3 Hidden Expenses that Kill Deals
When buying a flip house or a value-add rental… “back of napkin math” on that property usually looks more profitable than the deal actually is. And not because of the obvious culprits like hidden repairs or a dip in the market.
What can really trip us up as investors are the hidden fees that come with buying, selling, and holding real estate.
In today’s newsletter we will go through a few of these together.
Then I will show you how just two of these costs can absolutely demolish a deal that originally looked good on the MLS.
Debt service/lender closing costs: If you are funding a flip with hard money or a “fix and flip loan” many times the lender will charge close to 5% of ARV on the deal. How?
Between paying “points” at closing, interest payments during the project, and other fees…you can expect to pay almost 7% of ARV in total debt service costs… especially if they require things like a survey or an appraisal!
Sales commissions: For a flip, if you are listing on the MLS, you will usually lose about 5% of your ARV to agent commissions. That’s just to pay the buying and selling agents their commission, and the seller foots the bill!
Increased Property Tax Assessments: For a “buy and hold” or rental property. You may have forecasted your PITI (monthly payment) to stay the same for the life of the loan, especially on a fixed rate mortgage.
Although the interest rate is locked on a fixed rate loan, insurance and property taxes are not. Insurance premiums (especially in FL) are known to fluctuate, but few people factor in the increased costs of property taxes when the property is re-assessed following a sale.
The rates and methodologies of how this is done vary in each state, county, and city. So I would contact the assessor’s office in your town to better understand how property taxes may be affected in the year after purchase.
As an example…In Texas, (where property taxes are assessed every year) we had a property go from a monthly NOI of $700 to $300 just from increased property tax assessments. (Ouch!!)
Okay, now that you know the 3 hidden costs let’s see what just 2 of them can do to a potential flip.
Here’s 3/2 in Satellite Beach that recently went under contract. Before it did, I analyzed the house to see if it’s something I could flip.
Subject property
First, let do some back of napkin math the way an experienced investor might… NOT factoring in the hidden fees we just discussed.
Asking price: $360,000
Repair Costs: $80,000
ARV: $500,000
Profit: $60,000
Looks OK right?? 60k proft? That’s over 10% of ARV (our target)… so should we make a full price offer?.... Not so fast.
Here’s how the deal looks after adding in our (often-overlooked) expenses.
Asking price: $360,000
Repair Costs: $80,000
Debt Service: $32,000
(2% points, 6 months of interest payments, other closing costs)
Agent Commissions: $25,000
2.5% per side, buyer/seller
ARV: $500,000
Profit: $3,000 (Ouch!!)
In the past couple years, I have seen investors dive into deals with almost no due diligence and the market has bailed them out.
In the deal above, you could still make money overlooking those extra costs if your ARV went from 600 to 650 in the 6 months you spent fixing it up. That’s essentially what was happening during 2021.
But supply is up 3x since then, and rates are double. In my opinion there still more opportunity now than the last two years, but profitable deals are going to come more in the form of buying low instead of market tailwinds.
So let’s not forget these hidden fees, and get out there and find deals that make sense and make offers!
-Levi
Thank you for taking the time to read, if you know anyone else who is interested in investing in Brevard Real Estate please invite them to subscribe by sharing this or any of our other newsletters. If you are not subscribed yet, you can do so here.
Want to work with me and my team? Here are some ways we can partner together:
Short Term Rental Property Management: Ocean Blou Properties
Long Term Rental Property Management: IGC Rents
Sales Associate with IGC Realty: Levi@IGCrents.com or 7194521225
