UNDERWRITING ACCURACY QUESTIONS
Hey,
I wanted to just ask a couple questions regarding some aspects that will impact underwriting of multi-family properties.. I've really been putting in a ton of work to learn the ins and outs of the game here but I'm trying to get a more thorough understanding of a couple aspects in regards to underwriting.
A lot of the numbers we input in underwriting models are pretty concrete to know such as mortgage rates, LTV, amortization, certain expenses etc.. but its the unknowns that can greatly skew an underwriting model such as renovation costs if you mess it up..
So, my question would be.. How can we determine "ACCURATELY" the cost of the renovations we "plan" to do to a property to ensure we aren't making a good deal bad or buying a bad deal. I feel if you underestimate this line item it can greatly screw you over..
I would think, that perhaps when you do a walk through of a property you bring a contractor with you to get an idea.. sound right?
But then this leads to another question.. How much money are you likely to go out of pocket before even locking up a deal? And IF the deal falls through then the cash you spent on this is "wasted"..
So, what are your ideas, thoughts, and attitudes on how to accurately figure out reno costs, as well as costs you can incur without even locking up a deal?
Cheers friends!
Kory Louvelle
@Account Closed when estimating rehab costs, there are a few steps you can take to accurately determine the cost of renovations for a property:
Create a detailed renovation plan: Make a list of all the renovations you plan to do, including any new appliances, fixtures, finishes, and any structural work that needs to be done.
Get estimates from contractors: Once you have a detailed renovation plan, you can get estimates from contractors to see how much each item on your list will cost. Be sure to get estimates from at least three contractors to ensure you are getting a fair price.
Account for contingencies: It's always a good idea to set aside some extra money for unexpected expenses that may come up during the renovation process. A good rule of thumb is to set aside 10-20% of your renovation budget for contingencies.
Research the cost of materials: You can research the cost of materials online or by visiting a local home improvement store. This will give you an idea of how much you should expect to pay for items like paint, flooring, and fixtures.
Don't forget about the cost of permits: Depending on the scope of your renovations, you may need to obtain building permits from your local municipality. Be sure to factor in the cost of these permits when calculating the total cost of your renovations.
By following these steps, you can get a good idea of the cost of your renovations and make sure you are not overpaying for a property or making a good deal bad.
There isn't much money spent before the property is "locked-up", and I assume you mean before the Purchase and Sales Agreement (PSA) is signed and being under contract.
You will incur travel expenses if the asset isn't close to you. You will have attorney costs to draft the PSA.
And if the deal falls through, Yes these costs are wasted.
I rely heavily on contractors for rehab costs. Get a few opinions and only work with extremely reputable GCs. Some items that are missed is the vacancy cost incurred while you're renovating or waiting on permits. After you lock up the property you can do your in depth due diligence. If you decide to walk from the deal usually you'll be out a few thousand in attorney fees and any inspections you ordered.
