Steve and Jodi Faulkner

Here is the continuation of the article breaking down the expenses in a realistic manner.

So, let's ACTUALLY look at all the costs that were conveniently excluded from Craig's profit calculation and see why I say he paid too much for the house initially. The list price is $299,000 (IF one is able to sell the house for the listed amount!) Here is a more realistic scenario of what will happen to the $59,000 potential profit:

$59,000

Real estate commission - 7% on 300K -$21,000

Price Reduction - negotiated 3% -$9,000

Loan costs for 6 months - 3 for remodel, 3 to sell and close -$6,000

Closing costs -$1,000

Taxes and Insurance 6mo's -$1,500

Profit before 20% short term capital gains tax - $20,500

Payment to brother for 1 month work 33% of profit -$6,833

Total $13,667

So now we are down to $13,667 profit IF the house appraises for what the realtor said and IF the seller only negotiates a 3% price reduction. IF he can do these things, and if the house sells and closes in 90 days, then that would equate to $4556 a month for his 3 months work on the house. Not a bad living, but we still have to pay taxes on the money. Depending on your tax status it could be as much as 20%.

After being in the real estate business for 15 years, I am here to tell you that many of these "ifs" are BIG "ifs". I was very disappointed that they ended the show in this manner, as I believe this is extremely misleading to people who are thinking about flipping or renovating houses. By my calculation the profit on this deal will be about 4.6% before taxes. We try for 20% profit in our deals, although we don't always make it. The 20% goal gives us room to live with what ifs, cost overruns and the inevitable surprises that pop up.

The only effective way to know how much you can pay for a house is to figure the average finished selling price/sq. ft for the area and then subtract your remodel costs. From a practical standpoint I would never pay more than 50-55% of the finished value for a house that was going to take this much renovation. The most I ever pay for a house is 70% of the after repaired value and that's only for one that just needs mostly paint, carpet and light repair.

The biggest mistake that rookies make is paying too much for the house and that's just what Craig did. If your finished value is $299,000 he could not afford to pay more than 55% or $165,000 for a house that requires this much remodeling. Craig actually paid $216,000 or $51,000 too much for the property. That amount added to his $13,667 actual profit would put his profit at 21%, or $64,667. If you don't get anything else from this article please remember these two things:

1. Rookies usually pay too much for houses -- just as Craig did

2. Just because it's on TV or in print doesn't make it right or true -- the shows producers thought Craig did well or else they lied in the name of entertainment.