Happy Thursday!! I hope everyone is having a great week. If you are a fan of house flipping shows and thought to yourself, “Hey, I could do that” or if you are interested in flipping homes, then this article is for you. The financial return on flipping a home can be very lucrative, however, beware of some big financial costs besides repairs that you need to think about, but are never mentioned.
HOME FLIPPING IN THE REAL WORLD
Insurance. First you have to purchase vacant-property insurance, which is much more expensive than rental-dwelling policies because of the increased risks inherent with a vacant house.
Utilities and maintenance costs. In addition, electric and water utility costs can add up over several months. Sometimes there are also maintenance costs, such as keeping the lawn mowed and edged, unless you do it yourself.
Taxes. On the day you close on the sale of the home, you will have to pay real estate taxes, with the amount prorated from the day you bought until the day you sold that home.
Commissions. The biggest costs in a real estate transaction are the real estate commissions and closing costs. Unless you’re a licensed real estate agent, you can expect to pay anywhere from 4% to 6% of the sales price in commissions when you sell. So given that $400,000 sales price, a 4% commission would be $16,000! They don’t tell you that on TV!
Closing costs. Closing costs on the buying end of a cash deal are usually small, but on the selling end, you can expect to pay about 2 to 5% of the sales price, and more if the buyers need you to pick up some of their costs. That 2% of the $400,000 sales price would add up to an additional $8,000!
So,if you’re projecting a $60,000 profit, minus your commissions and closing costs, then from that amount, subtract the taxes, insurance, maintenance, and utilities, and the net would probably be closer to $30,000. That’s only half the projected profit that the show would lead you to believe you’d see.
Unexpected expenses. Now, $30,000 profit in a few months is still a pretty good return, but that’s assuming all the repair estimates are accurate, and that no other unexpected expenses arise during the rehabbing process.
When it comes to neglected foreclosures, there’s always the possibility of running into unforeseen problems such as termites, water damage and/or mold, or defective wiring or plumbing.
Losses from theft. Another expense rarely mentioned on the home flipping programs comes from theft. Thieves break into vacant properties and steal flooring materials, tools, or even an air conditioning system. Since you never know if or when this might happen, it’s not something you would ordinarily put in your profit projections. But it does occur.
In closing, while these shows are very entertaining, they don’t always show all of the issues you might encounter when flipping a home. Always be prepared to run into problems with service providers not showing up, stores losing orders, delayed materials, bad weather, unexpected repairs, and a host of other issues.
Do your research, go into it armed with knowledge and with your eyes open.
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