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The Real Cost of a Flip

Posted January 17th, 2019 under smart buying, myths and truths.

Many people make the mistake of thinking that the selling price of a flip is equal to the buying price plus the value of the renovations.

Not even close! Flips greatly inflate the prices of homes. The reality is easier to see if we walk through an example.

Let's start with an investor buying a home for $500,000. And let's assume they spend $80,000 on high-end renovations. The real value of the property is now $580,000, but what would the selling price be?

First we need to consider buying costs, including $8000 of land transfer tax and legal fees.

Renovations take at least one month to do, and selling takes a minimum of 3-4 weeks (but sometimes up to 6 months). Carrying costs for a minimum of two months would include property taxes of $800, insurance and utilities of $800, and mortgage interest of $4000.

When selling, there would be legal fees of about $1000. The investor would also need to pay his agent a commission of at least $25,000 (3.5%). (If the investor is his own agent, he still has to pay himself, otherwise his left hand is sacrificing profit to give to his right.)

In total, the investor must recover at least $40,000 of costs in addition to the cost of the renovations.

A typical final selling price for a property like this would be around $635,000. Out of the total price increase of $135,000, only $80,000 of that would be real value. The other $55,000 is simply price inflation. This is how flips push up the prices of surrounding homes.

Want to know more about the factors that influence the price of homes? Just ask me, I'll be happy to help.

--Peter

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