Transaction costs

[N/A N/A]

Background: I am not active, at present, in the real estate investing field. Did a bit of it in the mid-90s and got out after a couple years. I started looking again a couple months ago (some posts on this forum), then put it on the shelf. And yet, I return here again :)

I think what I would be most interested in is flipping fixer-uppers. Emphasis on the fixing up - that is more appealing to me than the transactional stuff - buying cheap and selling at a good price, though I know the latter is important, too.

One problem with any relatively short buy/sell scenario is transaction costs.

Conventionally, a real estate agent takes a ~6% commission. You can envision this being split between buyer and seller as a sort of spread. Yes, I know normally the seller pays it all, but effectively the buyer is likely paying about half, in that for a deal without any agents, the two parties could meet in the middle, each saving about 3%. Regardless, since you will be buying once, then selling once, your round trip commission cost will be about 6%, assuming use of agents on both sides.

On top of that, there are other hard costs - title insurance and inspections, in particular.

On top of that, there are *soft* costs - things that both you (the first buyer), and the second buyer (the one you sell to) must do - due diligence to make sure you're not being hosed by a bad house or a bad deal. These may be more time than money costs, but still, they're duplication.

The net of it is, by nature of the house being sold twice in a short period of time (once to me, then, after some fixups, once to an ultimate purchaser), there are a lot of one-time transaction fees that are absorbed two times. Perhaps 6% in agent fees, 1-2% in closing costs, title insurance, inspections, and the like, and perhaps 1-3% in 'time costs' - the due diligence I've mentioned. Fortunately, I have my own money so bank financing costs don't factor in for me, other than the time-value of the money tied up during the process. But with short term rates so low anyways, those aren't **too** big a factor.

Still, add it all up, and there is a basic 'flip' cost that seems to be around 10%.

This means that to make a profit as an investor, the price gap between what I pay and what I sell for must be perhaps 10% + fix up costs (call that 10%) plus profit (being VERY conservative, let's call that 5%). For a 25% minimum pricing gap, in order for me to invest 10% in the actual fixing up.

It seems excessive. I know some sellers are not in a position to invest that 10% (financially, or because of their time or expertise), but still...

I guess my point/question here is - does the above logic seem correct?

And in particular, have I been about right in my cost assumptions of the actual transaction costs?

Do folks use agents on both the buy and sell side, incurring ~6% in agent fees?

What about inspections and title insurance?

I've read that the payout ratio on title insurance is ludicrously low - would it be cheaper to simply self-insure and do the raw research myself (go to the county courthouse and verify good title)?

(Yes, I know some folks will say "Just do it and find out for yourself". But 'just doing it' even once requires a fair amount of time and money, and I'd rather be as fully informed as possible before doing so.)

Thanks in advance.