Major Beginner House Flipping Mistakes & Risks (Must Know’s Before Starting!)

Hung up on all the house flipping risks, “what if” scenarios, and worries? You’re not alone. House flipping can be lucrative and exciting, but those rewards don’t come without serious risks and a plethora of pitfalls. Some succeed, and other’s fail miserably.

So what are the keys to success? In order to make house flipping a profitable venture, you must first identify and understand the risks and mistakes that plague many. This will allow you to learn from them and hopefully avoid them all together, or at least know how to approach these issues if they arise.

There’s a lot that goes into house flipping and flippers are involved in every aspect – it’s definitely not a hands-off career by any means. From identifying assets and negotiating a deal to design, renovations, project management, and eventually, re-selling the home and hopefully turning a profit, there’s a lot that goes into house flipping. Quite a bit more than you’ll see on your favorite home renovation TV show!

What Is House Flipping?

Before we get started, let’s clearly define what house flipping really is: purchasing a home with the intention to quickly resell it for a profit. There is usually a renovation process involved, though this isn’t always the case.

Beginner House Flipper Mistakes

It’s important to note that while many people attempt to flip houses for a profit, there are some that don’t make any money. Especially beginner house flippers! This is usually because of a lack of experience and making these common mistakes:

Forgetting About Taxes

There are two things we can expect in life: death and taxes. And you can bet your bottom dollar that the government wants the cut on any of your home flipping ventures! They’re not fun to think about, but they absolutely must be considered so you’re not surprised (or shocked and appalled) later on down the line when it’s time to pay up.

Taxes are one of the single biggest expenses associated with house flipping, and are a crucial component for beginner and expert house flippers to consider. With short term flipping, any profit you make is going to be treated as “active income” as it’s not usually considered passive investing by the IRS.

“Active Income” and profits on flipped houses are treated as ordinary income with tax rates from 10% – 37% based on your tax bracket. Whether you’re paying “active income taxes” or “capital gains” taxes (which tend to be lower) will generally depend on whether or not the IRS considers you as a “dealer.” 

According to the IRS, a real estate dealer purchases real estate and sells it to customers “in the ordinary course of his or her trade or business.” So unless you are purchasing properties that you are holding for over a year, you’re probably going to be considered a dealer and must pay the corresponding tax rate. There are also local and state taxes that may apply.

Additionally, you may be responsible for self-employment tax as well. Between self-employment tax and dealer “active income” taxes, you may be looking at a range from about 25% to even 52.3%, depending on your tax bracket. The easiest way to keep track of any taxes you may owe and get a crystal clear picture of what you’re subject to tax-wise depending on your situation and house flipping plans, is to talk to a tax or accounting expert.

Closing Costs

Selling a home always requires that the seller pay part of the closing costs. This can sometimes get pricey and eat into your profit if you’re not factoring it into the cost to flip the home. 

Even if you’re paying all cash for a home and avoiding those pesky lender fees, there are still going to be closing costs associated with the property. This can include appraisal fees, title searches, title insurance, property surveys, taxes, deed-recording fees, etc. and can result in thousands of dollars you’re on the hook for at closing. Expect there to be a cost so you’re not unprepared when you show up to closing.

Real Estate Agent Fees

When you buy a home, the real estate agent working with you to help purchase the property will earn a commission that is typically paid for by the seller. When you go to sell your home, whether you’re selling it yourself, or working with a real estate agent, there are always going to be real estate agent fees. 

If you’re selling the home yourself, you’ll save on the expense of a listing agent. However, you’ll still have to account for the real estate agent working with the buyer of your home. You may get lucky and find a buyer that isn’t represented, but these days most will be working with an agent and that agent expects to get paid from you. If you market the property without including any commission for a buyer agent, some real estate agents may be wary of showing your home. While not technically legal to steer buyers away from your home, you can bet they’re not going to be putting in any work (including showing your property) if they’re not going to get paid. 

Most contracts even include that as the buyer’s agent, they’re entitled to compensation if the seller isn’t going to pay them. The buyer isn’t going to want to shell out thousands of dollars, especially when it’s customary for the seller of the purchase home to do the commission paying. You can probably see how it’s not going to do you any favors to not include any commission!

It can sound alluring to save money, but you’ll likely end up having to reduce the price when you don’t get any bites. You can estimate these fees to be 2-6% of the purchase price depending on your area and if you’re going to be selling the home yourself, or utilizing the services of a listing agent. 

One helpful tip is to use a flat-fee listing agent. This usually saves you thousands of dollars, rather than going with a full service agent. And they still offer some services like preparing the contracts/documents and adding your home to the MLS, which is often all you really need in a hot market if you’ve got a winning home! Though you’ll want to make sure that that approach will work for your market and situation.

Unexpected Complications + Repairs

Inspections are great, but sometimes you don’t discover an issue until you start getting into the actual renovation process. It’s just the nature of the business. Beginner home flippers run into serious trouble when costs and complications occur that they weren’t expecting. Do yourself a favor and use a home inspector that you trust, but also set aside a “just in case” budget built into your cost expectations for the flip.

Carrying Costs

These are costs associated with owning a property that are required to use and maintain it. These typically include utilities like gas, electric, and water, and taxes and insurance.

These are some good mistakes to avoid making, though, of course they’re not all encompassing. There are a lot of factors that go into flipping houses and renovations of any kind. Do your research, a solid plan in place, and a budget enough for mistakes, taxes, and additional expenses beyond what you’re expecting, to have the best shot at making a profit flipping houses.

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