Putting closing costs inside the loan cut my deal board in half

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Putting closing costs inside the loan cut my deal board in half

Steve Waller
Lender · Houston, TX · Member since 2026 · 79 posts · 11 votes

I screen listings against a hard money purchase test, and I had been doing it wrong.

The usual sizing is ARV times advance rate, minus repairs, and whatever is left is the most you can pay for the house. Then the borrower brings the closing costs. That gets called zero down. It is not zero out of pocket.

So I moved closing inside the advance -- purchase, repairs and closing all have to fit under the advance rate -- and re-ran 1,574 active listings south and east of Houston against it at both 70% and 75%.

Twenty-four listings that had been within 20% of the asking price became twelve. Eleven within 12% became three. Exactly one clears the ask on a full rehab budget.

The reason it bit that hard is the closing-cost schedule. I had been carrying a percentage, and a percentage falls apart at the bottom of the price range. Three percent of a $90,000 purchase is $2,700, which does not cover origination, title, survey and prepaids on anything. The real number runs in bands: roughly $10,000 under a $200,000 purchase, $11-15k from $200-300k, $18-20k from $300-400k. On a $150,000 house that is 6.7% of purchase, not 3%. And it has to be solved circularly, because the band depends on the purchase price you are trying to calculate.

Nine more came off when I read the listing records instead of just the math: cash-sale-only financing, a HUD listing needing a valid NAID to bid, two pre-foreclosures with no interior access, a patio home comped against detached sales, a 55+ age-restricted community, a house listed under the wrong city, and two already-renovated houses where the entire apparent discount was a gut allowance applied to a finished kitchen. Those last two were the best two numbers on the board before I read the remarks.

The repair band is the whole argument. Full gut allowance by vintage: one house clears the ask. Half that band: six do. You cannot settle scope from listing photos.

So a question for anyone underwriting their own deals. Where do you put closing costs? I keep seeing spreadsheets that treat zero down and zero out of pocket as the same thing, and they are ten to twenty thousand dollars apart. And has anyone got a closing-cost number that actually holds up under $100,000, where the flat costs eat the whole margin?

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  • Kasing Ng
    Accountant · San Francisco, CA · Member since 2026 · 112 posts · 61 votes
    3w

    Hi Steve, good post. The closing cost thing is where I see people fool themselves too, just from the tax seat instead of the sizing seat.

    Here is the part that connects to your margin point. On a flip the house is inventory, not an investment asset. That matters more than it sounds. All those acquisition side closing costs you are pulling inside the advance, the title, the survey, recording, the legal, they capitalize into the cost of the property. They do not get expensed the year you pay them. They sit in basis and come back as COGS when the thing sells. So yes, they eat the margin. Pre tax, exactly like you laid out. But the after tax hit is smaller than the number on the settlement statement, because you are getting them back against the sale price. Whatever you paid in acquisition costs is lowering the taxable gain dollar for dollar.

    That only works if there is a gain to lower. Deal breaks even or goes upside down, the basis does nothing for you and you are just out the cash. So it is not a free pass, it is more of a discount that shows up at the end if the deal actually prints.

    Financing costs are the one piece that does not play by that rule. Your points, the origination, lender fees, those are a cost of the loan and not a cost of the house, so they do not fold into the property basis. Different bucket. They amortize over the loan and on a short flip they just fall out when it pays off. Worth keeping them mentally separate from the title and survey side or the math gets muddy.

    Now the part that goes the wrong way for the flipper. A flipper is a dealer in the eyes of the code, so the profit is ordinary income and it catches SE tax on top. No long term capital gains, no 1031, none of that applies. So those flat costs you are worried about at the bottom of the price range, you are recovering them at ordinary rates, which is the most expensive rate there is. On a sub 100k purchase where the flat costs are already eating 6 or 7 percent, that stings more after tax than it would on a buy and hold, not less. The rental guy at least gets to play the cap gain game later. The flipper does not.

    I would not begin to tell you where to park closing in the advance, that is your read and you clearly have the reps on it. Just adding the tax layer, because the cost that eats your margin and the cost that eats the after tax margin are not the same number, and on the small deals the gap is real money.

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  • Steve Waller
    OP
    Lender · Houston, TX · Member since 2026 · 79 posts · 11 votes
    2w

    Fair point, and one I don't think about enough from the lending side. Flip profit taxed as ordinary income makes those flat costs on a sub-$100k purchase hurt even more than the closing statement shows. Thanks for adding it.

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  • Victor Ramirez
    Member since 2026 · 25 posts · 5 votes
    2w

    This is a great point, and the flat-dollar closing band is the part most people miss. Using a percentage makes cheap houses look better than they are, because title, origination, survey and prepaids barely shrink when the price does. On a $90K buy, closing can easily eat 8-10% once points are in.

    A cleaner way to run it: treat buy-side closing as a fixed dollar number by price band (like you did), add points and interest separately on the actual loan amount, then solve MAO with everything inside. It's a little circular, but iterating 2-3 times converges fast.

    One lever worth checking on the low-price deals is seller-paid closing credits. With a motivated seller, asking for a few thousand in credits instead of a lower price can keep you inside the advance rate without changing the headline number.

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  • Steve Waller
    OP
    Lender · Houston, TX · Member since 2026 · 79 posts · 11 votes
    5d

    Victor, good add on the seller credits. On the cheaper houses that's usually the easier ask. The seller keeps his price and you keep the cash you'd otherwise bring to closing. Just check it with your lender first. Most cap the credit at actual closing costs, so it can't turn into cash back, and anything over that you lose at the table. Are you seeing sellers agree to credits on the sub-$150k houses, or only on the ones that have been sitting?

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