How to Estimate Rehab Costs with No Construction Background

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I was surfing the BiggerPockets Forums last week when I came across this post.  Being that I had a few minutes and we are in the middle of a rehab myself, I figured that I would jump in an assist a fellow investor.

Rehab Cost Estimates
Here a few of quotes from the post…

I have a question for the experienced wholesalers out there. How does someone, with no construction background estimate the rehab cost of a house.”

“(Would) I would just measure everything, write down the materials that are already in there (i.e – granite countertops), and price it out at Home Depot or something?”

As for the labor costs – how do people usually go about estimating that?”

So essentially this poster was asking how to estimate rehab costs for a house with no construction background.  Let me ask a few other questions.

  • If you didn’t have an automotive background, would you buy used car and try to sell it to a mechanic to fix and resell?
  • If you didn’t have experience with yachts, would you buy a used yacht and sell it to someone who was going to fix and resell yachts?
  • Or how about if you didn’t have experience with airplanes, would you buy a used plane and resell it to a plane rehabber?

Hopefully you answered no to the above questions.  How is it any different with a house?  In order to have success in buying anything used and reselling it to someone that will fix it up, you have to understand all of the things that they will do to fix it up and resell it.

Going back to the plane rehabbing, I was actually discussing this topic with a friend recently.  One of his mentors just started a business flipping planes.  Now… did he buy $1,000 course or jump on an internet forum and suddenly started buying and selling used airplanes?

No, he did not.

He actually partnered with another guy who had in depth-knowledge or the commercial airplane industry.  He then learned and understood the entire process from someone who had gone through it before he went out and found his first deal.

Can you imagine if he just went out on his own, found a used airplane, tried to estimate what it would take to repair and started offering this as a deal?  I can’t imagine it would have gone well.  And it is no different with a house.

Now this topic is not new, but it bears repeating.

IF YOU DON’T KNOW HOW TO REHAB, DO NOT START WHOLESALING!

There, I said it.  But don’t just believe me, here are some quotes from other real estate investors and experiences wholesalers.

Aaron Mazzrillo

 

Sharon Vornholt

And here a few related articles on the topic.

How to Estimate Rehab Costs with No Construction Background

Now I try to educate and provide actionable steps whenever I can.  So here is the response that I gave to that forum poster.estimating-book-3d-6e426e649320141edfa1b7d2a38628b6

1. Understand/Learn From Your Customers

If you want to sell someone something, first step into their shoes and understand them.  J Scott has written 2 simply amazing books from a rehabber’s perspective (The Book on Flipping and The Book on Estimating Rehab Costs).

Pick up both of J books. Read the rehabbing one first, then read the estimating one. J does an extremely thorough job of detailing the rehab process and every potential aspect of a renovation.

2. Understand All Steps & Costs

Create a list of everything that a rehabber will need to do.  Then create a detailed spreadsheet (maybe using J’s book as reference) for every potential aspect of a renovation. Call around and get quotes on some of the major ones (ex. cost per square for a roof replacement, either tear-off or 2nd layer). Put these in your spreadsheet.

RelatedThe Ultimate Guide to Determining House Flipping Costs

3. Think Like a Rehabber

You have to evaluate a potential deal the same way that your customer would.    When evaluating properties, work backwards like most rehabbers do. Determine the ARV, multiply by 70%, the subtract out all of the rehab costs. Multiply your estimated rehab costs by 20% for your fudge factor.

If you really want to be great, actually have some contractors come out to the property to give you quotes.

Related: The 70% Rule: One Critical Formula Investors Need to Know

4. Find a Deal & Market It

Now that you understand your customer and their process, use that to find a deal that meets their criteria and flip it to them.

What are your thoughts on this?  Should people have experience in something (ex. rehabbing) before trying to sell to their customers?  Or is it ok to to start with something (ex. wholesaling) without having experience with their potential customers?

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About Author

Tom is a serial entrepreneur and real estate investor from Rochester, NY. His real estate investments primarily target multi-unit properties. Along with his wife Ariana, they run a blog called Entreprenewlyweds, which helps couples understand how to manage being real estate investors/entrepreneurs while also maintaining a great relationship and family life.

13 Comments

  1. Tom, I keep saying this over and over,

    Start either bird dogging for a successful wholesaler or learn sub2 purchases or lease option assignments or something that does not require pricing a job with construction knowledge, you can’t “wing” that, and if you do “wing” that and make errors, you lose respect FAST from any experienced REI, and can not get it back easily or quickly.

    It reminds me of the word “cavalier” Showing arrogant or offhand disregard; dismissive.

    Pay your dues, get some cash, read J Scotts’s books, be patient.

    Awesome post Tom.

    • Thanks Brian. I think most experienced investors say this over and over, but the “gurus” keep touting it so we keep getting flocks of new investors trying to wholesale.

      I agree with you. If you try to wing it you will lose respect fast. Better to take an alternative approach or learn from someone who is actually doing it (one of the things that I always recommend).

  2. Couldnt have said it better myself. So many new investors jump into, but NO ONE stops and tells them that they need to KNOW what costs go into renovating a property first. No one seems to say this at all. My issue is also that for the amount of work, you could renovate a rental property and have income for years to come. Thanks for the article.

    • Lisa – I agree with you on the income from years. We have a property that we are working on that is a full renovation. We could have flipped it, but decided to keep it as a rental. It would have worked out with either exit strategy, but I also prefer the benefits of owning.

  3. Michael Dorovich on

    ‘If you really want to be great, actually have some contractors come out to the property to give you quotes.’

    Thanks Tom for the article. This sounds like very good advice. So far I have had one property which was quoted as $90k in rehab, which was $130k-$150k from an actual estimate, and another which was quoted as $65k, and the contractor, who lived down the street from the property, said ‘it won’t sell quickly even if you put $200k into it.’

    So it seems like people making up numbers out of thin air is par for the course in the wholesaling world. True investors must laugh at most wholesalers. The percentage of wholesalers who actually know what they are doing must be in the 5% range.

    The number of people who been sold the ‘wholesaling is easy’ idea seems staggering.

    • Michael – We can all thank the gurus for the “wholesaling is easy” idea. Like you said, the small percentage of wholesalers who actually understand how to estimate are the ones actually making money wholesaling. The rest just keep trying until they give up.

  4. Sara Cunningham on

    I totally agree. There are so many people that introduce themselves on the newcomers forums stating that they want to get into wholesaling because they don’t have any money to go any other way. I’m not sure why they all think that anyone can step in and start doing this. I wouldn’t get into wholesaling and I’m not a newbie as such. I must admit I also feel a little bit wary of using a wholesaler myself as I’m not sure how many are actually experienced or just think they are.

    • Sara – I agree. The only time I really even look at a wholesaler’s deal is either if they have done a successful deal with someone else and that person recommends them, or if they spend the time to create a very nice package for the deal. I will still run the numbers myself, but at least I know they spent some time on it. Then I also know how far off their numbers are from mine.

      • Michael Dorovich on

        Tom, the one thing I have learned from a successful rehabber I am working with is that, as a wholesaler, you must present good solid realtor comps (less than 6 months, less than 1 mile radius, similar sq ft, beds/bath, age, with DOM numbers) and a scope of work/rehab estimate from a contractor to be taken seriously.

        He has asked for them several times, but it took me a while to read between the lines and realize that this means ‘don’t even *think* about a presenting a deal without realtor comps and a rehab estimate.’

  5. People are focusing on wholesaling here but it really doesn’t matter what the exit strategy is if you are looking at fixers.
    If you are rehabbing or fixing to rent you need to have some ability to estimate how much work it will need. So newbies really have a big strike against them regardless of the business they choose when they are looking at distressed properties (vs. distressed situations where you can get more “turnkey” types or use some of the “pretty house” strategies).

    • Shaun, you said that well.

      (Distressed in ugly condition) vs (Distressed with no equity but pretty houses, and current mortgage) vs (Distressed with high equity, current mortgage but pretty house).

      Sub2, owner financing free and clear houses and lease option assignments can be great tools above and beyond traditional wholesaling and retailing-rehabbing, without needing “rehab quoting” skills.

  6. Great article! I started flipping in 1998 and wish I had started as a wholesaler for the experience. Lots of mistakes and problems when I started in this game. I can’t add anything more really, just learn all you can – work with an experienced wholesaler if possible and commit to succeed

    • Thank you for this amazing article and great comments.. I am a new guy learning more about this business. I do plan on starting as a wholesaler, this article and everyone’s comment help me realize what i could do to be a successful wholesaler..

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