average buying, holding, and selling costs?

Hey there,
I just finished reading a book in which the author laid out his average buying, holding, and selling costs for his rehab/flips. He says, on average, his expenses over the years have looked like this:

Buying costs are generally 1.5% of the selling price
Holding costs (utilities, taxes, etc) are usually 1.5% of the selling price
Selling costs are generally 6.5% of the eventual selling price, after repairs

He projects the months required for rehab work (holding time) with the following formula:

Rehab cost per square foot, divided by 10 + 2.5 months to market & sell

Do you guys think these numbers are accurate? I would be interested to hear how these projections stack up with your personal investment experiences.

Have a good one,
Patrick

Edited: 06/26/2010 at 05:02AM

Frank Adams

· Loveland, CO

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Apr 13 '08, 06:26 PM

The problem with stuff like this is that you don't define (maybe he didn't either WHAT he lumped into each category.

Buying costs: The only way it could be 1.5% of ARV is if he only considered what was paid on the HUD-1. IF so, what does he consider loan application fees and DOWNSTROKE?

Holding costs: This looks a bit more like it. I'm in TX where the tax and insurance are crazy high, and I doubt if mine have exceeded that.

Selling costs. Well if he's using an agent the would be HIGHER than that, again according to state. Our local agents use 8% TOTAL to get a rough estimate of seller's net. 6% commission and 2% for seller's closing costs. We're in escrow selling our residence and it's 7.6%, I just saw my preliminary HUD-1.

Rehab time. Why go through anything that complicated? Just learn how long it takes you and your braceros to do particular jobs. I've generally worked alone, which means I set my own pace, and hired help on things I NEEDED help on. Over the years I've found few people that work at my speed or QUALITY.

I've never been a big one for " formulas" , " scripts" and " wonderful closing techniques" . You can either calculate times and percentages in your head, deal with people, and KNOW WHEN TO SHUT UP AND SIGN or you can't.

Put down the books and start knocking on doors is my advice.

all cash

Edited: 06/26/2010 at 05:02AM

Patrick Barmann

· Indianapolis, Indiana

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Apr 14 '08, 04:47 AM

Yea I certainly realize that these projections are not set in stone and are not the end all, be all. I do think they can be helpful to provide a very rough estimate of potential holding time and various costs, to consider while sizing up a potential investment.

What accounts for your 7.6% of closing costs? Here in Indianapolis, I believe the average is closer to 6%, with the selling and buying real estate agents each getting about 3%.

Thanks for the feedback.

Edited: 06/26/2010 at 05:02AM

Frank Adams

· Loveland, CO

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Apr 14 '08, 07:02 AM

Well the 6% is commission. The rest is title insurance (real high in TX) legals, doc prep, recording etc.

all cash

Edited: 06/26/2010 at 05:03AM

Richard Warren

Real Estate Investor · Las Vegas, Nevada

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Apr 14 '08, 07:27 AM

The standard formula for rehabs is (ARV * 70%) - repairs = maximum purchase price.

This takes into account holding and selling costs. If you anticipate a longer hold than 4-6 months or so you should adjust the percentage down to 60-65%. If you are paying cash and don't need financing you can raise the percentage to about 75%. If you follow that formula you should come out OK most of the time.

Edited: 06/26/2010 at 05:03AM

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Apr 14 '08, 07:56 AM

I generally use 2% for the buy closing costs and 8% for the sell closing costs. The buy does NOT include any loan origination fees. I know exactly what those are, so I can calculate those exactly. The 8% includes 6% for real estate commissions.

Holding cost can usually be estimated pretty accurately. You can find out taxes from county records, and utilities from utility companies. Get insurance quotes from an agent. Some of these are lumpy, like insurance. You'll have to pay a bunch up front, then nothing for a while. Or, maybe you'll have to pay monthly if its getting escrowed. Similar for taxes.

Money holding costs can usually be determined pretty closely, based on your loan.

Richard's forumla is the one I use, though I like to come in below that. My current deal was 63%, but looks like the rehab will go over budget. If you stay at the 70% guideline, you stand to make about 10-13% of the ARV for profit, before taxes.

Edited: 06/26/2010 at 05:03AM

Jon Holdman, Flying Phoenix LLC

Patrick Barmann

· Indianapolis, Indiana

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Apr 14 '08, 09:29 AM

Good stuff as usual from you guys. Thanks for the insight.

Jon, I hope your budget doesn't run too far over. Any particular reason that it might run over? Keep us posted. :beer:

Have a good one,
Patrick

Edited: 06/26/2010 at 05:03AM

Jon Holdman

Real Estate Investor · Wheat Ridge, Colorado

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Apr 14 '08, 10:15 PM

Well, for one I budgeted $2000 for a new furnace, but bids are coming in around $2400. I'll probably end up doing more work in the bath than originally planed.

Edited: 06/26/2010 at 05:03AM

Jon Holdman, Flying Phoenix LLC

Apryl McDowell

Real Estate Investor · Minneapolis, Minnesota

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Jan 06, 05:44 AM

I found a website that allows you to input your zipcode and it lets you know some average utility cost for the year. [url]http://hes.lbl.gov/consumer/. If anyone finds this helpful or not, let us know

~Apryl