Profit From Flipping Houses
I’ve been watching the "Flip That House" program on TV lately and find it interesting. I am, however, quite bothered by the way they calculate "profit". They have a very simple (and misleading) formula for calculating profit. They take the difference between the final sales price and the original purchase price (plus the cost of renovation):
(Selling Price) - (Original Purchase Price + cost of renovation) = Profit. WRONG!
What they have not plugged into the formula were the loan origin fees (to finance the purchase price) OR the selling costs involved to sell the house at the end. Loan origination fees generally run from 1.5% - 3% (and up). Selling costs will run about 8.5%, depending on the county and state. When working with a real estate agent to sell the property, the fees are negotiable so there is some flexibility… but I’m trying to show you a realistic picture of buying and selling costs. And, be sure if you’re getting a loan on a property you intend to "flip" (selling quickly), be sure you do NOT get a loan that has a pre-payment penalty. These penalties can be substantial.
Anyway, let me show you a couple of scenarios from yesterday’s programs:
Home #1
Purchase Price $152,000
Cost of renovation 58,000
Total cost of acquisition: $210,000
Sales Price $315,000
Reported profit: $105,000 WRONG!
Reality:
Purchase Price $152,000
Cost of renovation 58,000
Finance fees @ 1.5% on 80% LTV $1,824
Total cost of acquisition $211,824
Sales Price $315,000
Less 8.5% selling costs: $26,775
Net Sales Value: $288,225 (less original cost of $211,824)
Actual profit: $76,401
* * * * *
Home #2: This one is very alarming when you look at the bottom line!
Purchase Price $1,050,000
Cost of renovation 85,000
Total cost of acquisition: $1,135,000
Sales Price $1,249,000
Reported profit: $114,000 WRONG!
Reality:
Purchase Price $1,050,000
Cost of renovation 85,000
Finance fees @ 1.5% on 80% LTV $15,750
Total cost of acquisition $1,150,750
Sales Price $1,249,000
Less 8.5% selling costs: $106,165
Net Sales Value: $1,142,835 (less original cost of $1,150,750)
Actual profit: <$7915> NET LOSS
* * * * *
Do you see the point I’m trying to make here. When you are calculating profit, please be sure to include ALL costs of acquisition and ALL costs of selling. It’s critical to the actual bottom line.
For answers to your real estate questions, please contact:
Carol@TopPropertiesWenatchee.com
www.TopPropertiesWenatchee.com
source: Profit From Flipping Houses
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