Last week, my blog post discussed my method for determining the maximum purchase price you can offer for a property that you plan to rehab/resell or wholesale. In the formula I presented, I referred to “Fixed Costs” and I mentioned that I know my Fixed Costs to be about $17,000 on a typical project.
I wanted talk about how I calculated my typical Fixed Costs, and also give new investors an idea of what they should be thinking about when they try to calculate their Fixed Costs number.
Fixed Costs are compromised of the various fees, commissions, and costs associated with all parts the investment project (outside of the actual rehab costs). You may have heard the term “Holding Costs,” which generally applies to things like: Mortgage Payments, Utility Payments, Insurance, etc. These are costs you incur during the rehab portion of the project. Fixed Costs include Holding Costs, but also extend to the costs incurred during the other phases of the project: Purchase and Sale.
That said, I break Fixed Costs down into the following three categories:
- Purchase Costs
- Holding Costs
- Selling Costs
And then each of these categories can be broken down in more detailed expense line-items. Below I’ll discuss the most common Fixed Costs I run into, and approximately what I spend on them for a typical project…
Purchase Costs refer to those fixed expenses that contribute to the purchase of a property. For my projects, Purchase Costs can specifically be broken down as follows:
- Inspection Costs: In general, I have an inspection for each of my properties prior to purchase (at least I did when I first started rehabbing). I use the same inspector for every inspection, and for the most part he charges about $400 for a full inspection of a typical property.
- Closing Costs: Each purchase comes with a fixed set of closing costs paid by the buyer. In Georgia, and for REO purchases, this generally includes a title search, attorney fees, courier fees, recording fees, state taxes, document review fees, etc. Basically, all those ridiculously inflated costs charged by the closing attorney to ensure clear title and recording of the new deed. Across all my purchases, these costs generally come in around $1000.
- Lender Fees: For the most part, I use the same lender to finance each property purchase. The lender charges a set of up-front fees to fund the loan, including a Loan Origination Fee, appraisal, underwriting fee, flood certification, document preparation fee, processing, fee, credit report fee, etc. (again, all those ridiculous and inflated fees that contribute to the lender’s bottom line). While every investor and every lender will have a specific sets of fees — and while these fees are somewhat tied to the purchase price of the property — for a typical acquisition I do, these Lender Fees total around $2000 per property.
You may find you have other recurring Purchase Costs, such as Appraisal Fees, Survey Costs, Bird-Dog Fees, etc. If so, add those into your Purchase Costs.
Holding Costs refer to those expenses that add up between the time I acquire the property and the time I sell the property. For my projects, Holding Costs can specifically be broken down as follows:
- Mortgage Payments: On a typical project, my monthly mortgage payment will be about $500. And a typical project — from purchase to sale — will generally run between 4-6 months. So, during that time, I’ll generally make about $2500 worth of mortgage payments to my lender to keep the property.
- Property Taxes: On the properties I purchase, the typical yearly property taxes are on the order of $1400. Again, if I hold the property for 4-6 months, this will average out to about $600 in property taxes per project.
- Utilities: While performing rehabs, I like to ensure that all utilities (electricity, water and gas) are turned on. This is both for the convenience of my contractors as well as to help diagnose any issues with the property. Because the seasons in Georgia tend towards extreme temperatures, I’ve found that my utilities in my properties generally run about $200 per month for the duration of the project. Again, over 4-6 months, this averages about $1000 per project in utility costs.
- Insurance: Typical insurance costs for my properties is about $350-400 per year. On average, I pay about $200 in insurance costs for each project.
Again, you very well may run into additional Holding Costs, depending upon how you do your flips. For example, you may have costs for: Lawn Mowing, Rental Income, etc.
Selling Costs refer to those fees and commissions that must be paid in order for me to sell a property. Again, different investors will use different marketing mechanism to sell their houses, so selling costs for each investor may be quite different. For my projects, Selling Costs can be broken down as follows:
- Commissions: Because my wife is our real estate agent, we save about half of the commissions we would otherwise incur when selling a property. That said, if our buyer has their own agent — they generally do — we must pay about 3% of the purchase price to that agent at the sale. A typical property of ours sells at about $120K, so that 3% comes out to about $3600 paid to the buyer’s agent at the sale of our property. Add to that the fees my wife pays to her broker, and the total commissions average about $3900 per property sale.
- Closing Costs: In this market, most buyers ask the seller to pay some or all of their closing costs. On our sales, we’ve been asked to pay anywhere from $2000 to $6000 in closing costs for the buyer. On average, we’re asked to pay about $4000 in buyer closing costs, and because it is a buyer’s market, we generally agree to it.
- Home Warranty: Most first-time home buyers (the type we cater to) request that the seller purchase a home warranty as a condition of the sale. We always expect to do this (and almost always have), and this adds about $500 to the cost of the sale for us.
- Termite Letter: In addition to the home warranty, many buyers (and/or their lenders) require us to provide a proof of termite inspection at the sale. This generally runs somewhere just below $100.
- MLS Fees: Because my wife is our agent, she is required to pay a fee to the local MLS for listing the property. This generally runs about $100.
Depending on how you sell your properties, you may have more or fewer expenses associated with the process. For example, while I don’t calculate it as part of our Fixed Costs, we generally receive about $5000 in commissions (between the purchase and the sale of the property), which goes right to our bottom line. It wouldn’t be unreasonable to subtract $5K from our Selling Costs (and therefore from our total Fixed Costs), though we prefer to account for this elsewhere in our analysis.
You may also have expenses associated with: Direct Marketing, Partnership Payments, Bonuses, etc. If so, add those into your Fixed Costs.
As you can see above, buying, holding and selling a property can cost a lot of money in fixed fees. Let’s see how these add up on a typical project of mine:
And there you have it — it costs me about $16,500 in commissions and fees just buy, hold and sell a property (which I round up to $17K to make my calculations easier and to have a margin of error). Many investors ignore these costs when calculating their potential profit on a deal; but, consider that if you plan to earn about $15K on a typical project, these costs can actually mean the difference between earning your desired profit and losing money!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.