I’ve been flipping houses for decades. At the risk of dating myself, my professional real estate investing career goes back to before we even knew what a “blog” was. So, it isn’t unusual for people to ask me to tell them the key to making it in this business. That’s when I reach back in the years, think of everything I’ve done, get up on my soapbox, and tell them the “secret.”
And, here the answer is for you, too: Make sure your revenue is more than your expenses. I know, it seems obvious. But, it contains a lot of hidden difficulties—bringing us to the real wisdom.
There’s so much more than just the cost of purchase plus rehab equation. When you really start to add up the cost to flip a house, you see that there are a lot of hidden expenses, all of which can eat into your bottom line.
When revenue exceeds expenses, you win. The only way it can do that is to understand the true costs. Here’s how you get the numbers right.
Counting All the Costs of Flipping a House
There’s no two ways around it. Flipping a house is going to cost you money and, for new real estate investors, it will probably be more than you expected. You have to estimate the time and the costs against what you think you are going to sell your house for. I can’t emphasize this enough: you have to be realistic.
You know how carpenters say “measure twice, cut once?” I say estimate five times, and then estimate again.
PRO TIP: ERR ON THE SIDE OF OVER-ESTIMATION.
There is always going to be something you didn’t anticipate, whether in the market or with the property. When you estimate your expense numbers to meet only your best-case scenario, you usually get an unpleasant surprise.
There are big costs that you know and smaller ones you might not think about. Obviously, the price for everything is going to vary between and even within every market and can change month to month. But, these costs are always there. Let’s take a look, one by one.
Marketing for Leads
It isn’t cheap to get leads. In theory, I suppose, you can go door-to-door in a neighborhood with a lot of foreclosures and ask people if they want to sell. That’s technically free, but you’re costing yourself time. You can also look through Craigslist for free, but to be honest, looking for quality real estate on Craigslist is a dead end.
Other free ways to do this is to look at sites like Zillow or Redfin. But, most of the time you’re looking at houses after they’ve been listed on the MLS or foreclosed on. That means a lot of competition, potentially higher prices, and possible red tape. It’s not fatal to your plans, but you can do better.
Of course, you can use non-free avenues for lead generation. But, they all have pluses and minuses. Some of these include:
|Lead Generation Method||Pro||Con|
|Hire a real estate agent||They do a lot of the legwork||Could shave off up to 6% of your margins on the deal|
|Become a real estate agent||You cut out the middleman||Costs include the coursework, licensing fees, ongoing education and brokerage costs|
|Market yourself through billboards, direct mail, internet advertisements||You have control||Unless you have a known brand, expect to spend a lot on repetitive outreach|
Marketing yourself gives you the most budgetary control. But, it means you have to figure out a way to cut through all the clutter without spending too much. There are a lot of investors out there with clever slogans. Would you be spending money to be just another face in the crowd?
Rehab and Renovation
This isn’t a hidden house flipping cost, of course; it’s the main one to think about. You are going to put in a lot of work and hire people to put in even more. You have to estimate supplies, labor, and time. And, that means having a good idea of what work will need to go into this even before you start.
When thinking about rehab, there are a few things you have to keep in mind.
- How much work a house actually needs
- How much work you can realistically do on your own
- How much you will have to pay people to do
- How much you really should do
The last one is hugely important and, in my opinion, the biggest stumbling block for many new investors. I’ve known many rookies who see a house and their eyes get big. In their mind, they turn it into a Venetian palace, with trickling fountains and kitchens adorned with tiles of many hues. I tell them to take a deep breath and get real.
In some neighborhoods, you want to do the full master bathroom treatment. In others, you will want to repair the grout and make it livable. Probably the biggest single unneeded cost is doing too much in a place where the market can’t bear a super pricey house.
About half of the states require that an attorney is involved in the closing of a real estate transaction. Expect the costs to range from between $150-300 per hour. Some investors think that won’t hit their wallet because home sellers usually pay closing costs.
But, think again. If you are buying from a distressed homeowner, they probably won’t take that cut. You will pay for it either outright or out of the higher price you pay for the house.
Here are the states where legal fees could be a concern for you. Keep in mind, though, that the laws change so you’ll want to check with your local real estate attorney anyway to make sure you are conducting your real estate transactions properly.
States That Currently Require an Attorney for Real Estate Transactions
Even if you are not in a state that requires you to pay attorney fees, you could get caught up in other legal fees. Buying from a county sheriff auction where homeowners have a lot of post-foreclosure rights, for instance, could cause you to rack up legal costs to fully take ownership from them. Or, you might be faced with evicting tenants or squatters. Expect to pull out your pocketbook to pay an attorney for that, too.
Red tape isn’t just a hassle; it’s a cost.
Loan fees and interest
Unless you are absolutely swimming in cash, you’re probably going to take out a loan in order to quickly buy your property. If you go to a bank, you are going to have to wait a long time to get the money and, if your credit isn’t great, you are either going to get rejected or pay a huge interest rate.
That brings us to hard money lenders, the first choice for most real estate investors. They’re fast. They understand the market. But, they also have different rates for different situations. You want to make sure you get the best rate because interest cuts into your revenue. If you borrow $75,000 for a $100,000 house, you are already at a profit ceiling of $25,000. How much interest are you paying?
Then, add up the other costs:
|Hard Money Lender Fee||How it Works|
|Points||A loan origination fee, calculated as a percentage of the loan and based on your creditworthiness|
|Processing/ underwriting Fee||The cost to process your loan application and prepare the underwriting documentation|
|Appraisal fee||Paying a licensed appraiser is typically on you|
|Referral fee||If a real estate agent referred you to the lender, their referral fee may be passed on to you|
|Prepayment penalties||Sometimes paying the loan off early can cost you|
A house priced at $100,000 costs a lot more when you add in all the cost of borrowing money. That’s why it’s important to know what lenders are looking for to get the best terms.
Utilities and Smaller Expenses
Let’s say you buy a pretty run-down house. You want to get to work so you hire some contractors, and they get in—but it’s dark. There’s no electricity. That’s not an ideal way to get good work done.
One thing some new investors always forget about is that in order to do rehab, you have to pay bills to keep the lights on. You’ll need power tools and some heat or air conditioning. You might even want to keep that alarm service going if the neighborhood isn’t great.
Heck, you might even be buying food for your contractors. You’ll certainly be buying food for yourself. Hungry doesn’t get the job done. It wins people over when you drop by with Gatorade for everyone.
I know this sounds ridiculous, but all of this adds up. You’re spending money every day you don’t sell the investment property. So, you’ll be paying these bills as long as it takes you to rehab and sell the house.
Marketing and Selling Your House
Here’s one you can’t forget: you still have to sell the house. The longer it takes to sell, the longer you are paying taxes, utilities, and everything else. So, you want to sell fast.
Just like when you bought it, there are free or super cheap ways to do this, some that are in the middle, and some more pricey options. You’re going to have to balance effectiveness and value against the cost. Let’s look at some options at each price point.
Free is a very fine price
Craigslist has lost its sheen for many and Facebook Marketplace is quickly moving in as the best free place to post your house for sale by owner. But, free isn’t really free. Your ad is going to be buried in the middle of a million other postings. You’ll be prone to scams and have your time wasted by people just casting a line. It’s the same with the other ‘free’ websites.
Middlemen for an intermediate cost
Pay-per-service brokerages are an option for those who are cost-conscious. There are a variety of ways this works. The barebones brokerage might just have an a la carte service list that you can pick and choose from. Or, there might be a flat fee for core services with an additional menu for add-on items like showing fees.
This seems like a reasonable way to remain in control of your costs—if you carefully consider exactly what you need from the start. I’ve seen fresh budget-minded investors—who likely overspent on the rehab—try to cut corners by just going with the basic services. When the house didn’t sell quickly enough, they started adding more services for the brokerage’s upsell price. Cutting corners doesn’t always save time or money.
Full service—and cost
You can also hire a full-service real estate agent, and that usually moves things along a lot quicker. After all, they are plugged into buyers. And, they know the market so you can get solid advice about comps and what homebuyers in the area are willing to pay.
The flip side is that you have to pay them. Expect the real estate agent’s commission to be anywhere from 4-6%, depending on where you are trying to sell. If that seems like a lot, it is. After all, you are paying the buyer’s agent half out of that, too.
Know How To Estimate the Costs—and Yourself
One mistake some investors make all the time is thinking that they can beat the market without having to put out too much effort or money. It’s understandable why they think that: there’s a million television shows about house flipping that highlight people buying a house for $11 and then making millions off of it. Sure, sometimes you find a diamond in the rough, a nice house that’s just up for sale in a neighborhood about to boom.
But, the market is efficient. If you buy a house in a neighborhood where houses are going for $150,000, your house is probably going to sell for a similar price. If you put in the work to make what you think is a $250,000 house, but it is in a neighborhood where people don’t want to live, don’t expect to sell it for that much. When you overestimate your selling price, you overestimate the expenses you can bear. And, that’s how you lose money.
The After Repair Value (ARV) isn’t just about the house. It’s about everything around it.
That brings me to perhaps the most important point: know what you are good at. That is to say, know your limitations. Know what you legitimately can and can’t do, and what you have to pay people to do. Remember, paying people to do something you’re not good at is not a bad expense.
If you think you can probably redo a roof pretty easily and then spend a ton of time and money trying to do it yourself, you’re costing yourself. If you DIY and it isn’t right, you either have to pay someone to fix it or lower your asking price. Why not spend the money and get it done correctly in the first place?
I know I’m very good at some things, and there are other things where others are much better. Paying them to do it saves me money. Knowing that, and factoring that into your expenses, is a key part of keeping your budget in line.
The Best Way To Control Your House Flipping Expenses
When I first started my professional real estate investing career, I was pretty consistently surprised by how much things cost me. I got a lot better as the years went on and my margins went up. But, I didn’t hit my peak until I became an independently owned and operated HomeVestors® franchisee.
I quickly got the benefit of top-notch training, which is especially valuable for learning how to evaluate the potential ROI of a deal. Even better, I have access to HomeVestors’ proprietary platform, UGVilleSM. With this cloud-based toolbelt at my side, I can manage the cost to flip a house from beginning to end. Everything from direct marketing, managing leads, and accessing some of the best hard money lenders across the nation to evaluating rehab costs and potential ROI is right at my fingertips.
The basic formula might be “Revenue Minus Expenses Equals Profit” but underneath that is “Knowledge = Success”. Knowledge is estimating your costs while finding the best ways to minimize them. Knowledge is knowing the market so you can estimate your revenue. Knowledge is getting the most out of every deal, at every step. It’s about finding the right tools to help you reach your goals at every step.
If you’re interested in the best way to fix and flip houses with all the costs on the table, request information about becoming a franchisee today. You still have to do the work. You’ll just start out ahead.