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.
My lender told me that my appraisal in Dallas, Texas would be $690 and I was very upset. However, the appraisal is a very important part of getting funded.
My closing costs were more than expected. Be sure to look at what closing costs for your state are as they vary.
I estimated 15k for my reno and I now estimate at least 19k. I had to pay a little more to get my reno done in a timely manner. Many flippers this time of the year and resources are scarce. It was very important for me to get my house back on the market before school starts.
I estimated 6% for realtor fees but since I also bought with my realtor we negotiated it down to 5%. (Dropped from 3 to 2) My realtor is also staging my home for free : ).
I did not budget in enough money for light fixtures, fans, door knobs, bathroom hardware, and fixtures in general and those costs add up very quickly.
One thing I would like to add is that getting tiles above bathtubs professionally cleaned and tubs acrylic-ed saved me a lot of money instead of replacing them. I chose to replace the vanities and bathroom floors which look fantastic.
I'm a first time flipper and these are just a few things I experienced.
Closing costs are very locale specific. I can get away with 2-3% of purchase to transfer a property, whereas in places with high taxes or high transfer fees this can cost you as much as 10% of your purchase amount.
Get with a title company in your area ahead of time to get an idea of all of the transfer costs in a purchase as well as sale local to you. You might be surprised at how it affects your deal economics, but better to be surprised before you pull the trigger than at the closing table.
I'm like Justin that I enjoy watching those 'flip' shows but I usually end up shaking my head at the end when they post some ridiculous supposed profit for the investor when in fact, they are gonna be lucky to not LOSE money. So many costs they don't take into account .... :roll: :oops:
Great article Justin!
yea i loved screaming at the screen that there is no way they are getting that much work done for those little budgets. I guess that explains why they havent aired a new episode in two years...
I love the panic mid episode about "were going to be cutting it close on this deal" then they say they made $70k smh!
It was probably a 2MM house so that 70K would account for barely a 3.5% gain and it probably didn't account for their private money cost at 10% so they actually lost over 100K, but you know, details....
This is a "must read" for anyone even thinking of flipping. I have flipped several houses and sure could have used this advice BEFORE I started. Thanks!
Principal, Interest, Taxes, Insurance, otherwise known as the mortgage payment. I think he meant subtract the mortgage payment from the rent, but the overall point that more thought needs to be put into how much it costs to acquire and run a property is still valid.
I would like to start in the real state world, I have $ 30000 available ready to invest, I would like to start in fix and flipped is a good idea? or would you recommend me invest in something else related to real state?
Where should you start? I'm a big fan of the apprenticeship model. Trade time for money. Go seek out a successful flipper in your area and ask them if you can help them with their lead generation, making calls, hustling. This is the number one problem in this business and the successful ones have it figured out, so let them teach you that part. Once you have the leads, everything else false into place. Without leads you have nothing.
Great article. Another expense I recently ran into was flood insurance. It was an older home, so some companies would not cover it. Had to do some shopping around. Cost me an additional $900.
Great read. I have to say that even if you don't plan on doing the work yourself you should have a good understanding of what goes into doing the work. I had a house built using a GC. We do our own remodels and rehab our rentals etc. My hubs has worked in construction on and off over the years. I'm a cost analyst in manufacturing and have an accounting degree and 30 years of business experience. Between the two of us we are pretty good at estimating and considering what our costs will be. Understanding what we can do ourselves and what we need to hire out is important since a failed attempt at doing something can cost more money when you have to hire a professional to fix what you broke. Understanding the process will allow you to manage your own projects even if you can't do the actual work.
I would suggest that people learn as much as they can about rehabbing even if that means you are watching your neighbor's house go up or whatever.
I go through phases of watching those fake HGTV shows not because I think they are real but because I lack skills in decorating. I'm a minimalist and really struggle to create a "look".
Just keep in mind you should protect yourself with a builder’s risk insurance policy. To use some hard money lenders a lot of times and to really ensure the private lenders position and strengthen your proposal, you should get some construction insurance. If you need any help with that aspect of it please just let me know.
I get a kick out of all these people who don't have a clue what the true cost of flipping is. I am going to write a book that goes against all the TV Shows
Great Article by Justin, thanks all for sharing! I am under contract on our first flip and admittedly am worried about what I may be missing. We have done our fair share of research and did not want to get stuck in analysis paralysis so I am glad we are under way on our first deal, but it is nerve-wracking nonetheless and I am sure we are hit some learning speed bumps.
One question I am struggling with is how i should factor in holding costs (conventional loan + utilities, insurance, tax, etc.) If we are living in the house for a year? These expenses add up a ton in the deal analysis when you extend out a year. However, we would have at least some of these expenses elsewhere if we decided to stay in our rental during the flip. Further, aren't I paying towards the mortgage and thus creating a small bit of equity in these payments or does that not factor in because I am mostly paying interest? If anyone has an experience with live-in flips and how they analyze the deal in these scenario I would really appreciate the insight.
One question I am struggling with is how i should factor in holding costs (conventional loan + utilities, insurance, tax, etc.) If we are living in the house for a year? These expenses add up a ton in the deal analysis when you extend out a year. However, we would have at least some of these expenses elsewhere if we decided to stay in our rental during the flip. Further, aren't I paying towards the mortgage and thus creating a small bit of equity in these payments or does that not factor in because I am mostly paying interest? If anyone has an experience with live-in flips and how they analyze the deal in these scenario I would really appreciate the insight.
Personally, I would factor in all those costs in full at the start to make your purchase decisions. Then, since it is a live in flip, the utility costs you had which would have been elsewhere anyways along with the fact that you paid down a tiny amount of principle in year one is just extra gravy on the deal. In actuality, if you did not live in the flip and flipped it in 3-5 months instead, your ROI would be much higher so the fact that you have a few savings from the live in is all lost in opportunity costs anyways, and then some.
If one was to argue that you do this live in flip for 2 years to utilize the homeowner tax exemption up to $500k for married couples, I would counter that argument with the fact that paying the added taxes on the first flip, but getting to reuse that same money 2 or 3 times in the first year and 3 or 4 times more in the second year, all those added flip profits would more than pay for that extra tax exposure.
Hi my name is nickie . i have nothing to add because i am at the beginners stage. i am saving money and building credit right now. iv's learned something new from this. Thank you.
Hey all - I'm trying to learn a lot before getting started later this year. I'm trying to figure out a sense of what to expect for costs, but this all seems so dependent on your area. The fees, relative rehab prices, etc all seem very regional. How would you suggest a new investor starts to get a sense of prices? How did you figure it out?
Hey all - I'm trying to learn a lot before getting started later this year. I'm trying to figure out a sense of what to expect for costs, but this all seems so dependent on your area. The fees, relative rehab prices, etc all seem very regional. How would you suggest a new investor starts to get a sense of prices? How did you figure it out?
Since prices range from different areas, you need to learn how to do it in your area. To start, get a repair list form with all the possible repair items, then find out what each item costs either per item or per task. You can get some pricing for materials from box stores and other general pricing from other investors in your area. For example, talk to 5-10 rehabbers in your area and find out what their average spend is on a bathroom remodel or standard 6X12 L shaped kitchen. Plug in the numbers as you go. Then go to as many open houses for listed homes in need of repair “handyman special” or “needs updating”, etc and walk through each house noting which items need to be repaired or updated. Then go back and fill in your worksheet for each house. Doing this over and over again will get you experience. After awhile, you should be able to divide the home up into sections, I.e. kitchen, bath, windows, doors, stucco/siding, flooring, paint, landscaping, etc. Once you know the average price for your average home in your area for each section of the home, you will get good enough to walk through a home and in 15 minutes, come out with a number in your head.
There are many other valuable forms you may download in the BP Fileplace as well. My form was provided about a decade ago so it likely needs some updating but it will give your a great start.
Hey all - I'm trying to learn a lot before getting started later this year. I'm trying to figure out a sense of what to expect for costs, but this all seems so dependent on your area. The fees, relative rehab prices, etc all seem very regional. How would you suggest a new investor starts to get a sense of prices? How did you figure it out?
Since prices range from different areas, you need to learn how to do it in your area. To start, get a repair list form with all the possible repair items, then find out what each item costs either per item or per task. You can get some pricing for materials from box stores and other general pricing from other investors in your area. For example, talk to 5-10 rehabbers in your area and find out what their average spend is on a bathroom remodel or standard 6X12 L shaped kitchen. Plug in the numbers as you go. Then go to as many open houses for listed homes in need of repair “handyman special” or “needs updating”, etc and walk through each house noting which items need to be repaired or updated. Then go back and fill in your worksheet for each house. Doing this over and over again will get you experience. After awhile, you should be able to divide the home up into sections, I.e. kitchen, bath, windows, doors, stucco/siding, flooring, paint, landscaping, etc. Once you know the average price for your average home in your area for each section of the home, you will get good enough to walk through a home and in 15 minutes, come out with a number in your head.
There are many other valuable forms you may download in the BP Fileplace as well. My form was provided about a decade ago so it likely needs some updating but it will give your a great start.