New (and even some experienced) investors often think there is more money in a deal than there actually is, because they are focusing on gross profit and incorrectly calculating their net profit.
For example, a house with a $100,000 ARV that needs $20,000 in repairs and purchased at $50,000, yields an average net profit of around $13,500. While the net profit may appear to be higher, as it looks like there is much more equity in the deal, let’s discuss why this is not the case.
There are five costs incurred at the sale of a property that go into a formula we will use to calculate the net profit. These costs are:
- Seller’s Closing Costs: This includes the title company escrow fees, title insurance, recording fees, and any other title company costs.
- Carrying Costs: This would include utilities expenses such as water, gas and electric, as well as any interest expense if you borrowed money to purchase the property.
- Seller Concessions: If your buyer doesn’t have enough money to bring to closing, they can ask you, the seller, for some assistance. This assistance means they want you to pay for some of their closing costs and/or lender costs. Many lending products allow for up to six percent in seller concessions. Although a buyer will seldom ask for this high of an amount, just know that they can.
- Commissions: If you are listing the house on the MLS (which you should be doing), you are going to have to pay your agent or broker a commission. In most markets, six percent is the norm.
- Pro-rated Property Taxes: As a seller, you will have to credit the property taxes to the buyer for the current year up to the date of closing on the sale. So if you sold the property on May 31, you would have to credit exactly five months’ worth of property taxes to the buyer at the sale closing.
Keep these costs in mind when you are making your decision to buy a deal you are planning on flipping, and use them to determine what you are going to net at closing. Remember, your costs will vary based on the value of your deal, as well as how long you own it before it sells.