(This is the second of a multi-part series about real estate flipping. My introductory post covered the basics.)

Flip investors generally try to clear at least 20 percent profit on a deal. In other words, your net piece of the money pie will be 20 percent AFTER ALL EXPENSES. Your asking price after acquiring and improving the house should not be higher than prevailing market value given comparable homes of similar age and finished square footage within the neighborhood or immediate area.

I could write a book about pricing but that’s not the focus of this blog post; however, when it comes time to price (and I suggest you research a likely price BEFORE you make a purchase offer), you’ll need to rely on a real estate agent, an appraiser or yourself for researching current (less than 6 months old) values for the neighborhood/area of the flip property. So while this post is not about how to price accurately, I will share how to avoid pricing inaccurately. Your asking price is not Acquisition Cost + Improvement Cost + Target (fingers crossed) Profit = Price. That would be a recipe for no profit, maybe a big loss and/or your new second job as landlord if the place doesn’t sell.

Other than missing the boat on pricing, investors often mess up by spending too much for construction (i.e. going overboard renovating) and either misestimating or missing entirely their holding costs, known generically as “quiet costs”. Not calculating accurately or padding enough, will chew your profit and potentially saddle you with a money loser. Knowing these figures will help you walk away from deals that don’t make sense.

In coming posts I’ll delve deeper into construction related matters, especially to help investors avoid over-improving a house, but knowing your holding/quiet costs is so important because just those could scuttle a deal. For instance, what if you’re attempting to flip in a down market and average days listing-to-sale is one year? Maybe the amount of holding costs are too high to justify fixing a particular house. You’d much rather learn this before demolition has begun and the building materials arrive on site.

So what are holding and quiet costs? Technically, holding costs are spent after you purchase and until you sell. Holding costs are part of your TOTAL quiet costs which also include expenses for two settlements (i.e. when you purchase and eventually sell), the cost of money (if financed) and marketing charges (e.g. commission if you use an agent). Keeping it simple, remember quiet costs as Sneaky Costs. The investor incurs these charges acquiring and holding (owning) the property before the “flip”, and includes taxes, insurance, HOA/condo dues, utilities and maintenance (e.g. cleaning, lawn, garbage, snow removal services). Every penny spent consumes your eventual profit.

I’m not going to list every possible source because I’m sure I’d miss something pertinent to your locality or circumstance. For a good general rule, estimate 15 percent your eventual sales price as the total for quiet costs. Another good number to remember is $100 a day, or $3,000 monthly, for “holding costs”, the various costs that accrue while you own but not including money spent acquiring, improving, marketing or closing the deal. (Also, don’t forget to consider whether your profit will be taxed as income or capital gain. Consult your tax advisor.)

Calculate a rough guesstimate by multiplying how many days/months you think the construction and marketing will take before you sell (close) by the daily/monthly rate. However, before you commit, you’ll want figures for each specific expense to determine whether your expected profit is realistic compared to fair market value for the home. In other words, does the proposed deal survive the financial/opportunity cost reality check?

Selling Price/Fair Market Value

− Quiet Costs (acquisition, holding, marketing/selling)

− Improvement/Construction Costs

= Minimum Profit (Worth your time, effort and money?)

Wonder why these expenses are called “quiet” costs? Like money trickling down the drain but without the dripping sound, they’re easy to miss, add up quickly and could make you want to scream if the quiet costs become a gusher.