HGTV Flipping Shows Exposed!
It’s nice to take some time off from potty training our son this weekend to sit down and write a blog post. It is a well earned break from waiting for the timer to go off and incentivizing our son to use the bathroom. I thought about writing about how to incentivize your team to work harder but I’ll save that for another week.
Today’s post is going to give the honest truth behind flipping houses and how much money is ACTUALLY made doing this business. This post will hold nothing back and I promise not to hide any expenses to make it look like we make more money than we actually do. I, like many of you, occasionally watch the HGTV shows that glorify flipping and show these investors making $100k plus on every renovation project. However, I find that they never really show all the expenses and costs that we have when it comes to flipping. I’m going to break down one of our recent deals and show you all of the numbers the HGTV way and the ACTUAL way.
Quick Background on This Property
This house was one that we purchased at the foreclosure auction earlier this year. It was a 3/2 single family home, built in 1994, 1,625 sq ft with a pool in Navarre, FL. We didn’t have access to the house before bidding but did know that the house was vacant. It’s in a small subdivision with a couple of other foreclosures listed on the MLS and some decent comps. I did find that houses in that area with a pool sold well above those without and moved quickly.
This house was a relatively simple renovation and almost all cosmetic work. We demoed out the old flooring throughout the whole house, countertops in all bathrooms and kitchen, removed the old appliances, and did a lot of landscaping cleanup including the removal of a few dead palm trees out front and tossing the old fence. The whole house was repainted, laminate hardwood floors laid in the living areas, new baseboard trim, new carpet in the bedrooms, new tile flooring in the bathrooms and outside patio, granite countertops in kitchen and all bathrooms, stainless steel appliances, paint the cabinets, new toilets and plumbing fixtures, new lighting, and all tubs and surrounds were refinished. We added a new water heater, serviced the HVAC unit, and refinished the concrete in the garage because it was previously painted poorly. On the exterior we power washed the whole house and pool area, added a new privacy fence, and finish landscaping was done. The estimated renovation costs were $35k.
So now, let’s break down the HGTV numbers compared to the ACTUAL numbers.
Purchase Price: $117,100
Renovation Costs: $38,766.07
Realtor Fees/Closing Costs (These are rarely included): $10,955.71
Sold Price: $201,000
Profit: $34,178.22 w/ closing costs included and $45,133.93 w/o closing costs included
Purchase Price: $117,100
Purchase Closing Costs: $2,691.58
Utilities (water, electricity, pool care, lawn mowing): $590.38
Repair Costs: $38,766.07
Before and after photos: $150
Repairs before closing: $1,105
Closing Costs: $10,955.71
Sold Price: $201,000
ACTUAL Profit: $27,821.26
So, one thing I realized after writing this is that I didn’t include the cost of money. There are a lot of options when it comes to finding the funding to do projects like this. I wrote about all of them on a previous post HERE. In short, it could be your own money, private lenders (friends, family, other investors), a bank, or hard money lenders. In this case, to buy this house we needed the cash the day of the auction so a bank or hard money lender were not options for us. On this project, I did a joint venture with a passive investor from out of state who put up almost all of the money while I found the house and managed the project. We came up with a profit split that made sense to both parties and are doing a few more together as well. So, that is the reason I didn’t include the cost of money. If I used a private money lender at 10% interest for example, the profit would have been $21,155 and if I had used a hard money lender at 2 points and 12% interest with $3k in other fees the profit would have been $13,621. So, the cost of money can really eat up your profit margin and this is where new flippers and investors make big mistakes. For your reference on the money costs, this project took 5 months from purchase to closing on the sale. The timeline can also eat up your profits because the holding costs (money cost, utilities, insurance, taxes, etc…) just continue to rack up!
Now, don’t get me wrong. I am not complaining at all about an almost $28k profit on this project. I am both sharing our success story and trying to show all of you that what you see on TV is not really how this business goes. HGTV would have nearly doubled our profit margin when they show Sale Price – Purchase Price – Repairs (which is exactly what they showed on the one I watched most recently). I would love to say we made almost $50k profit on this flip but that just isn’t the case.
RISK – I am the one taking all the risk here. What would the profit margin be if this house sat on the market another 30 days and I had to lower the price $10k to get the house sold? What if I had to do that twice? If you are considering the possibility of getting into this business make sure you account for all of those soft costs that eat up your profit margin.
I’ll finish up with a quick update on what we have going on. At the beginning of this week we had 8 active houses on the MLS and as I write this we now have 4 active houses and 4 contingent houses. That’s right, I am happy to say that 4 houses went under contract this week! That doesn’t mean the money is back in the bank account as there is a long way to go from contract to closing, but what it does mean is that I will be looking for more projects again!
We are closing on two houses this coming week, which I am working hard to secure funding for. If any of you reading this are interested in flipping houses or partnering with us please reach out to me and we can discuss some options for you as an active or silent partner on some projects.
Thanks for reading and please share this on social media so we can all attempt to debunk the HGTV real estate craziness!