Would you flip a property for £15k profit?
Of course you would right? What’s wrong with making £15k clear profit on a buy to sell?
Nothing if you get it right. Most investors trip up because they don’t account for all of the costs involved, and can even lose money.
Glorified TV shows like ‘Homes Under The Hammer’ love to show simplistic formulas on how much profit is going to be made.
They make it look easy. They have to, so it doesn’t get confusing. But the reality is, they completely ignore the typical costs for flipping a property.
Because that’s not ‘sexy’ right?
For instance, the after repaired value [ARV] might be £100k, with a refurb of £15k and a purchase price of £70k. To the uninitiated, this appears to leave a £15k profit. This would be awesome if this was the case? Wrong.
Because the ‘other costs’ involved may erode that 15% and you may end up even losing money.
So what costs can eat your lunch?
Buying and selling costs – As a rule of thumb it costs around 10% of the final sale price to buy and sell a property. That surprises many investors, they don’t factor that in, and that margin eats all their profit.
You now have an important advantage.
Holding Costs – This will usually include mortgage payments, insurance and any other cost associated with owning a property ready to flip.
It may not seem like a lot, but these costs can really eat into your profit, especially if you are using bridging finance.
If you want sanity profit not vanity numbers, account for holding costs, and factor in the property may not sell within the estimated timeframe.
Estate Agent Commissions – Depending on where you are, agents commissions can range from 1-3% of the sales price.
Of course, you could market the property yourself ‘For Sale By Owner’ and save the commission, but is that something you are realistically willing to do?
Gifted Deposit – Most of the flips are sold to first time buyers and owner occupiers getting a residential loan.
These buyers are allowed to get assistance from the seller, if they need it. Now don’t get us wrong, but if your buyer can only get a 90% LTV, and only has a 5% deposit, you might be better off giving assistance.
Price Reductions – You find a seller, who is willing to pay the price, but you need to reduce the price.
This is nothing to do with over-estimating the end value or finding a willing buyer to pay the price, but it can happen if the surveyor doesn’t think the property represents true ‘market value’.
In this case, the property will be down-valued. Obviously, there is nothing stopping the buyer to make up the difference with a higher deposit, but convincing them to do so is another matter.
Of course, you can always find another willing buyer to top up the deposit, or another surveyor who agrees the property does represent the correct price, but in the meantime, your profit will be diminishing every month the property is on the market.
So what can we learn?
Although losing money is NEVER pleasant, sometimes that experience can teach you a lot.
Be mindful about ALL of the costs that can eat up your profit, and always be conservative with the end selling price.
If you’re flipping a property that shows a potential £15k profit but doesn’t take account of the above costs, then we wouldn’t recommend you doing it.
Sometimes the best investments are the ones you never do.