If buying, restoring, and selling a “fixer-upper” is a topic that you find fascinating, you’ve likely watched some of the popular shows about house flipping that are on TV lately. With the magic of modern technology and editing, we can watch amateurs and professionals alike as they purchase and renovate an old, dilapidated home and then turn around and sell it. Sometimes the proud, self-acclaimed contractor profits by making thousands of dollars above their total investment in the property. Other times, he or she reluctantly takes a loss on investment property. What you may or may not see discussed or addressed in these TV shows are many of the hidden expenses that come into play when you’re flipping a property. At Cash 4 Kansas Homes, we’ve been buying and selling homes for cash for more than 15 years, and we’ve seen our share of ups and downs when it comes to restoring homes. If you’re serious about entering the house flipping industry, here are some of the hidden expenses you’ll want to be aware of ahead of time.
Carrying Costs
The first set of expenses that are often overlooked are the recurring expenses that are ongoing as you work to renovate your investment property. These are often referred to as “carrying costs.” Remember that when you purchase a property for flipping, there will be a mortgage that needs to be paid, unless you bought the property from the bank or former owner outright. Along with the mortgage will be utilities such as gas, electric, and water. Additionally, there may also be HOA fees that are ongoing until the property sells. Depending on your location and local code enforcement policies, you may also need to account for yard maintenance and/or snow removal. While they may seem like minor expenses initially, carrying costs can add up over time and really impact your profit margin.
Insurance
Although insurance is considered one of the carrying costs of a house flipping project, it is important enough to warrant its own discussion. When you’re flipping a house, there are several considerations that should be given to making sure you and your investment are properly insured. For example, a standard homeowner’s policy typically covers accidental and direct physical damage to the structure and any personal property contained within it. Many homeowner’s insurance policies have specific exclusions for property of others (such as any contractors that may be working on your flipper) or business property (such as your tools). If you’re considering buying an investment property for flipping, be sure to contact your insurance agent to discuss the specifics of the property and the project to ensure you’re covered for any kind of theft or damage that may occur during the course of your project.
Mitigation Expenses
As you begin demo work on your house flipping project, you may start knocking down walls, detaching plumbing, and pulling up floors. As you do this, you may encounter hazardous and/or toxic materials such as asbestos, lead, and/or mold. For example, prior to 1980, many contractors used shingles, siding, insulation, floor and ceiling tiles that contained asbestos. Homes built prior to 1978 may have lead-based paint throughout the home. Or, you may discover a hidden plumbing leak resulting in widespread, dangerous black mold. Depending on the size of the affected area and materials, mitigation and/or abatement may be necessary before any further demolition or renovations can be done. Not only can abatement and mitigation expenses be costly, but the process can also cause large delays and draw out the amount of time you have your carrying costs.
Corrective Repairs and Code Upgrades
As mentioned above, the demo process can expose conditions that were not readily visible when you and your home inspector initially checked the home out. Understanding what potential corrective repairs may be needed and budgeting for those accordingly is important. For example, any damaged plumbing will need to be remedied to ensure there are no future gas or water leaks in the home. Likewise, if you discover a large crack or damage to the foundation, this will need to be addressed as well. Code upgrades can also eat away at your profit margin. Improper roof ventilation, antiquated electrical materials, and incorrect plumbing practices are all code-specific trades that can bring your renovation to a screeching halt. While these corrective repairs and code upgrades can be time consuming and costly, they are a necessary part of ensuring your house flipping project is successful and safe for the future buyer.
Dumpster and Dump Fees
When you buy a property to flip, the amount of debris and waste that demolition generates can vary from job to job. During the demo phase of your project, you may have a variety of materials requiring proper disposal, such as drywall, flooring materials, and possibly appliances. While the demolition part of house flipping can initially be an exciting venture, many investors don’t realize that the cost of removing all of the demolished building materials can be quite expensive. Additionally, there can be removal and hauling fees for any hazardous materials you come across in the tear down process. For example, a 30- or 40-yard dumpster can range anywhere from $400 to $600 for a 10-day rental period. With many house flipping projects taking three to six months (or sometimes much longer!), budgeting appropriately for dumpster fees will be vital for the success of your job.
Selling Expenses / Realtor Commissions
Once you’ve completed renovating your fixer-upper, there comes the celebratory task of putting the property on the market and selling the home. This task, like every other in the process, can often present some hidden expenses that you may not have accounted for initially. If you choose to sell the house on your own without the assistance of a realtor, you’ll incur expenses for traditional and digital advertising. If you enlist the assistance of a professional real estate agent, there will be his or her commission to consider in the overall profit (or loss) once the property sells, and these can be anywhere from five to six percent of the selling price, on average. Additionally, there will be title fees, taxes, and other costs that come with selling property. Before you enter into the house flipping industry, be sure to locate a trusted realtor who can give you an idea of what kind of expenses you can count on when selling property.
With proper planning and budgeting, house flipping can be fun, exciting, and very rewarding! Think about the sense of accomplishment that can come from purchasing an old, worn down home and restoring it to its former glory. For more than 15 years, Cash 4 Kansas Homes has been doing just that, and we can do it for your unwanted property also! If you have a house you’re looking to get off your hands, or know someone looking to get rid of their fixer-upper, contact us! We buy houses for cash and will get you an initial purchase offer today! We can’t wait to hear from you!
