The 2 Costly House Flipping Traps to Avoid and the 4 Strategies That Actually Work

TLDR

Two traps catch most house flippers: the mirage and the HGTV dilemma. Both caught me early on and I had to live on job sites and sell my truck to claw out. Four strategies actually work, and they all run on the same scale of livability rule.

Table of Contents

• First Principles: The Scale of Livability
• The Bombed Out House
• The Barely Bankable House
• The Range of Comps
• Trap One: The Mirage
• Trap Two: The HGTV Dilemma
• The 4 Strategies That Actually Work
• Livability Is a Step Function
• FAQ
• Related

First Principles: The Scale of Livability

As a flipper you buy houses in neighborhoods that have a sales history. You never guess. You always base decisions on historical data. A neighborhood has sales at different prices. Some sell low, some sell high, there is a pattern.

The ideal neighborhood shows three clusters. Not one price point, three. And those three clusters map exactly to the scale of livability.

Compare it to vehicles so it sticks.

The Bombed Out House

A bombed out house is one where everybody knows it is going to take a lot of work. Major mechanical, electrical, plumbing problems. Major demo needed on drywall, floors, or siding. Roof leaking, siding rotten, HVAC dead. Sometimes water or mold remediation. Sometimes asbestos. Sometimes major structural damage.

The buyer and the seller both know it is going to take a lot of work.

Key thing: a bank is not going to give you money to buy a bombed out house with a normal mortgage. That is why they sell cheap. Only cash buyers, hard money borrowers, or investors buy them.

The Barely Bankable House

This is just beyond the line of livable. Someone can safely live in it. That means a bank will give you a mortgage on it.

Bankable matters because bankable is monetizable. Past the line of livable means an end user can live in it. Before the line of livable you have to sell at a haircut to an investor like me who knows they have to do all the work.

If you try to sell a house before it reaches the line of livable, you take a serious haircut. For most strategies, get it past the line.

The Range of Comps

These are the nicer houses. The flipped houses. The renovated houses. This is what people mean when they say after repair value. It is what your real estate agent is talking about when they pull comps.

This is the car everyone with a good job is driving in.

Why does this matter? Because banks give you money for houses past the line of livable. Banks know the scale of livability is also the risk index. Raw land is the riskiest thing you can buy. It is furthest from the line of monetization through rent or sale.

Trap One: The Mirage

When I finally had some cash in the bank I decided to buy my dream truck. A Ford F250, since I had always driven F-150s. Being cheap, I wanted one that needed a little work. I would fix it on weekends. I found one in Ohio for 18,000, drove up there with my wife, negotiated it down to 17,000 because the radio and AC did not work great. I made the deal.

Ten miles down the road the dashboard lit up like a Dave and Busters. Check engine, traction control, oil, blinker. The whole thing. I had to have my wife take me back to Tennessee, and later I took a bus up to fix the truck so I could limp it home. Lemon.

The thing I thought I was buying was a vehicle that needed a little work. The reality was I had to tear the thing completely apart before I could get it back to a usable condition.

That is the mirage. And it happens to flippers all the time.

Here is the formula you have to understand before anything else.

Sale price minus acquisition price minus renovation cost minus other costs equals profit.

Real example. Sale price 300,000. Acquisition 210,000. Renovations 25,000. Other costs (insurance, interest, realtor fees, title) 15,000. 300 minus 250 equals 50,000 profit. Fantastic, right?

Here is how the mirage gets you. You start the rehab and find some mechanical, electrical, or plumbing work. Maybe a structural issue. You end up doing demo that does not push the house forward on the livability index. In fact it takes the house back.

But taking it backwards is not free. You still pay for the demo. Now the 25,000 budget needs another 10,000 for the backwards work. Then another 25,000 to bring it back to where you started. Now your profit goes from 50,000 to 15,000. And usually it does not stop at 15,000. Usually you end up negative.

When you buy a property you need to either be pushing it forward on the livability index from the start, or you need to be pricing it at the lowest point it is ever going to have. If the house would sell as is for 210,000 but you are going to have to take it back to a worth of 180,000 before you move it forward, you need to buy it at 180,000. Not 210,000.

Trap Two: The HGTV Dilemma

This is the hgtv dilemma and it works like a truck stop diner.

You are hung over. You go to a truck stop diner for greasy food. Dollars per calorie kind of place. The waitress hands you a menu but it only has high dollar petite gourmet meals. You have 20 bucks in your pocket. You were not going to pony up 50 for a plate of salmon.

Everybody who walks into that diner has the same issue. They expected the truck stop diner. The chef put gourmet on the menu. The chef has one option. Discount the meal to 20 bucks, because that is what the customers came to spend. Even though he spent 40 on ingredients.

That is what happens to flippers on HGTV. They buy houses right around the barely bankable line, then push them way way way way beyond the range of comps. They can get away with it because they have a TV show. The people buying those houses are the TV show fans, or HGTV makes money on sponsorships regardless of whether the flip is profitable.

You watched those shows and it got ingrained. Definitely happened to me. You start trying to turn a Ford Taurus into a Maserati in a neighborhood where nobody can afford the Maserati. You spend way too much on a renovation you are never able to recoup.

Why? Because beyond the range of comps is pure speculation. Flippers use historical data. Beyond the range of comps has no historical data. You are hoping the market will pay a price nobody in the neighborhood has ever paid. That is not a strategy. That is hoping.

Stay inside the range of comps. Above it is speculation. Below it is where you buy.

The 4 Strategies That Actually Work

Once you understand the scale of livability, there are four strategies that work.

Buy low, sell less low is what wholesalers do. It works anywhere on the index because there are always people who will pay more than you paid. You just need to find great deals on the front end and find the buyers on the back end.

Flip to the flipper is advanced. You buy a bombed out house with scary mechanical, electrical, plumbing, or roofing issues. You know how to fix that scary stuff at a reasonable price. You fix it, then sell to a less experienced flipper who does not want to deal with the mechanical scary stuff.

Lipstick on a pig is the classic starter. You buy a barely bankable house and modernize it. Floors, cabinets, paint, trim, hardware. Stuff you can often DIY. You usually can get a personal mortgage on this house because it is bankable, and a lot of people live in it while they renovate. That is what I did when I started out.

The real deal is the big paycheck. Buy bombed out and take it all the way to the range of comps. Not beyond. To it. Biggest chunk of money per project, longest timeline.

Livability Is a Step Function

One more thing. The scale of livability is not linear. Linear means every dollar of work makes the house equally more valuable. That is not what happens.

It is a step function. You are here. You are here. You are here. Then you cross the line of livable and you are way over here.

Livable means monetizable. Livable means if something bad happens in the market, I can still rent this house or sell it to someone with a mortgage. If it is not livable and the market softens, I am stuck. I cannot monetize it.

This is why I do not do a lot of new building. New building keeps you as far from the line of livable for as long as possible. That is the riskiest spot to be.

Pro Tip

Anytime you have a house that is not livable, work your butt off to get it to livable first. Kitchens and baths and cosmetic can wait. Water on, electric on, HVAC on, roof on. Get across the line, then you have options.

FAQ

How do I know which of the four strategies is right for me?

Start with lipstick on a pig if you are new. It has the lowest skill bar and you can live in the house. Move to the real deal once you have done a few and have contractor relationships. Flip to the flipper and buy low sell less low require specialized skills in construction or deal flow, respectively.

What do I do if I already bought a house and I am in the mirage?

Stop spending. Figure out what the new lowest livability point is and price from there. Decide whether it is worth pushing forward to the range of comps or if you are better off flipping to another flipper at a small loss. The worst thing you can do is keep throwing money at a house that is still backing up.

Why do flippers go beyond the range of comps?

Ego, mostly. HGTV brainwashing. They want a portfolio that looks pretty. The finished house gets compliments. The problem is the compliments do not pay the mortgage. Speculation money is lottery money.

How do I know where the range of comps actually starts and ends?

Pull sales history in the neighborhood for the last 6 to 12 months. Look for houses that sold between the outdated grandma house price and the highest sale price. That range is your comps. Anything above the highest recent sale is speculation.

Should I ever buy raw land or new construction?

If you understand that you are as far from the line of livable as you can be, and you have the cash and the timeline to ride it out. For most solo flippers, no. Stick to the four strategies.