Here’s more on property flipping TV shows as a tag on to yesterday’s entry. It's a scary thought on Halloween. At the end of every show, we generally see people telling us about the “gross profit” they made, but they ignore the many other costs referred to in our last blog entry. Here’s another angle the show’s producers use to distort the end result. I mean, they want these people to win and make a profit because it brings you back to their TV Show, right? Well, there’s more you should know.

In other scenarios, a property investor buys and property and goes through a fix up process and completely blows up their budget by a factor of two or three times their original intent. So, now they may be faced with the situation of being “upside down”. This means that after they have purchased the house, done all the fixing up, kept paying on a mortgage during the fixing period, the house is worth less than the total combined cost of the project. Here’s what we mean.

Suppose the same house as yesterday cost $250,000 with an overloaded budget of $45,000 when the original intent was to spend $15,000. Using a monthly carrying cost of $1,250, less say it took an additional three months to try to sell, costing another $3,750. Let us again, assume 8% cost of selling and a $315,000 market value. Here the picture.

$250,000 price + $45,000 fix up + $7,500 for 6 months of holding cost + $25,200 selling costs (broker fee + normal closing costs (est.)). In this case, the loss would be -$12,700.

Rather than accept a loss (which the TV guys don’t want you to know, the tag line at the end is the investors chose to turn this into a rental property they will sell at a future date. Over time, that may work out though in this market it is tough to predict. The other aspect of this situation may have several ramifications:

1) The investor’s money is now all tied up in the property and they can’t get it out until the market improves.

2) If the market doesn’t turn, and they have no more available capital, they can’t invest in other flips. Their investor capital is all ties up.

3) There is a very good chance that they will not be able to rent the property for as much as their monthly payments which would mean they have continuing negative cash flow to some extent.

STOP! We are not saying that you shouldn’t invest in property with the idea of flipping, we simply saying you need to consider everything. You can do a fabulous job of rehabbing a property, but if you can’t get enough to get out of it and make a profit, you should look for another investment property. Don’t kill yourself to make nothing. Work hard on initially finding a property and then determine what it call sell for in top shape. After you’ve done that, consider your cost, your fix up budget, broker’s fees and all other costs (don’t forget the time on market component) and then figure out how much you’d make or lose by pursuing this investment. Do your research and you stand a better chance of achieving your objective...profit!