What are Holding Costs on a House?
When someone inherits a Tulsa area house or buys one to flip they very often overlook the one thing that can destroy their profit and potentially wreck their investment relationships and bring major stress to their personal life. That thing is the unrealized holding costs. It’s not uncommon to have to figure in some unexpected expenses along the journey, but it can be extremely frustrating to overlook the obvious because you were in a hurry running the numbers. If you are not sure you want to take on a flip project and may want to sell the flip house fast, then let us know and we will see if we can get you a price that is a win win. If you decide to move forward with purchasing the fixer upper then please read below to make sure you have figured in most of the holding costs.
Holding costs can really be anything that requires payment during the time you acquire a house till the time you sell it. I would even go as far to say that your time is a type of cost because you are using your physical energy to see a project to the finish line. That physical exertion can rob you of everything else needing your attention during that season of your life. So let’s review some of the holding costs you will encounter.
Rehab
The rehabilitation of the Tulsa house is the main thing people think about when running their potential profit numbers. This is the fun part which is the planning. Figuring out what granite and cabinets to choose. It is fun and the most time consuming part of the planning. When you are pricing the rehab you should add another 20% on to that price and another month onto your timeline because it always costs more and takes longer than planned. Yes sometimes you can meet a deadline and budget but it may require you to get your hands dirty. So know going into it to have some flexibility so you don’t get stressed when things don’t go perfectly. Once you start tearing drywall and cabinets out, there may be other issues you never saw coming so learn to roll with the punches!
Home Insurance
When you get a house with a mortgage you are required to have insurance. If it is a flip then the insurance company will want to know that. Some insurance companies are picky about flips and won’t do them. I had an insurance company back out of a policy shortly after closing and I had to scramble to find another company because the bank said they would implement their default insurance company but it was way more expensive and I wasn’t about to pay what they quoted me. I found a small insurance broker in a small Oklahoma town that was able to get me taken care of fast.
Flood Insurance
I purchased a house that the owner couldn’t find the flood survey that stated it was out of the flood zone so it could be removed from the mandatory flood insurance. So I had to get flood insurance. I was shocked when I saw the estimate. They said it would be $4000 a year on the high side. OMG! I was not thrilled so I got the property resurveyed for $700 just to get that flood insurance removed asap. I did not expect the survey to cost that much but I had trouble finding someone to do it in a reasonable time so I went with the only available company who could fit me into their schedule.
HOA Fees
When you buy a house in a Tulsa HOA neighborhood then you will have a monthly fee for them to keep up the neighborhood amenities. This fee is often anywhere between $50 – $150 a month. Even more if it’s a nicer neighborhood. Most likely if you are done with the flip in a reasonable time then you will just pay those fees as a part of the closing costs when you sell the property.
Routine Maintenance
If you buy your Tulsa flip in the spring or summer, get ready to mow and trim every 1-2 weeks. If there is a lack of rain then you will have to water the grass to keep it looking good when you put the house back on the market. Some items you may not have considered when buying your Tulsa flip is landscaping and fencing. You will want to make sure those items look good and are maintained or repaired before you take exterior pics. Remember that curb appeal plays a big role in selling your flip house fast. One more thing to keep in mind is pest control. If you see roaches, termites, or carpenter ants then get that taken care of before inspections happen when you sell. You don’t want to scare off potential buyers!
Utilities
If you are rehabbing a house during an extremely hot summer or cold winter then expect a rather high gas and electric bill. The first thing you have to do is get all setup with the utility companies. This is one of my least favorite things to do. For one you can be on hold for hours getting all the utilities set up. Then after you sell the house you have to do that again because new owners don’t always put the utilities in their name right away so you have to call and cancel and wait on hold f-o-r-e-v-e-r. Some water and trash companies that are in the country require paperwork filled out in person to even get started.
By the time you finish a flip you will be surprised how much money goes into utilities. Also if you rent a dumpster from the trash company you may be out another few thousand after it’s all said and done. There are several local businesses that rent out dumpsters in Tulsa so check prices for your specific rental time period.
Mortgage Loans
Flip loans are often interest only for so many months, so the principle isn’t being paid down at all. These rehab loans start with the origination fee. This fee can be hundreds but very often it is thousands of dollars. If your lender has a 2% origination fee then it is likely you will end up with a $3,000-$4000 fee if you’re buying an average flip house in a decent area. This is how lenders get their money up front. Then they rake it in on interest payments on the back end for the remainder of your loan. If you are using a private hard money loan then your interest rate will be even higher and the pressure to complete the house flip fast will be in your face every time you make the loan payment. So when running your flip numbers budget in a few extra months just in case the rehab goes past schedule. Also keep in mind that closing companies can get booked up and may not even be able to get you to the closing table for a couple months after you have a contract on your flip house. This will add a couple more mortgage payments to your tab, along with more insurance and utility payments. Man, the unrealized holding costs really start adding up!
Closing Costs
Origination fees that we just covered are part of the closing costs but I didn’t mention the title insurance, property taxes, escrow fee, realtor commissions, inspection costs, survey fees, and appraisal fees. The amount for closing can add up to between $5,000 – $10,000. This number can vary depending on many factors so call around and get a price sheet estimate on what the closing company will charge you for the house you are buying. Then add your lender’s origination costs to that.
Down Payments
I usually don’t worry about my down payments on rehab loans because it’s a temporary separation with the money. I will get it back when I sell the house. But investing is a risk so do your due diligence on the property and have a plan B in case the rehab doesn’t go as planned. Ask yourself if a $20,000 unforeseen repair needed to be done, would you be able to overcome that obstacle? If not and the house sits and loan payments are not made then the bank can foreclose on the flip house. You would lose your down payment and all those closing costs you paid on the purchase side would have been for nothing. Plus you lose all the time and money you put into the unfinished project.
The Unforeseen
When buying a flip house I try to figure in the unforeseen. If worse came to worst I would have to be able to break even. This happened to me when I first started flipping houses. I had a contractor totally rip me off and ruin the project. This guy was referred to me by a reputable person so I trusted them. Well everything seemed to start out ok but went downhill after a few weeks. So I had to fire the guy, clean up their mess, and restart. I hired new guys and did a lot of the work myself to keep from running out of money. It was stressful and hard, but that’s how we learn. I have been able to choose better contractors since and willing to pay top dollar for the ones that keep their word.
Remember if you know of anyone who has a house that needs some love and needs to get it off their hands, please let us know so we can help them. We buy homes cash in Tulsa!
Call or text us at 918-297-6222.
This website does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
