Real Estate News & Commentary

Calculating Fixed Costs on a Rehab, Flip or Wholesale Real Estate Deal

Expertise: Real Estate Investing Basics, Real Estate News & Commentary, Flipping Houses, Mortgages & Creative Financing
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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.

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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:

  1. Purchase Costs
  2. Holding Costs
  3. 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

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

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

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:

Fixed Costs

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!

By J Scott
J Scott runs a real estate company that invests in several parts of the country and that specializes in new construction, as well as purchasing, rehabbing and reselling distressed properties. J is ...
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    Mark Arenella
    Replied over 10 years ago
    Great article… I’m a RE investor myself and your fixed costs are very important to figure out when going into a deal. Thanks for sharing valuable information with others… always good to see! .-= Mark Arenella´s last blog ..“The Johnny O Show” – Episode#3 =-.
    Rachel Aka Mobile Home Gurl
    Replied over 10 years ago
    Great article! I really like how you break down fixed costs even more and group them into categories. Having the categories helps to break down the fixed costs to be able to see where the costs are going. Very good information here, thanks for sharing!
    Le Jon Ratchford
    Replied over 10 years ago
    J Scott, Very detailed and well written article. My first deal I lacked to take in account the little expenses that occur. Now having a better idea of what cost I will in counter, I make sure to take this in account when negotiating a deal with a seller. Great Post!
    Replied over 10 years ago
    Great breakdown of the different expenses you can come across. I have sometimes done my figures based on a percentage basis, but I think as this market is evolving and you have to been firm in your numbers this is a better way to go. Thanks for your input. Celeste
    Replied almost 7 years ago
    You are a true teacher! I have read and followed many well known flippers/investors such as Robert Kiyosaki. However you made it so simple yet detailed without all the filler and jargon. I just want to say thank you for sharing and creating a path for potential investors. Sincerely, Lisha
    Replied over 6 years ago
    This is such a helpful post it’s crazy…thank you!!!
    Replied about 6 years ago
    Thank you for sharing ..this is really helpful…simple and detailed…
    Replied almost 6 years ago
    This is very helpful information. Unfortunately, I live in the Boston area where you’d be hard-pressed to find a foreclosure or fixer upper for under $300K. I’ve seen total dumps selling for $600K. It’s ridiculous. Yearly taxes are $4500 on the LOW end and go all the way up to $8-9K and these houses aren’t mansions either. I’ve yet to buy my first fixer upper so I’m currently in the research phase – but the numbers I’m dealing with in this part of the world scare me and make me wonder if it’s even fiscally possible. There are definitely fix & flips out there because I’ve seen open houses – but I don’t know how they’re doing it. I wish there were more posts on the higher priced real estate markets for those of us who live in them.
    Jennifer Talcott from Brandon, Florida
    Replied over 5 years ago
    @J Scott Good article! I’m glad Josh resurrected it. If you have a minute, I have a quick question for you: Who is your lender? I’m currently using a hard money lender and they are expensive! 3.5% to fund plus 12% annual (or 1% payment per month). On a $100,000 house, it costs $8500 for 5 months. I would LOVE to find a lender that only cost $2000 to fund the loan and $500 a month for the mortgage. Are you still using that lender? Would you mind sharing their contact information with me? I’ve lost several bids because I have to bid extra low due to money costs… I appreciate any info you can give me
    Aaron Cullen Investor from Portland, OR
    Replied over 3 years ago
    @jennifer talcott I have a great hard money contact that charges 2pts and 12% with no payments due till the end of the loan. And now that I’ve done a few deals they dropped it down to 10%.
    Replied over 3 years ago
    Hi Aaron, What state is your hard money lender in?
    Celeste Karan Real Estate Broker from Des Moines, IA
    Replied over 3 years ago
    I would be interested in more information about this lender, as well.
    Suzgo Phiri Real Estate Investor from Washington, District of Columbia
    Replied over 5 years ago
    Another great @j Scott article! As always thanks for sharing
    tom kelly
    Replied over 5 years ago
    Check out a “reissue of the title insurance” Title insurance is an expensive cost and if the bank just did a search, you can get a reissue at a substantial discount.
    Tyler Kaye Rental Property Investor from Vancouver, WA
    Replied over 5 years ago
    Do you request this from the bank, or can you request it from the title company?
    Tyler Kaye Rental Property Investor from Vancouver, WA
    Replied over 5 years ago
    Thank you.
    Yechezkel B. Flipper/Rehabber from New Jersey
    Replied about 5 years ago
    Nice and clear article… J is the man!
    Walter Williams Rental Property Investor from Huntsville, AL
    Replied over 4 years ago
    Very good information. Thank you J. Scott for sharing!
    Rick Taylor from Austin, Texas
    Replied over 4 years ago
    Thank you kindly for this information, however I may be making this a little more difficult than it may seem. I’m just not grasping how commissions and closing costs are calculated. From my understanding Selling Costs (Commissions to agents, Sellers Closing Costs, and Buyers Closing Costs) is where i’m stuck. Please correct me if i’m wrong, and in most cases I am here. Commissions to agents, is that not the same thing as buyers closing costs? To my understanding, I would need to pay “my agent” generally 3% if the buyer has an agent as well where the other 3% will go. Wouldn’t that be considered the buyers and sellers closing costs? If this holds true, isn’t that the same thing as the Commissions to agents? Taking all into consideration, Commissions to agents and (Buyers and Sellers closing costs) would be equal so you are double accounting for this in your formula. All help is welcomed as I need to understand this to follow through with a potential home I am looking at. Thanks again!
    J Scott Developer from Sarasota, FL
    Replied over 4 years ago
    Hi Rick, As the seller, you will pay your agent a fee (commission) and your buyer’s agent a fee (commission). This total commission will typically be 2.5-3% on each side, so 5-6% total. Sounds like you’re clear on that. In addition, both (in most states) the buyer and seller will pay closing costs — these are costs paid to the closing agent for things like title search, title insurance, document fees, courier fees, etc. You’ll generally cover some of these costs (seller’s closing costs) and the buyer will generally cover some of these costs. In reality though, the buyer will sometimes ask the seller to cover some/all of his closing costs — most lenders will allow the seller to do this to reduce the out-of-pocket expenses of the buyer. So, the buyer may ask that you pay his portion of the closing costs — many sellers are happy to pay this to get the deal done. So, that would be the line item “Buyer’s Closing Costs” for the seller. Does that make sense?
    Rick Taylor from Austin, Texas
    Replied over 4 years ago
    Roger that J. Thanks for the dummied down version for me as this makes perfect sense now. Is there a general rule of thumb or a calculator to factor the Buyer’s and Seller’s Closing Costs based on the propertie’s Selling Cost? Or is this something that I may be able to ask my Agent as a rough estimate? Again thanks for the super fast reply, and hope 2016 is off to a prosperous year for you and everyone else on BP!
    J Scott Developer from Sarasota, FL
    Replied over 4 years ago
    Every state (or local jurisdiction) will define what’s “standard” in terms of what the buyer pay and what the seller pays at closing. For example, in Georgia, buyer pays most costs. In Wisconsin, seller pays most costs. In Maryland, things are split (though buyer pays a bit more). If you ask a local title company or closing attorney what the costs typically are for each side, they should be able to tell you. It will consist of some things that are related to the price of the sale and some things that are fixed price. In terms of what the seller may be asked to pay for the buyer, it’s generally negotiated as a percentage of sales price — the seller paying between 0-3% of the buyers closing costs is typical.
    Jorge Martinez from Clermont, FL
    Replied 5 months ago
    you (typo)
    Jorge Martinez from Clermont, FL
    Replied 5 months ago
    Hi, I wanted to know if run or are member of a local REIA or if you hold meetings because I am your neighbor. Thanking you in advance. Jorge
    Victor Shepherd from Hollywood, Florida
    Replied about 4 years ago
    thanks j this information is very important for a someone who is new to the business . looking forward to my first flip. thanks again
    Jennifer Joseph Rental Property Investor from Akron, OH
    Replied over 2 years ago
    Hi again, This is a great article and a bit scary too as I’m sure I missed figuring some of those in on my current offer. I know this is a pretty old article, but I’m paying around $800/month on my current rental for insurance and see here that you paid, in 2010 at least, about $400/month. Do you or does anyone have advice about where to get good, but less expensive insurance on rental SFHs? Thank you!
    David Craig New to Real Estate from Boston, MA
    Replied 6 months ago
    Thanks so much for this article. Your book was great too!
    Tony Argueta Real Estate Agent from Mobile, AL
    Replied 5 months ago
    Super helful! Creating a spreadsheet to model Thanks!
    Sarah Lapinski
    Replied 4 months ago
    Wow how are you able to keep insurance costs so low? So many properties on one underwriter? I definitely learned a few things from this article...including to perhaps ask for a home warranty when I buy my next property! And perhaps get a real estate license...
    Kent Gushow
    Replied 3 months ago
    Simple breakdown. Great article.