Financing House Flipping: What are Soft Costs?

In the world of real estate financing, understanding soft costs is essential for wholesale lenders, brokers, and referral partners who provide funding for fix-and-flip projects. While many investors focus primarily on hard costs, such as materials and labor, soft costs play a crucial role in determining the overall profitability of a flip.

For wholesale lenders and brokers, ensuring that clients fully account for these often-overlooked expenses is key to structuring loan products effectively. Without proper budgeting for soft costs, borrowers may struggle with cash flow issues that can delay projects or lead to financial shortfalls.

In this guide, we’ll explore the differences between hard and soft costs, break down the most common soft costs in house flipping, and discuss how lenders can help clients manage these expenses while maximizing profits.

What Are Hard Costs?

Hard costs are the direct expenses related to the physical construction and renovation of a property. These costs include:

• Materials (flooring, cabinets, roofing, paint)
• Labor (contractors, electricians, plumbers)
• Permits for structural work
• Demolition and debris removal

Because these expenses are tangible, they are easier to estimate and finance. Hard costs form the core renovation budget, making them the primary consideration when underwriting loans.

For wholesale lenders, accurately assessing hard costs is crucial to ensuring that financing covers the necessary repairs while maintaining a healthy loan-to-value (LTV) ratio.

What Are Soft Costs?

Unlike hard costs, soft costs are indirect expenses that support the renovation process but are not directly tied to construction. These costs can add up quickly and, if unaccounted for, erode the profitability of a flip.

Accounting, Taxes & Carrying Costs

Carrying costs include property taxes, insurance, and utility bills, which must be paid while the property is under renovation. If the flip takes longer than expected, these costs can significantly impact the budget.

Lender Considerations:

• Encourage borrowers to factor in holding costs when structuring loans.
• Provide bridge loan options for investors needing to cover extended holding periods.

Construction-Related Soft Costs

Even though construction is a hard cost, many related non-physical expenses fall into the soft cost category. These include:

• Architectural plans and engineering designs
• Surveyor and zoning fees
• Permit applications for minor changes (non-structural work)

These costs can delay project timelines, impacting loan repayment schedules.

Lender Considerations:

• Require borrowers to estimate construction-related soft costs before funding.
• Offer flexible loan terms to accommodate delays in permitting.

Legal Fees and Title Costs

Title fees, legal paperwork, and closing costs can add up quickly in a real estate transaction. If title issues arise, the closing process may stall, increasing soft costs.

Lender Considerations:

• Work with reputable title companies to streamline the process.
• Provide education to borrowers on potential legal costs.

Lender Fees & Financing Costs

Lenders charge various fees that borrowers must account for when planning a flip:

• Origination fees
• Underwriting fees
• Interest payments
• Draw inspection fees

For wholesale lenders, it’s critical to educate borrowers on financing costs upfront so they can budget effectively and avoid cash flow shortages.

Marketing & Sales Costs

Once renovations are complete, marketing the property is key to securing a profitable sale. This may include:

• Agent commissions
• Online advertising
• Professional photography
• Home staging

For brokers and referral partners, helping clients factor in marketing expenses ensures that their flips remain profitable.

Why Wholesale Lenders Must Account for Soft Costs

Avoiding Cash Flow Shortages

Many borrowers underestimate the total cost of a flip, leading to cash flow shortages that can delay renovations or force premature property sales at lower-than-expected prices. Lenders should work with borrowers to:

• Ensure sufficient capital reserves are available for unexpected costs.
• Consider offering lines of credit to cover unexpected soft costs.

Structuring Loan Terms for Success

By accounting for soft costs, wholesale lenders can:

• Set realistic loan repayment timelines based on true cost estimates.
• Offer interest reserve accounts to cover borrower payments during renovation.

Enhancing Borrower Education

Many new borrowers are unaware of soft costs. Brokers and referral partners should:

• Provide cost estimation templates to clients.
• Educate borrowers on how to estimate and manage soft costs effectively.

Can Soft Costs Be Financed?

Unlike hard costs, soft costs cannot always be directly financed. However, there are strategies that borrowers can use to cover them:

Bridge Loans & Short-Term Financing

For investors who need extra funds for soft costs, short-term bridge loans can be a great option. These loans help borrowers cover taxes, insurance, or unexpected legal costs until the property is sold.

Refinancing for Recouping Costs

After renovations are complete, some lenders offer cash-out refinancing, allowing borrowers to recover soft costs based on the post-renovation property value.

Partnerships & Joint Ventures

For borrowers who lack upfront cash, joint ventures (JVs) can be a way to split soft costs with a partner, reducing financial risk. Lenders can provide:

• Education on structuring JV agreements.
• Loan products tailored to partnership-based investments.

Managing Soft Costs for Wholesale Lending Success

Soft costs are often hidden expenses that, if overlooked, reduce profitability. For wholesale lenders, brokers, and referral partners, ensuring that clients fully account for these costs is essential.

Conduct Pre-Funding Soft Cost Analysis

Before approving a loan, lenders should require borrowers to:

• Submit a detailed budget including soft costs.
• Demonstrate an exit strategy that factors in carrying costs.

Offer Flexible Loan Products

Providing borrowers with financing solutions that account for soft costs can prevent loan defaults and increase borrower success rates. Consider:

• Bridge loans for extended holding costs.
• Rehab-to-rental financing for fix-and-hold strategies.

Partner with Industry Experts

Lenders can reduce borrower risk by partnering with:

• Title companies (to avoid closing delays).
• Contractors & appraisers (to improve renovation accuracy).
• Marketing specialists (to ensure fast property sales).

By proactively addressing soft cost management, wholesale lenders can:

• Reduce borrower default rates.
• Improve loan performance.
• Strengthen long-term client relationships.

RCN Capital: Your Trusted Lending Partner

RCN Capital offers flexible financing for investors, and real estate professionals. Our short-term and long-term loan options help borrowers cover hard and soft costs efficiently.

Looking for financing solutions that maximize borrower success?
Contact RCN Capital today to learn how we can help!