It’s not that $ 15,000 isn’t a bad profit, it’s just that you’re unlikely to make that amount and You can even lose money.. The reason is all of the unexpected costs.
I thought that the purchase price minus the repairs was equal to the profit …
Home-turning TV shows love to show very simple formulas about how much profit they can make, completely ignoring the typical costs of modification and flipping. If they cover all the costs normally included, the fonts will probably be as small as the legal statement of a small printed matter made in some commercials. You need to keep it simple so you don’t get confused. It’s not too confusing, so let’s see what can happen if you choose to do a houseflip with just a $ 15,000 profit potential.
The temptation to make a deal
We’ll start by looking at why people are tempting to make a $ 15,000 profitable deal on paper. The common formula used to calculate the most payable amount to turn a home over is 70% of the repaired value (what it sells) minus the cost of repairing the home.
If your home sells for $ 100,000 in repairs and it costs $ 20,000 to repair, you shouldn’t pay more than $ 50,000 for your home. To beginners, this may seem to leave a profit of $ 30,000. That’s great, but it’s rarely the case. There are other costs involved and 30% of the room will cover your interests and those other costs.
If you underestimate these “other” costs, you may want to trade with a potential profit of $ 15,000. In the above example, it means buying a house for $ 65,000 instead of $ 50,000. You should still make a profit of $ 15,000, right? error.
The cost of modifications and reversals that may eat your lunch
- Closing cost at the time of purchase
- Change order
- Owning cost
Holding costs are usually included Loan payment,Property tax,insurance,utility,HOA membership fee And other costs associated with owning a home while you repair and sell it.
You may not think these costs really have a big impact on our profits, but let’s take a look at an example.
Suppose you are repairing and selling a home in the first example. We need to buy it for $ 65,000 and spend $ 20,000 on repairs in the hope of earning $ 15,000. Suppose you receive a purchase and repair loan ($ 85,000). This was a hard money loan that allowed you to pay interest only with 14% interest. Monthly interest payments will be $ 991.67. Wow. This is a lot, especially considering that it can take up to 6 months to fix and sell. If that happens, it will cost you $ 5,950.02. If you add vacant home insurance on top of that, you can pay an additional $ 1,000. The property tax I live in and invest in is about 3%, so for a home close to $ 100,000, it’s about $ 3,000 a year. Therefore, even if you repair and sell within 6 months, you will still see a $ 1,500 property tax invoice.
I’m sure you will understand the idea. It’s strange that people don’t think more about these costs before jumping into investment. Only those mentioned, we are looking at about $ 8,500. That’s more than half your expected profit!
- National Association of Realtors Membership Committee
- Buyer Closing Cost Assistance
- Repairs required by the lender
- Price cut
Oddly enough, people tend to be less concerned about the cost of actually buying a home. If you have a loan (especially if you have a hard money loan), you may pay thousands of points. Title policies, escrow fees, document preparation, courier fees, etc. are all a significant part of the intended profit.
You will find what you did not plan for and what you have to fix. Just count on it.Most rehab Come up with a repair quote For homes, add 20% or double the total repair cost. This is because repair costs can go out of control if you are not in full control.
From time to time, we may want to keep certain things in the house and rerace others. It’s amazing what an outdated or filthy thing looks like after you paint a house and leave some things alone. This can lead to changes in many of the items you were trying to keep.
I’m not talking either Over-modification of the houseJust do what it takes to make your home desirable for potential buyers.
The real estate agent’s commission is usually 6% of the selling price. For the flip in this example, this would be $ 6,000 (typically $ 3,000 for the buyer’s agent and $ 3,000 for the seller’s agent).
Of course, you can sell it yourself for sale by the owner, or you can license it and list it yourself. This saves you half the fee, but in reality it could be even more.
Most of the fix houses and flip houses we sell are sold to buyers with FHA loans. Buyers can get help from sellers for some of the closing costs and usually need it. The Federal Housing Agency limits this support to the selling price or 6% of the permissible closure cost, whichever is lower.
You may end up selling to a cash buyer or someone with a traditional loan qualification that doesn’t require help with closing costs, but you’re more likely to get a buyer who needs help.
For our example home, this could be over $ 6,000. To be exact, it is not a champ change.
You don’t need to give help, but your buyer needs it and you I’m having trouble getting buyersYou may be better off offering to do it.
Just because you repaired your house and hooked up a buyer does not mean that you have run out of transaction costs. Lenders often need to make certain repairs because they have guidelines on what they feel is needed for what is being used as collateral for the loan (house). In the case of FHA, these necessary repairs tend to be related to health and safety issues, structural issues, and home safety and security.
You may need to reflect certain things in your current code, but this can be really costly. If you want your buyers to be able to get a loan, you may have to get out of your pocket for these repairs.
You may need to lower your price, which certainly affects the amount you make as a profit from a transaction. This can happen not only because you overestimated the value after the repair and couldn’t find a buyer who was willing to pay it, but also if the house didn’t value the amount if you found a buyer.
So, if your home has been on the market for months, you obviously need to lower the price (unless the potential buyer says it’s a big problem with your home). Remember, you estimate that you will earn only $ 15,000 and you have calculated that you have already lost most of it at the cost of your possession and repairs. Lowering prices now will be very painful.
You may need to stop the bleeding.
I had previously lost money in rehab and it wasn’t comfortable. Such an experience can teach you a lot, but you really don’t have to learn it that way. Be aware of all the costs that can eat up your profits, stick to the formulas used to buy these homes, and make sure you probably make them more conservative. Most of the time I’m trying to shoot 65% of ARV minus repairs. It’s not a bad idea to do the same. Of course, you also need to know what the market you are trying to invest in is. If the home is on the market for a year, it’s probably even more conservative than 65% of the ARV.
If you’re considering a flip that shows a potential profit of $ 15,000 but doesn’t consider most of these costs, we don’t recommend doing that. Unless your plan is to see how much money you can lose in a transaction, that’s not the case.
I’m sure some of you may have other costs not listed here, so please let us know. You can share your comment with the comments below. please. Thank you.