Numbers should drive everything you do in real estate. If the numbers don’t work, as difficult as it may be, you need to walk away. There are plenty of numbers that alone won’t move the needle too much but added up can have a significant impact. These seemingly hidden figures are especially prevalent in the world of fix and flip real estate. Most investors only look at the pot of gold at the end of the rainbow and fail to dive in the numbers on how to get there. As obvious as it sounds the goal isn’t to simply close a transaction. The goal is to maximize profit and only pursue deals with acceptable upside. If you are sloppy with your numbers and fail to notice the hidden costs you will be left disappointed with the results. Here are five hidden rehab costs you need to look out for.
- Wholesale fee. There are many ways of finding good fix and flip deals. Two of the most common are through local wholesalers and through real estate agents. A strong relationship with a wholesaler is essential for finding good deals. They will do the legwork of working with sellers and negotiating the best possible price. They then pass that deal along to an end investor and expect a fee for their services. This fee varies on the relationship with the investor, the potential profit of the deal and how far along they are in the process. Some wholesalers work for a flat fee on every deal, while others try to get a percentage of the bottom line. Regardless of the fee structure you can expect to pay some kind of fee, generally anywhere between $1000-$5000.
- Commission. Working with investor buyers is not easy on the real estate side. Most investors look at dozens of properties without making an offer and if they do submit an offer it is generally well below the asking price. To say that real estate agents earn their money is a gross understatement. When listing agents get quality deals they are generally from lenders in their real estate owned (REO) portfolio. Because there is a process for how properties must be sold they have to charge a set commission, regardless of the relationship. This means you can easily pay a point or two, possibly even three percent to the listing agent. This must be looked at as the cost of doing business but still must be calculated when evaluating the property.
- Inspection/appraisal. Unless you plan on knocking the property down and starting from scratch you need to order an inspection on the property. Where some investors get in trouble is thinking that they know everything about the house and nothing could possibly elude their experienced eye. All it takes is one oversight on a given deal to cause a world of trouble. It is a good idea to spend the money for an inspection on every deal. The inspection cost varies on the size, style and square footage of the house but is typically only a few hundred dollars. This may seem like a waste of money if the deal falls through but will actually be the best money spent in the process. Most investors don’t see the value of ordering an appraisal but there will be times when a hard money lender requires it. A single-family appraisal can cost $400 with a two family just under $600. Between the inspection and the appraisal, you are easily looking at close to $1000.
- Title/attorney. A title search should be performed on every deal you are a part of. Without clean title you can waste months on a transaction only to have it fall through. Pulling title is a legitimate fee that must be endured by the attorney. If you have a good relationship they can give you a discount, but some fee must be passed along to you. This fee may only be a few hundred dollars but if you plan on making offers on five properties your title search fee can easily hit $1000. You also need to consider the attorney closing fee if you are using traditional financing. Between the search, title insurance and miscellaneous fees the total attorney fees will be anywhere from $1500-2,000.
- Carrying costs. It is not just a cliché to say that time is money in the world of fix and flip real estate. Every day you hold the property literally costs you money. For starters, you are paying daily interest on your financing until you pay back the note. On a high interest hard money loan this can add up at the end of the month. You also need to account for prorated property taxes and insurance payments. You also have utility payments that need to be made for the water & electricity. As with most of these costs alone they won’t be too overwhelming but when they are added up they can make a difference.
There are dozens of minor fees and costs in every fix and flip deal. Without knowing and understanding every one of them you can be left frustrated and disappointed when it is time to close. The hidden fees can make or break any deal.
