Hello To All:
There has been alot written lately here about flipping properties and the opinions have been very educational to say the least.
One of the things I have not seen posted is about deal costs and accounting for them. One of the things you need to understand is that just because your assigning a property to a investor and receiving a fee of lets say $5000.00, you may not have really made $5,000.00.
What does Jimmy mean by that, I did make $5,000.00, I can prove it, I have the closing paperwork and the bank deposit ticket.
Okay, I will meet you half way and say yes, you did make $5,000.00, but you grossed $5,000.00. WHAT!!!!
Yes my friend, you grossed $5,000.00, but you did not make that figure of money, NET!!!
This is a business ladies and gentleman, first and foremost. If you created a company, setup a bank account, printed business cards and you go around telling anyone who will listen to you that you buy real estate, your a business. Afterall, did you tell the local real estate community that you have a hobby and it's called real estate???
Okay, let me get back to the thread. Okay, you got a deal closed and your received a deal check for $5,000.00, great, and it could have been any amount of money but for this here, I used this figure.
Now, you spent lets say four hours driving around looking for the property, so you had fuel costs for your car or truck.
You had to make some phone calls and you used a cell phone for example, so you have a cost per minute to account for.
You had lets say three faxes to a out of state owner, so that cost you money.
You had to possibly overnight your offer, so that is a cost.
Then you have your time to pay yourself for. This is a big expense that hardly anyone takes into account.
Then you have costs in contacting the investor/end buyer and/or meeting him/her at the property.
You have costs associated with taking photo's of the property.
So lets say, all the above expenses came to $400.00, and it could be any amount of money.
So on this deal, your business earned-$5,000.00
Costs associated with transaction- 400.00
Your net profit on this deal: $4,600.00
Now that is not bad and really as long as you make a profit, that's what it is all about.
When calculating whether a deal is worth undertaking, you need to account for each and every cost associated with the deal.
One cost I did not mention is earnest money. You may need to put this up with your offer to lock up the deal and then again, you may not. If you do have to put this up, then factor that cost in as well.
On the made up deal above, if you had to put up $100.00, then you would be recouping that when the deal closes and you would just adjust your net profit to reflect this.
Happy deal hunting.