There’s no doubt that house flipping can be a fun and lucrative way to make a living. According to a 2016 article in Money, the average gross profit from house flipping in just the first quarter of 2016 was $58,520. That’s a lot! But there are a lot of other people out there who are losing money. Many have to change their plans when a fix and flip does not work out. What do you do when the flip does not go as planned? Do you have an exit strategy?
When you get over-confident and feel that nothing can go wrong, that is often when things do go wrong. When you’re over-confident, you may not be looking realistically at risks. You may not question possible outcomes as much as you normally would if you had a realistic view of what might go wrong. Even experienced flippers should have an exit strategy, because things out of your control can change the scope of your project at any time.
The number one problem we run into is that the house isn’t selling. When this happens, it may eat up all of your profit in the project to have the house sit empty. Here are ways to get out of this situation.
Lower the price.
This may hurt, depending on how much profit and cushion you have in the project. Do your research and know the average days on the market for homes in your area. If you are getting showings and no offers, or no showings, and your property has been on the market longer than the average home, most likely you are over-priced. No amount of waiting it out will change that. Rip the band aid off and lower the price.
Also, hopefully, you’ve padded your budget with 10 to 20% extra above what you are realistically expecting to spend. That way, you have some cushion in the price cut. And consider increasing your budget padding for your next fix and flip. That article in Money mentioned above recommends 30% padding in the budget, just for unexpected events.
Rent it out.
You did not go into this business to become a landlord. But if the summer went by and you didn’t get the sale you needed, consider renting it out for six months on a month to month lease. This could get you through the lean months when less people are home shopping until the weather gets nice again and you can re-list it.
A lot of fix and flippers also buy and hold projects. Even though your project was initially a flip, you may have the experience or resources to manage it as a rental investment property. If you pursue this option, consider the costs and run the numbers with a renter in place. Will the rents cover enough of your costs for this option to make sense?
Rent to own.
If you can find a buyer who is interested in buying but isn’t quite ready when you need them to be, consider a lease option. This allows them to live in the home with their rent going towards the purchase price. They will then commit to paying at an agreed-upon time. This gives you a bit of cash and the reassurance of an interested buyer in a few months. If they put down a deposit towards the purchase price but then opt to not buy it, you have the option of keeping the deposit. This can offset the cost of the additional hold time.
Sell it to another investor.
This is where it helps to be part of a network of people looking for investment or rental property. The home might not work out for you, but it could be right for someone else. Perhaps you sell it to someone else at a minimal profit. Become a member of your local REIA (real estate investors association) to build up a network of people who can offer resources.