How Can I Analyze Deals With No Idea How Much Repairs Will Cost?

Question

I am trying to practice analyzing deals but I always get stuck when it comes to renovations. Is there a standard or rule of thumb to estimate renovation costs? I know every property is different - does anyone have any advice? Thanks!

Kevin Sobilo · Answer

@Mae Jefferson, I understand what responders such as @Bruce Woodruff and others have said about having a contractor give estimates and yes that is fine but isn't practical at all. You may need to analyze dozens of deals in order to get one under contract and getting a contractor to estimate all of those deals is unlikely and cumbersome for both you and them.

This is what I do:

Step 1: Develop a high level scope of work. With practice this might only take a few minutes. Include a Misc item for all the small stuff not covered by the high level work items.

Step 2: Enter that scope of work into a spreadsheet.

Step 3: For each item in the scope of work give your best estimate. If you are clueless do a little internet research.

Step 4: For each item assign a confidence % based on how sure you are of the estimate. For example: If you know the flooring you like costs about $5/sq ft installed because you just had some installed in your own home you might be 90% confident. If its something you are less familiar with you might be only 60%-80% confident.

If you have a LOW confidence level on a high cost item, go back and work on that a little. More research online or call a contractor for general guidance. For example a roofer might be able to tell you the average price per square they charge for a roof. It isn't an estimate but it helps you be more confident in YOUR estimate.

Step 5: Use these values to have the spreadsheet calculate a HIGH and LOW value for each item.

For example: A roof you might estimate as $8k with 80% confidence. The confidence value of 80% means your estimate could be 20% low or high. So, the low value is $6,400 and the high value is $9,600.

Step 6: Add up the estimated values, high values and low values into totals for each of those.

Step 7: Evaluate. If you are comfortable with the estimate and the deal would be good at that amount then look at the high value. If the deal would still be "OK" at the high value then you have a winner.

A rehab is a project. Cost is only ONE aspect of a project along with scope and time. When managing a project you can manage these 3 things to bring the project home. If things come up costing money, you can often adjust the project by changing the time or scope. So, the estimates aren't the be all end all.

Also, its highly unlikely you should ever end up at the high or low estimate. EVERYTHING would need to either go wrong or right for that to happen and as I said you can manage the project as it progresses. So, that it should end up near-ish to your original estimate.

This approach allows you to be confident that even if things don't go to plan that your deal will still be ok at least.

Jason Maguire · Answer

There is also a BiggerPockets book called "The Book on Estimating Rehab Costs" that has really good generic information on how to price out rehabs. May not be a bad place to start if you're getting stuck.

Bruce Woodruff · Answer

With all due respect, I don't think this helps her be able to put a number on a house anytime soon. True if she studies the info, it will help at some point, but she will need a Contr to give her solid numbers right now. IMHO....

Scott Mac · Answer

What Bruce said^^^^^^^^^.

Bruce Woodruff · Answer

Sorry, but there is no way to 'estimate' renovation/repair/construction costs. There are speadsheets out there I think, but they could be waaaay off and you don't want that. You need to have a seasoned Contractor give you a bid on the property. You may have to pay for this. After many years, you can gain this skill yourself if you pay attention as you go.

Michael Mannino II · Answer

Hi Mae! It's always tough estimating renovations, especially on your first few deals. I would recommend finding a good local contractor that would walk the properties with you, and/or ask for help from other investors in the area and see if they'd let you tag along to learn from deals they're looking at. Take notes, understand how they estimate the cost per sq ft so you can do quick calculations when analyzing a potential deal. For example, we've got our systems down to a science now where I know it'll cost us $35/sq ft for cosmetic repairs (this will definitely vary depending on location/materials/your crew, so don't use our specific numbers), then if we can tell the house will also need bigger fixes such as roof, windows, mechanical, electrical etc. we add that in as well and we can use that to work the numbers backwards to get to our offer price. Our formula is the standard (ARV x 0.7) - repairs = purchase price. We've done over 70 flips in the last few years and have been very successful with this. Would love to chat more if you have any other questions, feel free to send me a DM! Best of luck!

Owen Dashner · Answer

Ask around with other experienced investors on who their favorite contractors are.  Then offer to pay the contractor to walk through houses with you so that you can listen to their feedback on what does/doesn't need repaired and a ballpark idea of what the costs will be.  Look at it as an investment in your education.  Also read J Scott's books.You could also partner with an experienced investor to learn from them.  Offer equity in a deal in exchange for them sharing knowledge on how they evaluate projected expenses.You will get more comfortable with this part the more experience you get.  So get out there and start networking and walking houses.

Steven Foster Wilson · Answer

I would go to your local brokerage ask some of the people if they can share some of their deal info. If you can get before and after photos, how much they estimated the cost would be, how much the cost actually was, and how long it took. I think doing this will help you know more per your area and market.

How Can I Analyze Deals With No Idea How Much Repairs Will Cost?

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