One of the things investors who buy from wholesalers complain about the most—with regard to buying from wholesalers—is the wholesalers’ inability to accurately estimate rehab costs.
“Dude, I’ve got this sweet deal that only needs like $5,000 worth of work” is a lie—and every cash buyer knows it. The fact is, the better you can estimate rehab costs, the more successful you’ll be. Why? Here are a few reasons:
- By understanding how much it will cost to rehab a property, you can arrive at an accurate Maximum Allowable Offer and avoid paying too much.
- By understanding how much the rehab will cost, you can accurately present the information to your cash buyer in an easy-to-comprehend way.
Keep in mind, this article will not be the end-all-be-all explanation of how to accurately estimate rehab costs. For that, you’ll want to get a copy of The Book on Estimating Rehab Costs: the Investor’s Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs by J Scott, published by BiggerPockets Publishing. Every wholesaler should have a copy of this book and commit to fully understanding the concepts therein. In lieu of that book here, however, I’ll present my six-step process for estimating rehab costs.
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.
The Simple 6-Step Process to Estimating Rehab Costs
1. Understand your buyer and the neighborhood.
Before you start calculating how much it will cost to rehab the property, you need to understand what the final product will look like. There are high-end remodels that take months, and there are quick flips that take just days. Understanding the level of finishing to which your buyer plans to rehab the property is imperative. Also, looking at the neighborhood around the property will give you a good indication of how far the rehab will need to go. Typically, most investors do not want to go too far above and beyond the level of other properties in the neighborhood. Therefore, if the home is in a working class neighborhood with mostly working class rentals, you don’t need to spend hundreds of thousands on a rehab.
2. Tour the property in detail.
Next, with a good understanding of how you want the finished product to look, walk through the property very slowly. Take a lot of photos or record a video, such as with your cell phone, so you can easily recall the condition later (trust me, you won’t remember it all). Furthermore, photos will help you sell the property later to the cash buyer. If the seller is home, be sure to let them know you will be taking pictures, that they’re for analysis, and that you won’t be making the photos public. Don’t make them feel like you are invading their privacy.
3. Write down the problems in each part of the property.
While you are still on-site at the property, go room by room and write down its condition, as well as any needed repairs that you notice. For example, if you walk into the living room and see carpet that looks and smells like dog urine, write down “replace carpet in living room.” Also, write down a quick estimate of the size of the room (it doesn’t need to be exact; just make your best guess). Be sure to take a look at the exterior of the home as well and pay attention to any big issues, such as the condition of the roof, siding, and any outbuildings.
4. Condense your list into one of 25 categories.
Next, you’ll want take your comprehensive list of repairs and classify each one into one of the following 25 categories. For example, if the living room needs carpet, the bedrooms need carpet, and the kitchen needs vinyl, group all of them together and include them under “flooring.”
5. Determine a rehab price for each category.
Once you have your 25 categories spelled out, it’s time for the most difficult part: estimating the rehab amount for each category. However, once everything has been broken down into these categories, calculating an accurate estimate is much easier, as opposed to looking at the entire project. Let’s return to the example of the flooring estimate. We may determine we’ll need approximately 1,000 square feet of carpet and another 500 square feet of vinyl.
With that information, we can call up a local flooring or big-box store and ask what they charge for the flooring we need. Speaking of big-box stores—I recommend spending a lot of time in them at the beginning. Learn how much material costs for the most common repairs, such as flooring, paint, cabinets, counters, appliances, etc. To get a really rough estimate on how much those items might cost in labor, double the price of the materials. Again, this provides just a rough estimate, but I find it to be fairly accurate. Additionally, you can go online and search sites such as Craigslist to see how much contractors are asking for certain jobs, such as replacing carpet or painting.
Related: Rehabbers Beware: 5 Big Issues Distressed Properties Hide (& How to Detect Them)
6. When in doubt, ask for help.
Don’t be afraid to ask for help. You can do this in a few different ways:
- Visit the BiggerPockets Forums and ask people there what they are paying. This is an incredibly useful tool, because you are able to get an inside look at what your potential cash buyers are spending.
- Ask a local contractor for help. Although you may need to pay them for their time, the cost of an hour or two consulting with this professional at the house would be an investment that would help you for years to come. Many wholesalers actually include a detailed, line-by-line bid from a licensed contractor with their presentation to a cash buyer, and I highly recommend doing that. The contractor will likely offer the bid for free, because there is a good chance the cash buyer will end up using them on the job, and you will not have to do the work of estimating the project.
- Ask a local real estate investor or another wholesaler to come with you. Getting really good at estimating rehab costs quickly is an important skill to have, so consider working on your first deal or two with someone who has been around the block and can share their knowledge.
[This article is an excerpt from Brandon Turner’s The Book on Investing in Real Estate With No (and Low) Money Down.]
What process do you use to estimate your costs?
Leave a comment below!