When I started out as a real estate wholesaler, I knew I didn’t have the same experience level as a contractor. So, I had to ask myself, “How do I estimate the rehab cost of a property with no experience?”
Have you asked yourself this question? If so, then this article is for you.
If you’re having trouble estimating rehab costs, wholesalers, try this because it really works for me.
I talk with a lot of beginning wholesalers, and this is one the most frequently asked questions. I can comfortably say it’s in the top 5 questions newbies ask. I remember this struggle myself, but after many underestimated rehab projections, I was able to gather the correct information from a few knowledgeable sources in my market(s).
So let’s jump right in and get started.
As previously stated, I was wholesaling and guessing at the rehab cost. Honestly, it seemed as though every rehab was $30,000. Seriously, this number made sense until I began to get so many low offers from my buyers. They wanted the deal, but at the right price. For a while, I would justify my error (arrogance) by stating to myself, “OK, this is not the buyer for this deal.” I was so wrong. Let me stop here to say — when you don’t know something, do not be afraid to ask the right people the hard questions.
So for every problem, there is a solution, right? I began to ask all of my buyers and contractors, “What is a simple but justifiable way to estimate the rehab cost on a property?” I found out I was making it much more harder than the process needed to be.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
Let’s review some of the basics. For every wholesale deal, you need the following )and please add in the comments section if I missed one of the basic elements): You need to be great at marketing, you need a good deal, and finally, you need good buyers. This are the extreme basics. Where many people trip up is knowing whether they have a good deal. It’s not too difficult marketing to get your phone ringing with sellers and buyers. Once the phone is ringing, how do you know you’ve found a deal?
The problem newbies face is calculating the ARV and knowing the rehab costs. For the sake of time, we will assume you know how to find the ARV, so our focus will be finding the rehab costs. As stated before, there is a formula for this. The formula will vary in each market, but by asking a few questions on BP or asking knowledgeable investors in your area, you will find the formula that works.
To estimate the rehab cost, multiply the square footage of the property by the rehab cost per square foot. For example, the property is 1,500 sq. ft., and the cost of rehab in your area is between $15-$30 a sq. ft. You will be able to find the rehab cost. So let’s go over that again. The property is completely trashed; this is not just a cosmetic rehab, so we will allow for $30 per sq. ft.
Multiply 1,500 x $30 = $45,000 rehab cost.
Let’s take it a step further and add the ARV to the equation.
[$250,000 (ARV) x .70] – $45,000 rehab cost – $10,000 wholesale fee = $120,000 (MAO)
Yes, I know 70% ARV is difficult to find in many markets. By knowing your market, you will know what percentage to use, just as you will learn what rehab cost per sq. ft. to use. In the example above, if the property had some updates and was not a complete gut job, then you would use $18 sq. ft., for example, as the rehab amount.
If you’ve found another way to justify your rehab cost, please share. I’m not saying my way is the only way, but it is a simple and effective way. If you have more questions or need more clarity, ask in the comments section below.
How do you calculate rehab costs?
Let me know with a comment!