Buy it, Fix it, Flip it?

There are more reality TV shows about by flipping houses than ever before and I am sure everybody has seen at least one and thought “I could do that”. I know I am always tempted, but the shows don’t tell the whole story. The biggest problem is they over-simplify the math. While I am no expert and welcome your views I think the following is close enough to deter me from the game.

Home 1

The TV viewer sees the following return on investment:

Purchase Price – $ 250,000
Renovation Budget – $ 50,000
Projected Sale Price – $ 370,000
Projected profit – $ 70,000

While the projected profit might be attainable they really should stress that it is a gross profit before expenses. Why? Let’s look at the hidden costs of flipping a home:

There is the commission you pay on the purchase of the property which in my area is $ 11,500 (will vary by Realtor and location). There is the commission on sale of home at $ 15,100. Assuming the renovation takes 60 days, the home is on the market for another 30 days and closing is another 30 days out there are the carrying costs for 120 days.

Home 2

Assuming you put $ 50,000 down on the purchase of the home the payments on a $ 200,000 mortgage at 5% are $ 1163.21 per month. Over 4 months this is $ 4652.84. The interest on the $ 50,000 in money borrowed for renovations over 4 months is $ 966.80 at 6% for a total of $ 3867.20.

There will also be property taxes, insurance, utilities and legal costs which could easily add another $ 2,500 to your costs.

Where does this leave you?

Gross profit $ 70,000

Less:
Real estate commissions $ 26,600
Mortgage payments $ 4,652
Interest expense $ 3,867
Miscellaneous $ 2,500
Total expenses $ 37,619

Net profit $ 32,381

And the one last expense is the government’s portion of the capital gain (again depending on where you live). Now I am not passing judgement either way on the merits of “flipping”, but the numbers are not what they appear to be and a careful analysis should be carried out each time.

Home 3

2 Comments Add yours

  1. George Altman says:

    Yes but I think you have missed the point. Flipping a house is near impossible since it would require a MASSIVE spatula. And who has one of those nowadays anyways? I knew a guy who could have flipped houses successfully back in the day but he’s retired in the Yukon now. May have heard his name before: Paul Bunyan. Anyhow, just my view on the house flipping deal.

  2. George Ethridge says:

    One item that I see wrong with your article is the $11,500 commission on the purchase of the pre-flip house, going in.

    It’s not added on top of the $250,000 purchase price, it should be included in the purchase price of $250,000.

    You don’t deduct the commission on the purchase from your net. The cost basis for the purchase was $250,000, which included the $11,500.

    Overall, it’s a good article.

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