Most people probably never really stop and consider any up-front, and on-going house flip costs that are as much a part of the total investment as anything associated with real estate flips. The problem is that these particular costs usually show up as “fees” and “premiums” and assorted other “payments” to be paid and accounted for in some way that is easy to overlook as part of the expense process.
If you’re new to flipping, it might be tempting to low-ball these types of expenditures (if accounted for at all), so as to make your overall projections seem tighter, and a little more “easier to swallow”.
But, as any prudent real estate investor will tell you, you should get into the habit early and often of projecting real-world costs when finalizing your budget.
Breaking Down ‘Hidden’ House Flip Costs
If you have the good fortune to get financing via personal lines of credit, or alternative sources of financing like partnering with a solid financial backer, then congratulations.
If, however, you are like many people who want to try their hand at flipping but can’t find the proverbial financial “angel”, then you’ll have to go the standard route and obtain a personal loan to finance your purchase.
Like any real estate transaction, you will still have to deal with the normal loan fees such as underwriting and recording fees, document charges, attorney fees etc. The only obstacle there is the fact that obtaining financing for such speculative real estate investing is hard (and getting harder) to do. Seems like the only people who can obtain bank financing are people who don’t need to borrow in the first place. But that’s another story in itself …
Also, be aware of other additional house flip costs, such as:
Real Estate Appraisal
This is determined by many factors such as location, square footage, number of bedrooms and bathrooms, garage (if any), etc.
Home Inspection Service
This is not required but some lending institutions do make full use of their services. One of the pluses for using these types of inspection services, is that they will uncover many things that you might not have seen in your initial walk-through. Things which ultimately could lead to a much larger remodeling, or repair situation.
From day one, while owning your newly accquired investment property, you will be responsible for the day-to-day upkeep and maintenance house flip costs of your property, plus the normal financial obligations like mortgage payments, taxes, and insurance. Just like your personal residence, your monthly outog will include:
- Utilities (gas and electric, water) Even though the property is vacant, you still need to heat the place so the pipes don’t freeze in the wintertime
- Monthly mortgage payment
- Property taxes and insurance
- Weekly yard maintenance during the warmer months (grass cut and trimmed, leaves raked, keeping the yard in generally good condtion)
Be sure to conservatively estimate how long you may actually own the property. By that, I mean err on the side of caution as to how long it may actually take to remodel and sell your property, and not what you hope it will be. Sometimes, you may have to sit on a piece of property longer than might have hoped, and therein lies higher-than-anticipated costs, which can further erode your bottom-line.
Repair and Remodeling Costs
Unless you have a trained eye in what to look for in the way of house-related problems and damage, either structurally or otherwise, you may not fully know what to expect in the way of remodeling costs. These types of expenditures are what the house flip TV shows point to as being the “total” costs involved. Far from, to be sure, but still the biggest expense primarily because of the dollars involved in renovation.
Sure, you have the normal remodeling expenses such as drywall, painting, flooring, etc. With those trades, you can reasonably expect to have a solid feel for what it will cost to do these jobs. But, what can probably hurt the untrained eye more than anything else, is buying a piece of property that really amounts to nothing more than a money pit. Property where your supposed profit goes down the drain in the form of foundation repairs (costing thousands more than you anticipated), or worse. A repair situation that may result in higher house flip costs, and ultimately, a possible loss.
So, consider hiring a general contractor as a consultant in some capacity to help with really tough calls, the ones where you need advice from a professional, and not just “go with your gut”, and hope for the best.
Do what the successful guys do. Add 3% to 5% of the projected total cost back onto the end of your budget to provide for any unexpected costs that may arise.
If you don’t feel like selling the house yourself, you’ll definitely want to hire a real estate agent to sell the property for you. Figure that you will be paying somewhere in the range of 6% commission. This could be quite significant based on the final seliing price. Include this cost as projected item. A real-world expense, not a hoped-for result.
In addition to any commission paid to realtors, you will have other house flip costs incurred during closing with various fees such as document, title insurance etc.
You may also, as a condition of the purchase as set forth by the buyer, be responsible for any loan costs or closing fees. You will not necessarily know up front what this might be until the actual negotiations take place, but just be aware that might, in fact, happen.