Hey it is a nice detailed expalaination for newbies and some experienced investors to take note. However, still missing several expenses such as :
1. Property Appraisal -- If I am buying from a Whoelsaler -- I like to have my own appraisal --" as-is" and after repairs value. Which may cost $3000 to $6000.
2. My Profit-- Before I decide to even consider the property --I have to make sure that I make at least $20,000 profit
for houses under $150,000 ARV and $40,000 for houses above $150,000 ARV.
3. Discount -- No one ever sells a house at Full FMV or ARV price --in todays economy. Even before recession --most buyers ask for discount off of listing price. I may discount 10 % to 15 % to sell quickly in todays market.
4. Closing Costs -- If I want to sell quickly after finishing repairs and / or increase my profits by reducing holding costs --I may have to sahre some of the closing costs for new buyer ( end buyer) --upto 3 % --- or some times offer FREE HDTV or even a Car --
5. Realtor's commission --yes -he did mention that when selling --However I may offer 5% commission instead of 3 %
to attract more buyers and more agents
interest --there by creating more competition for offers as well as reducing holding time.
That also assumes that Realtor's commission is paid by Bank ( Lender ) when we buy the house.
6. One more -- Dont forget to add at least 10% contingency --on top of contractor's bid for repairs --
7 Also --if you are buying out of state --make sure the repair estimates are prepared by that city
( state's ) local contractor--certifide and licensed in that state.
8 That reminds me another expense --if repair costs are over certain amount or for certain type structure ( such as a deck or adding new bathroom ) - may require a building permit from city or county--so add permit costs --some times included in contarctor's bid.
In general -- I never take what they show
as profit on listed properties --in BP or other websites. I assume very conservatively --half the profit or less -of the equity shown. Each property has to be evaluated on its own --based on ARV,
holding time, repairs and profit before making offer to buy.
There are a lot of people who don't realize all of the costs involved in flipping houses. It's true, reality TV has tricked them! Thanks for sharing the valuable information. It is so important to know this before flipping a house!
There are a tremendous amount of unforeseen costs that can occur when doing your first flip that newbie flippers never consider. Reading this article gave me an insight as to what type of expenses I can expect to incur and will help me in budgeting for my next flip. Novice flippers should read this article.
How much do the rehab/repair cost e.g. general contractor rate, flooring installation cost, etc. vary during the downturn/recession as opposed to the normal period? Can it be as much as 20% lower?
Flipping for profit is a fantasy. I have been a real estate investor for over 15 years. My model is to buy property on sale, put it into serviceable condition, add it to my rental portfolio, then await slow property appreciation. There is not a snowball's chance that one can purchase, remodel, then quickly sell for a reasonable profit. Transaction costs, carrying costs, waiting for a buyer is not the way to improve your net worth in this business.
After 7 years, this post and others like it about estimating rehab costs and flip costs remains strong. Although our market has changed dramatically over the last 7 years, properly identifying the costs associated with a flip is still a hot topic and should always be. The TV shows (more now then ever before) about house flipping have so many inaccuracies and those looking to actually do this business get a total wrong impression of the business.
That aside, I wanted to share a common error I have made many times. Underestimating the demolition costs of major rehab projects has been a common mistake for me and I have noticed the same with many others. I have since made the necessary adjustments and wanted to point out how and why thus mistake has been repeated.
Typically after making a mistake on a flip, I try to never repeat it. In this case, it is a line item that changes based on the scope of work at each project and each project will often have unforeseen expenses associated with the demo. More dumpsters than originally expected, more demo needed than originally expected, etc. Mybprojects today almost always involve additions, tearing down portions of existing, and all with plans and permits. At escrow time, I have a budget created, butbthat budget can often change based on what the city demands in the plans which can change the scope of work. This is wear your miscellaneous rehab costs should kick in and the importance of having that inside your original budget.
Seasonal labor supply and demand shifts, as well as local R/E market shifts can have a significant impact on construction costs. For example, at peak construction season in my area, you really have to hunt very hard to find someone willing to paint your project for less than $6/square foot, so when you find someone who'll do it for $2.50, all of the sudden that doesn't seem all that expensive.
@Kuba F.@Will Barnard That is definitely true. Seasonal changes are crazy, espeically when the guys start to pick and choose the jobs they want so they give you crazy prices because they don't nessecarily need your job. But it's totally okay, because where you have work during the winter or during times of market correction... where no one is buying and you position yourself correctly so you keep buying.. They all come crying and begging for work. it's just what it is, always have to hunt for the best prices.
Not only seasonal impacts but mother nature as well. Just recently, because of all the hurricanes and I am assuming the shortage of lumber, one of my estimates for an add a level that I am doing went up 8k over a week because of this... Went from 21k to 29k... My jaw dropped, I am playing the waiting game now while I wait for permits to see if I could wait out the crazy inflation of the prices and see if it will go back down by the time I get my permits and when I have to start work.
These days, if you're marketing yourself, photography fees for higher end properties are starting to get outrageous and definitely need their own line item. This is especially true when you start adding VR models, and drone video.
Yes, take the taxes and insurance costs (I do this with excel) for expected hold time in your area and use 6% of resale to figure out a very rough net before cost of financing. The 6% is of resale to cover - 3% to buyer's agent, and another 3% in closing fees to BOTH the buy and sell side costs. Listing houses with agents can be pretty expensive long term but if you are going that route then I'd use 9% plus taxes and insurance. I never factor in financing. If the deal meets the criteria- a lot of people use 70%, then I recommend securing the ability to purchase before shopping for capital.
Thanks for the great info...
Did this deal follow the 70% rule? From what I calculated out of the story, your buy price should have not exceeded $224k, which you were pretty close to at $225,937, which included the wholesale fee.
I'm wondering what the profit was from this project.
Still learning...Thanks!
Selling through an agent isn't expensive when you factor in that they're the ones paying for marketing, that you get access to most of the buyers, and the fact that when buyers come to an owner listing they expect to pay the commensurate agent discount. So you end up doing all of the work of an agent for the exact same net result, if not worse.
Wait all those hours spent watching HGTV were wasted?
At least there are a lot of homes for sale mid "flip." The sellers are broke and desperate. So like everything in a market economy some people have opportunities from others mistakes.
As long as those mistakes aren't that they bought too high and underestimated their rehab costs or overestimated their ARV. Depending on their motivation, it can be hard to pick up where they left off and still come out on top, although with some creativity it's possible.
Should I pay contractors to go assess the property in order to provide a bid on the work they will be doing? I am getting a mix - some are asking for a fee and others are not? Any thoughts on how to select without having to solely go for “cheaper”?
Although some will do it for free, in general you should expect to pay professionals for their time, unless you have a relationship with them, and they know for certain that you're going to use them for the work. However, most know that you are getting multiple bids, and are shopping around, as you should be.
In general, you'll want to select based on price and ability, removing a far below average priced bid as you're likely to experience many change orders from that contractor as the project progresses.
If you are talking pre-offer, then I wrote a BP blog post elaborating on the subject of how to come up with an estimate a while ago:
Love this post. One should always do their due diligence to make sure they understand costs involved, but those HGTV shows created way too many clueless flippers that probably flipped their first house, lost money, and gave up because they realized it isn't as easy as it seemed on TV.
I am currently about to start a rehab in the coming weeks and I have to say there were certainly a number of things that hadn't crossed my mind. I feel confident the cushion I have in the deal will allow me to still have a rehab and holding expense and walk out with a good profit. That said this list showed me things I can now at least expect and we'll see what other surprises the rehab itself presents! Fantastic article.
When you're starting out and you inevitably take longer to do the rehab, even the little holding costs start to add up. If you planned for 6 months of holding, but take 12 months to finish the project, even a relatively small $100/month insurance bill takes another $600 from your bottom line, so imagine the possibly ballooning of costs when you add them all up: taxes, utilities, lawncare, alarm, etc, etc. It can get out of control pretty fast.
I have not done my first deal yet, though have been studying and looking at property. My main question about holding costs has more to do with how to finance working capital to cover the holding costs.
Based on my studies, I have come to the conclusion that I will get working capital for my down and holding costs from private lenders, and get a hard loan for purchase and construction. In addition, I have a business line of credit I can dip into if needed. I imagine as I build my profits, I can begin to use my own money for holding costs without going to private lenders, though as I've learned leverage is king.
Is this a fair assessment of how most flippers work the finances?