There’s only one thing that grates on me when it comes to TV Shows that feature house-flipping for profit; they never seem to tell the truth about the profitability picture. I love what these shows teach about innovative ways to fix things up and the treatments people use to make a home look stylish. The number of talented people who can fix things up to show their best are truly amazing. However, here’s a classic scenario that always leaves the viewer up in the air as to how much was made or lost on the deal, and always leaves me irritated.

This situation is pretty straightforward where Matt buys a house or condo for $250,000 and has a budget of $15,000 to fix it up and then resell it in the open market. So, he’s in the property for $265,000. What the TV viewers aren’t told is that while Matt holds the property, there are maintenance fees, taxes, insurance, utility payments, gardening (if a home), interest payments on the loan and other miscellaneous cost. Assuming Matt paid 20% and carries a $200,000 loan, his monthly carrying costs are about $1,250 per month while the house is being fixed up and then marketed. So, if we assume that from the day he closes escrow on the home it takes him 90 days to fix-up, market, obtain and offer and close the deal with the new buyer, it has cost him another $3,750 in carrying costs. That is a very fast turn around, by the way.

The TV Shows’ favorite trick is to say Matt bought the home for $250,000 and fixed it up for $15,000 more so he’s in for $265,000. He sold it for $315,000 so he made a $50,000 profit! Wrong again! After fixing the property up, the owner always seems to have a real estate agent come in and price the home. This suggests they are going to use a real estate agent. That costs about six percent of the purchase price on top of another normal two percent of the price for title and escrow fees and other miscellaneous transaction fees. So, let’s do the math with that in mind.

$315,000 minus eight percent selling fees for real estate services and normal closing costs ($25,200), minus holding costs ($3,750), minus fix up costs ($15,000), minus the prior purchase price ($250,000) equals $21,050 pre-tax profit. If you are in a 25% tax bracket (State and Federal combined), you must also pay tax on your profit of $5,262.50 which leaves you a gain $15,787.50. (Taxes and other fees vary by state so these numbers could be a little higher or lower depending on your location).That is a nice profit for 90 days work, but it is a far cry from the $50,000 profit TV Shows would have you believe.

Three of the most important things you need to know are; 1) How much can I get for this place when it’s all fixed up? 2) How much will it cost me to fix this place up and will I stick to my budget? and 3) How long can I afford to have this property on the market with the other carrying costs I’ll have? If you answer all of those questions and you believe you’ll still make a profit, it may be worth it for you. So, prior to buying, do your research on the area and make sure of where the value ranges are to justify future value. If the property doesn’t make financial sense after you’ve gone through that exercise, find another property. There are a lot of properties out there.