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10 Signs of Property Flipping Disasters

 

In the statistics released by Real Estate and Housing Developers’ Association Malaysia (Rehda), we tend to see many newly launched units coming into the market, despite the already high number of unsold units available. All these numbers are telling us that there will be more supplies available in the property market.

However, Rehda’s survey also found that local buyers are leading the current property market, making up 80% of the total purchasers, and of that, 85% are buying for self-dwelling. This may boost the confidence in most investors as it signifies the demand of property is still fundamentally solid. More and more investors (or speculators) may be taking the opportunity to engage in flipping strategy since property prices are expected to become relatively more attractive to them.

If you are one of them, beware of early warning signs that a flipping deal can potentially go south before it happens, regardless of market situation. Read on for clues that you might be walking into a disaster that could cost you tens of thousands, if not millions.

10 signs that you should walk away from a flipping deal:

1. YOU ARE TRYING TO FLIP A

PROPERTY ALONE

Property investment is a team effort, especially when you want to flip a property in the shortest time. Of course you can do it alone, but this is definitely not the best option. In fact, not having a team increases the chances of your flip being a flop, more so if you are new to the industry.

The minimum requirement here is to have at least 6 months spent in networking and forming relationships with important team members. Your team members should include at least the following experts:

Lenders/bankers

Property agents

General contractors

Certified accountants

Conveyancing attorneys

2. YOUR VALUATION IS FROM GOOGLE

Trying to estimate the value of a property by merely doing an internet search is one way of setting yourself up for a disaster.

It’s not that you shouldn’t use the internet to get an idea of how much your property’s valuation will be, but your research shouldn’t just end there – you should meet and speak with local experts like property agents and other investors. A real estate agent who knows a lot about the area where you want to purchase the property would be in a better position to give you a more accurate estimation.

3. YOU ARE USING “ERASER MATH”

When you get too excited about a property flip and then try to adjust the numbers to suit your situation, that’s when you get into trouble. It is just like using and eraser to erase away those numbers not in your favour and then rewrite them to get some numbers within your own expectation. These numbers will tell you nothing except the fact that you are too optimistic over the profit picture.

If you find yourself trying to adjust the numbers so that they can look good on paper, that’s likely a sign that you are about to get into a bad deal. The reason is very simple – a good deal will intrinsically give you a “Wow” from its most conservative numbers.

4. YOU HAVE INVESTED ALL YOUR LIFE SAVINGS IN THE FLIP

The higher the risk, the greater the reward, right? But are you willing to take the risk with your life savings?

If you want to invest money in real estate, you should consider using some OPM (Other People’s Money). You can always find people around you who are looking to invest by networking and forming relationships. It could be your friends and family whom you can trust most. Get investors interested by offering them good deals. No one will give you their hard-earned money if you are the only one benefiting from it.

5. YOUR DEAL DOES NOT HAVE AN EXIT STRATEGY

Anything can go wrong when investing in property. Without an exit strategy, you might find yourself trapped. Some of the exit strategies you can employ in flipping a property include:

Renting to a tenant

Wholesaling to another investor

Using it for yourself

If none of the exit strategies mentioned above is feasible or you cannot plan one then you should let the deal go.

6. YOU ARE MANAGING RENOVATION WITHOUT EXPERIENCE

Some people believe that renovating a house or apartment involves just putting on a new coat of paint, fixing a light or two, and then they can sell the property for a profit. They may think they know lot of things, but what they don’t know is not anybody can renovate a house without any experience.

If you try to renovate a property on your own, and you do not know what you are doing, you are basically risking not renovating the property properly. As a result, a number of problems can happen such as you may find it difficult to get a buyer later. If you don’t have a clue as to how to renovate a property, find someone who does. There are plenty of talented contractors who are good at their job, you just have to find and meet them.

7. YOU THINK THE INVESTED CAPITAL IS INSIGNIFICANT

You won’t be serious about anything that you think is insignificant. When you are not serious about it, you tend to overlook a lot of things. Capital required for some flipping deal may not be a big sum if you are able to secure a mortgage loan. But the risk you are taking is in fact higher than losing the capital sum because of the leverage effect of finance.

Is “never mind” or “just relax” your regularly used expressions?

8. YOU ARE FINANCIALLY OVERSTRETCHED

If you are flipping a property using mortgage loan, be sure you are not overstretching yourself.

We introduced the 30 – 60 Rule of Property Financing as a simple guideline to check if one is financially overstretched:

Pay no more than 30% of household income for home mortgage

Keep instalment of investment property lower than 60% of income generated by the property

This rule can also be applied to property flipping with slight modification. If you are buying an uncompleted property which is not generating any income, it should be considered as part of your existing home mortgage. In other words, total instalments for both your existing home and the uncompleted property should not be more than 30% of your household income. Otherwise you can considered yourself overstretched.

9. YOU ARE OVERCONFIDENT

People can be overconfident in just about everything. Because of some previous successful investments, you might think you know more than the market about a particular deal and invest heavily in it. What you might not realise is that the market has already priced in that knowledge.

If you can’t help bragging a deal in front of everyone, or you have a habit of bragging literally everything on Facebook, you better watch out.

You might assume the rules apply to everyone but you due to something called “I-am-different effect.” You might hear about studies of people not being as great at investing as they think they are, but you don’t think that applies to you.

Avoid falling into this trap by consciously considering the opposite of what you think might be true. If you think flipping a particular house would make a huge profit, look for evidence that it won’t.

10. YOUR GUT TELLS YOU OTHERWISE

Investing in real estate comes with a lot of fear, but with a few tips you can easily overcome it. However, if you have an overwhelming sense of fear about purchasing a property, then you probably shouldn’t have started it. You should acknowledge that there’s a possibility you are in over your head if your gut constantly tells you that the deal might not work out well.

One typical symptom is you do not dare to tell anyone about the deal you are going to dive into.

What warning signs have you seen but perhaps ignored?

As Rehda has discovered also, some 31% of properties in the RM500,001 to RM1mil range were still unsold after completion in the past three years, largely in more popular property markets like Selangor and Johor. For properties in the price range of RM250,000 to RM500,000, 34% of the completed units were unsold, located mainly in Perak and Pahang.

So which way would you think the price of property will go? Well, it is up to you to speculate, isn’t it?

Before jumping into any flipping deal, please look out for these signs. If you notice any of the above signs, please make sure your insurance can cover you against high-probability, high-cost man-made disaster.

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