Estimating Rehab Costs

 

Before you buy that investment house to wholesale or rehab you need to be able to have a pretty good estimate of what the repairs will cost.  Remember the offer price is the After Repair Value (ARV) minus repairs and other holding costs minus your desired profit.

Most experienced investors can do this as they walk through a house, this speeds up their ability to arrive at an offer price and secure the contract.  The experienced investor has done it often enough to know what a new kitchen, painting, carpeting, windows, new bathrooms, etc. will cost.  A lot of new investors are really confused about how to estimate repairs and rightfully so.  It can be intimidating.

There are online tools to estimate repairs, however, beware that if the tool doesn’t ask for your zip code or at least area of the country, you need to use a different tool.  After all repair costs in a major metropolitan area such as Washington DC or San Francisco can be very different from say rural areas where the cost of living is lower.

When I go to the house to meet with the owner I like to have a clip board and paper with me.  An electronic clip board like an iPad will work too but I like the old school pad of paper, it is faster and as you go and are flipping through sheets of paper while writing stuff down the owner may better understand the amount of work his/her house needs without you saying negative things.  Write down all the things that need to be done room by room.  Remember the exterior of the house, especially the roof because that is a big ticket item.

If the house is rural remember to ask if it has a septic tank and/or well.  Ask if there are any known issues and the last time these were inspected as these are big ticket items too.  You want to have them both inspected prior to final purchase.  You don’t have to have them inspected prior to making your offer, just make the offer contingent upon an acceptable inspection.

I have a friend who is new to the business that takes a contractor with him every time he looks at a property.  This is a good option for the new investor, however, you need to remember that if the property isn’t under contract to you by the time you leave the property, the contractor may go back and put it under contract for themselves.   Also respect the contractor’s time.  They are in business to make a living not just to give bids so eventually you need to give them some work.

I know investors who make offers on homes all over the country.  They either get them so cheap that the cost of repairs won’t kill all their profit or they make offers based on what the owner tells them about a property with a contingency that the information provided is correct.  Once the owner accepts the price and the house is under contract then these investors have contractor’s go in and provide their opinions and prices.  If there is a significant deviation from what the home owner said, the investor will renegotiate the contract price.

If your buying a property from a bank they probably don’t know any of the history or issues with the property.  In these cases you can often hire a local person to go and inspect the home and provide you a report.

Here’s a tidbit for you to consider:  When talking to the owner about an older home, more than 20 years old, and they say everything is in great condition ask them when the last time the kitchen was remodeled.  If it has never been remodeled it may be in great shape but it also may need to be remodeled.

You can also use a local Home Depot or Lowe’s store to get ballpark estimates.  Both of these stores offer installation services for most of the things they sell.  If you have a rough idea of the actual measurements they should be able to provide you with ball park estimates for most major things.

As you get estimates from contractors ask them to break them down, how much will the painting cost, the refinishing of the floors, the kitchen cabinets, etc.  As you do this, if you are working in the same area over and over again, your ability to estimate repair costs will get better and better.  This will allow you to make your offers quicker and get the contract signed.

I like to create a written document that has everything I want done to the property in it and hand that to contractors for them to use to bid on.  I provide them specific instructions on how I would like the bid returned.  For instance I like to get the bid broken out by job components such as floor refinishing, painting, cabinets, etc.  I also suggest being specific about colors of paint to use, cabinets to be installed, etc. This puts me in a better position to be comparing similar bids and helps avoid any misunderstanding about expectations for the expected work.  If I am going to use different contractors for different aspects of the rehab then I just provide them a list for their part of the rehab.

I also ask the contractors to point out to me any items they think need repair that I may have missed.  After all they have done more properties than I have so their experience can be very beneficial.

I always try to get a minimum of 3 bids for any work I want performed.  I don’t always select the lowest bid.  I have had bids come in so low that I knew the contractor would not be able to perform at that bid.  Why would I want to do business with a person who may not be there to finish the job?  I usually select the contractor who was easiest to work with and communicate with, has good references, followed my instructions on bidding, and has a reasonable price.

Please note:  This article provides a starting point for estimating repair costs and I hope it has provided you with some good ideas.  There are whole courses written on this subject.  Also, remember that even the best of estimates can be impacted by things you can’t see when first looking at a property.  For instance, you find termite damage, pipes in the walls that need to be replaced, electrical wiring that needs to be replaced, missed a county/city code that needs to be complied with, etc.  These are risks, don’t let them stop you, the rewards can still be worth it!

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