Jumping Ship When A Flip Won’t Flip
Many things are important when you are getting into the business of flipping houses. You have to know how to spot a bargain; how to calculate a potential profit; how to pick upcoming areas and buy there before the prices start going through the roof. These are all essential skills that any wannabe developer has to learn, hone, and refine on a constant basis.
However, arguably the single most important asset to any developer’s mindset is far more straightforward than the points mentioned above: the ability to know when to get out of an investment.
How Developers Can Sink Rather Than Swim
A good developer will know when a property is in trouble. There are various signs you need to look out for; some are obvious, others less so.
The most obvious sign is a simple one: the property is becoming a money trap. If you find yourself having to plow more and more funds into the project, breaking your budget several times over, then it may feel like you have to stick around and see it through to the end. After all, you’ve already invested, so you might as well continue to completion so you can reap the rewards… right?
Not entirely; the above scenario is known as the sunk cost fallacy, and it’s a fallacy that can sink you as a developer. After a certain point, it is far safer to acknowledge that you’re not going to see a decent return on your investment, and walk away– even if that means losing money.
Yes, you will lose what you have invested up until that point. That’s a tough decision, and one that you might struggle to make; after all, you’ve spent money, and if you decide to get out, sell to a house buyer as quickly as possible, and move on, then the money you have invested has been lost forever. Isn’t that the exact antithesis of what developers are meant to do?
Why Losing Money Can Be Good For You
The idea of losing money being a good thing is a strange one, but it’s true. Let’s play an example to show why.
You buy a property for $100,000. You intend to spend $50,000 on it. You then expect it will sell for $200,000. Your projected profit is $50,000.
You buy the property, and it needs more spending on it. You spend an extra $10,000 on it, but it still needs work. You decide to sell; to walk away. You sell for $140,000 for a quick sale. You’ve made a $20,000 loss.
How is this a good idea? Simple: let’s say you don’t walk away, and you stick around. You invest a total of $210,000 on the purchase and necessary improvements to the property. You list it on the market at $250,000… but it doesn’t sell. You look to lease it out, but no-one’s renting it. For six months, you pay the mortgage; the insurance; the agent fees.
Eventually, it sells for $250,000, but by that point, your total investment is approaching $300,000… and now you’ve made a $50,000 loss. That $20,000 loss from selling it the moment you knew it needed more work now sounds far preferable, doesn’t it?
If a property is already proving more expensive than you originally planned, then sometimes, bailing out as soon as possible — even if that means making a loss — could save you a fortune in the long run.