buyer is an investor paying all cash? Then have that buyer send you an official statement from their bank showing the money is available in an account.
What if the new buyer is an investor who will be getting a hard money loan? Talk to the hard money lender directly, verify that this person is actually a hard money lender and not the buyer's cousin and finally, make sure that the hard money lender is willing to fund the deal.
What if your mortgage person thinks the buyer is shaky and getting a loan for them would be very tough? Move on. If the buyer isn't solid, you will tie your property up for a month or more, and when a real buyer does come along, your deal will be tied up with the lousy buyer and you will miss out. Have the courage to say no, or otherwise it will cost you more later. Besides, there are hundreds of buyers out there for your property. You only need one. Don't sweat it. If the person can't get a loan, don't sell them your property, move on.
#2 - Require Non Refundable Earnest Money
This is hands down the most not-followed advice we give in house flipping. Hopefully you won't have to learn this lesson the hard way. The concept is so simple yet rarely implemented. Simply put, you require that the buyer's earnest money become non-refundable once the inspection period is over. Our experience over the past decade with more than 1,000 real estate transactions is that if the buyer will not agree to allow their earnest money to go non-refundable after the inspection period, they are not a real buyer at all, but instead, a time waster. Most house flipping investors are too scared to make this demand until they have been burned a few times. Then, magically, they muster up the courage to take the non-refundable-earnest-money stand because they don't want to experience the pain again. Hopefully you don't have to touch the hot stove to know that it will burn your finger. I've got news for you. It burns. And it hurts.
But you may say, "getting non-refundable earnest money is much easier said than done." Yes, it can be against the grain, out of the box, and not the norm, but it helps everyone in the deal, including the agent representing the buyer. In fact, the buyers' agent is usually the biggest opponent to the whole idea of non refundable earnest money. They will use phrases like, "In my 10 years as a Realtor, I have never done a deal where my buyer's earnest money is non-refundable." To which you can reply, "There's a first time for everything."
When a buyer is serious about your property and is not concerned about being able to qualify for a loan, they won't run away when you ask for non refundable earnest money after the inspection period. But the more a buyer balks at a non-refundable earnest money request, the more likely they can't get a loan or they aren't serious about your property. The end result of NOT requiring non-refundable earnest money is that a buyer will string everyone in the deal out for 30 days or more and then, when the loan doesn't go through, or they find another home that interests them that week, they will leave the deal scot-free having wasted everyone's time. Requiring non-refundable earnest money on house flipping deals is the essence of controlling the buyer.
#3 - Your Post Inspection Response
After the inspection is complete on a house flipping deal and the report is provided to the prospective buyer, the buyer sometimes freaks out. Inspectors are paid to find problems. If they provide a report to a buyer that is basically blank, the buyer gets upset and wonders why they paid someone $300 for a blank piece of paper. So the inspector must justify their existence on beautiful. perfect, even new built homes. In other cases, inspectors find legitimate issues that were crucial for the buyer to discover prior to purchasing. Be prepared for a mini-meltdown from the Buyer when they read the inspection report. It's normal. However, your post inspection response is critical to controlling the buyer.
If they send you a list of demands that must be fixed prior to closing, you have a few options. The first option, which most people do, is to frantically call contractors, licensed and bonded electricians and plumbers, and other tradesmen, to hammer out the huge punch list the buyer required. This response is the opposite of controlling the buyer. The second option is to ensure the earnest money is non refundable and then to go to work on knocking out the post inspection demands of the Buyer. Although better, its not the best response. The third option is the one we usually recommend, which is to whittle down the list with the Buyer (or buyers' agent) to just the absolute necessities, the things that must get done or they will walk away. The deal killers on the list. Then, with help from a general contractor or handyman, come up with the cost to fix those items. Then, reduce the purchase price by that amount and let the new buyers decide on their own if they want those things fixed or not. They may just take the reduced sale price and leave everything as it is. Meanwhile, you didn't have to come out of pocket to fix anything or deal with any further delays that could occur if the contractors didn't get the work done on time. But most people choose option 1, they handle all the line items on the post inspection counter, and then, once all the work is done, the buyer doesn't close for one reason or another and the investor is now out more money out of pocket, is blaming the economy, the real estate market or just plain bad luck and then vow that house flipping doesn't work. I've seen that unfortunate result from beginners and experts alike.
The way to avoid the biggest house flipping mistake is to control the buyer. You control the buyer by having your mortgage banker per approve the buyer, requiring non refundable earnest money after the inspection period and offering to reduce the purchase price for just the deal killing inspection items. You've heard my take on this subject, what's your response to all this? Any house flipping horror stories you want to share about letting the buyer take control of the deal?