By Greg Herlean
As you build your business flipping houses, you’re going to hear the word “No” a lot. Don’t take it personally, and don’t let it get you down. Initial rejections don’t always mean that a deal is off the table forever. By the same token, when you buy a house at auction to fix and flip, you usually have to commit to it before you ever see the inside of the property.
Two of the biggest flipping mistakes people make both boil down to not understanding that “No” isn’t always final and that “Yes” really is. They either walk away from a deal before it’s even begun or they commit to a bad deal and find out that they can’t get out of it.
Don’t Walk Away Before the Deal’s Begun
To illustrate the first of these two huge flipping mistakes, let’s say that you’ve found a great potential flip. You know that the owner doesn’t live there anymore because you’ve checked at the tax assessor’s office. Furthermore, you know that no tenants are living at the property because the lawn is overgrown, the lights are out, and no trashcans go out to the curb on trash day.
In other words, you’ve found an abandoned property that someone is wasting a mortgage payment on or that is in danger of going into default and foreclosure. So, when you contact the owner, you expect them to be a motivated seller. You might not expect them to accept your very first offer as soon as they pick up the phone, but you certainly don’t expect them to say, “No, not interested,” and hang up on you.
Remember, when someone is in a position to do a short sale on their home or to sell it below market value to get out from under mortgage payments, they are probably feeling a lot of stress due to financial hardship. They might not see you as a problem solver. Instead, they might see you as an opportunist, and they might reject your offer because they feel like you’re trying to take advantage of them.
In this kind of situation, do not walk away. Don’t harass the seller, but don’t leave them completely alone, either. Send them a postcard letting them know who you are, what your company does, and how you can help them. Make sure that they know you are willing to negotiate with them (up to a point). If you call back, give them a better offer (within reason). They may not accept, but in most cases they will see that this is a win-win situation if they do.
Do Walk Away From a Bad Deal
Now, once you’ve won an auction or signed a contract, you’ve said a definitive “Yes” to your property. At this point, there is no backing out, even if you’ve paid entirely too much for a house that needs to be completely demolished and reconstructed. Though you likely won’t be able to get inside and get an inspection of a lot of the properties you’ll be purchasing, you can gather public records and information on them.
For example, do your research before you get to the auction or the closing table. Are there any outstanding liens on the property? Can you see any major damage to the property from the street (or from peering into the windows)? What are comparable properties selling for in the area?
As a rule of thumb, when flipping houses, you never want the price of the property and the price of rehab to exceed 70% of the ARV (after-repair value). So, keep a running tally going when you’re flipping. Include the cost of the house, your estimation for repairs, any outstanding debts on the house, closing fees when you fix and flip it, and anything else that occurs. Closing on a house that costs too much is one of the biggest flipping mistakes you can make, and it can put you out of business. Know when to walk away.