Obtaining a traditional bank loan for a piece of property is difficult enough, but getting money to buy and flip a home can be downright impossible. Because of this, many people turn to fix and flip loans offered by private investors. While there are many benefits to using this type of financing (e.g. quick turnaround times and easy approvals), people will often make mistakes that wipe out any advantages fix and flip loans give them. Here are the most common two and what you can do to avoid them.

Overvaluing the Final Product

A common mistake many flippers make is overestimating how much their renovated homes will sell for. Oftentimes, this occurs due to inexperience with buying and selling real estate, but it can also happen when people fail to do their due diligence and properly analyze the area.

Overvaluing a home can lead to a string of bad decisions. For instance, when a person thinks they will sell a home for more than it's worth, they may take on more debt than they can afford thinking they'll just pay it off with the proceeds from the sale. Another problem that can occur is that the flipper may purchase premium products that buyers aren't willing to pay extra for. Either scenario can result in a shortfall that eats up any profits the person would've gained if he or she had valued the property correctly.

To avoid falling into this trap, take the time to research how much homes are selling for in the area and price your property accordingly. It's best to have a real estate agent help you with this step, but even browsing sites like Zillow and Redfin for the sale prices of similar properties can provide some insight on how much you can expect to receive. This way, you'll make better financial decisions that won't leave you broke at the end of the project.

Leaving the Contingency Fund Empty

Hardly anything goes according to plan when it comes to renovating a property. It's not unusual for things to go awry, which is why it makes smart financial sense to set aside a little bit of money to cover unexpected expenses that may pop up.

Unfortunately, it's pretty common for flippers to spend every dime they have on the renovation and leave their contingency funds empty. This is just a recipe for disaster, since even the smallest monetary surprise would be enough to throw your whole budget out of whack and bring the whole project to a halt due to lack of funding.

It's essential you set aside contingency cash in a liquid account for emergencies, especially if you're using borrowed funds, even if it's only 5 or 10 percent of the estimated budget. This will help ensure you have the money you need in a pinch to complete your project, so you can sell it and pay off your debts.

To learn more about fix and flip loans or advice to maximize your funding, contact a lender you trust.