By Mike Baird
It’s one of the biggest fears people have about flipping houses, and it may be the top reason that perfectly qualified people don’t get into the real estate investment business. What is it? The fear that a house will sit on the market forever and that all of the profits on the property will dwindle away to nothing (or worse). Well, I could tell you that this will never happen to you and that there’s nothing to worry about, but the truth is it happens to everyone at one point or another in their investing career.
No matter how great the deal was when you bought it, how great your rehabs look, or how promising the market seemed when you made the deal, there’s going to be at least one house (if not more) that just doesn’t budge when you put it on the market. That might sound pretty bad, but it really isn’t…if you have an exit strategy or two.
Approach Risk Like an Entrepreneur
Basically, if you think of your real estate investment business as a start-up and yourself as an entrepreneur, you’ll be far more likely to succeed than if you think of it as a gamble. Every business deal includes some risk, but entrepreneurs don’t think of themselves as gamblers. They look at all of the aspects of any deal they make, and they especially focus on how it can fail and what to do if it does. And you should, too.
Before you make a deal on a flip house, you should first take a look at the market, the neighborhood, and the house itself. If the market has been in decline over the past eighteen months, it’s not likely to spike back up just because you rehabbed a house and made it a stunning place to live. If the market has been steady or has been slowly climbing, you’ll probably be in good shape when your rehabs are done. If, on the other hand, the market has been skyrocketing in this area lately, it may be due for a crash. Be wary.
Whatever the case may be, consider what you’ll do if the market isn’t good and your house doesn’t move. You may want to sell it at a slight loss to recoup as much of your loss as possible. You may also want to hold and rent the property to start gaining a positive ROI on it while you wait for the market to come back around.
When the Market is Good But Your House Still Won’t Move
Sometimes, though, a house won’t move because it’s been over-rehabbed or there are just too many other comps on the market at slightly lower prices. In this case, the market is good but the house still isn’t moving. Again, you have options. You could sit on the property and hope that a buyer comes along, all the while paying on high-interest loans or being unable to borrow more from private lenders until you pay off what you owe. This is obviously not recommended.
Instead, if the market is good but your house isn’t moving, take a look at what’s been done to the comps in the area and why they might be selling faster than your house. A little bit more rehab work might be the ticket (if the house isn’t over-rehabbed already), or you might just have to lower your price to the current market value. This could result in a minor loss, but it’s much better than doing nothing.
When flipping houses, you should go into every deal with an eye toward what can go wrong. Once you’ve weighed your chances, you should create plans and exit strategies for every foreseeable event. Then you’ll have everything together to come out of every deal in good shape. The real estate investment business involves a good deal of risk, but as long as your risk is calculated and you have a plan, you’ll be just fine.