New Flipper in Philly: How do you handle Rehab Estimates before the offer?

Question

Hi BiggerPockets Community,

I am about to start a rehabbing and flipping business in Philadelphia and looking for some procedural advice.

A bit about us:
My partner and I are not new to real estate, but we are new to flipping. I hold a Real Estate license in FL (currently obtaining my PA license) with 10+ years of experience in leasing and property management. My partner is an experienced investor who has some property renovation experience. We have our financing lined up and a proforma ready to go.

Where I am stuck:
I am analyzing neighborhoods and running numbers, but I am hitting a wall regarding Renovation Estimation vs. Offer Submission.

My specific questions for experienced flippers:

• The Process: Do you rely on your own "napkin math" to estimate repairs during the initial showing, submit the offer, and then bring in contractors for hard quotes during the inspection period?
• Contractors: At what stage do you involve your GC? I don't want to burn bridges by asking them to walk properties I don't have under contract yet.
• Accuracy: How did you bridge the gap between "guesstimating" numbers and getting actual bids when you first started?

I feel confident in the ARV analysis, but the rehab cost estimation prior to an accepted offer is my current bottleneck.

Any advice on your workflow would be greatly appreciated!

Drew Sygit · Answer

@Diana Palavra just about any new business will have startup costs.

Your's should include learning about local pricing.

So, suggest you offer to pay 3-5 contractors to walk a property with you (take VIDEOS!) and give you DETAILED Rehab bids, preferrably with a line item amount for each tasks and labor & materials broken out separately.

Pick a property that goes a little beyond what your target rehab is, so you learn a bit more.

In addition to your Scope Of Work (SOW), ask each contractor for their input on what they see needs to be done. Guarantee at least one of them will see something you missed!

Then, you can use their bids to create a thorough SOW with each bid amount in a spreadsheet.

This should give you a decent idea of what tasks will cost - which you can start using to screen potential properties.

Once you have a property under contract, you'll still want to get a formal inspection and THEN have at least 2 of the contractors go through the property with you (take VIDEOS!).
- If your numbers are off or you missed something, you will have a bid to support any offer adjustment - or walk away from the purchase.

Over time, as you get more experience, your pre-evaluations will get better.

You may also want to Google tasks to find out how many man-hours they take. If contractors will share their target hourly rates with you, this will help you improve your own estimates.

NOTE: the videos will come in handy to hold contractors ACCOUNTABLE! Many times we've had disagreements with contractors on how much something will cost or what specifically will be done - they always want to raise prices or claim their price didn't include something. The videos of them walking the property with us hold them accountable for what they stated.

Peter Mckernan · Answer

My specific questions for experienced flippers:

• The Process: Do you rely on your own "napkin math" to estimate repairs during the initial showing, submit the offer, and then bring in contractors for hard quotes during the inspection period?Yes, you should have a solid number you know when you make the offer by experience of running numbers in that area and with contractors. If not you have a partner that has that experience/mentor that has that experience. Typically you want to be about $2,000-$5,000 off on rehab.. In more expensive markets if you are a little more off, that is okay, as long as the numbers have a cushion in there for that change. Also, once you have a chance to get in a take a look with the GC (when you are newer) you can get a baseline of all the items needing to be repaired and rehabbed with a really great number. 
• Contractors: At what stage do you involve your GC? I don't want to burn bridges by asking them to walk properties I don't have under contract yet.This one is always asked, and above is the answer. You want to get a GC in the door when you have it under contract, or if you are paying the GC to come out and run a bid on properties to get experience on numbers then I would be paying him/her a trip fee for it. The other way to get around this is partnering with a person that really knows the true numbers on rehab costs and you can pull the GC in when you are under contract. 
• Accuracy: How did you bridge the gap between "guesstimating" numbers and getting actual bids when you first started?I worked with a guy that flipped all the time and got numbers from him and also numbers from other projects my clients were working on by licensed GCs. So I would see the numbers and the client would and then see timeframe of work etc.

Alan Asriants · Answer

The best recommendation I would give for anyone looking to flip out of state is to partner on a deal with someone that has a track record and experience. If you're looking at a early 1900's townhouse with 1200 sqft, you can likely do a full gut basic reno around 100k. Start adding more custom finshes, fancier rehabs (which is becoming more the norm for successful sales) and you're already bumping up to 150k

I have a flipper friend in the area and his rule of thumb is 250k in gap.

Meaning if you're buying for 100k, you should sell it for 350k for a full gut (new mechanicals, electrical, roof, windows, etc). This gives you enough room for rehab, holding costs, materials, commissions, trasnfer tax etc. Transfer tax in Phila is 2.3% both sides! Thats 10k for a 400k house!

Getting into rehabs that only require "just a kitchen, just some floors" can be dangerous to get into bc often times you will end up doing more work than that.

Sheryl Sitman · Answer

Feel free to reach out. I am in Philly and have a few resources that can help get you over that hump. Of course good people need to be compensated - whether its a good GC who can create a scope for you or a consultant that is themselves doing the same projects you are interested in and can provide the insights you need

Jules Aton · Answer

When I moved into another state my Realtor had a contractor come when we looked at the property for a rough estimate. In my backyard unless something unusual I’m decent at back of the napkin guesstimate when I make an offer.

Stuart Udis · Answer

Construction costs are going to be extremely localized due to labor costs, local permitting procedures and building code requirements that influence costs.  My recommendation is to begin with rentals in a new market where mistakes and the learning curve are easier to be absorbed, not in projects that only pencil as flips. Once you get comfortable with the labor costs and associated procedural steps and costs down then you can easily insert the finish specs into the equation.

If you feel strongly about going straight into re-sale strategy real estate you're better off being a capital partner to experienced developers who will give you an inside look at the process and use that time to learn the ins and outs while generating a return. Don't rely on 3rd party contractors, they aren't financially incentivized to give sound advice.

Chris Seveney · Answer

Philadelphia and northeast major cities are very challenging to do business in. I strongly recommend taking a trip to philly to learn the neighborhoods and the how things work in philly compared to florida. very different. Regarding getting GC and others involved, I have seen it both ways where some get them involved early and others later on if they are pretty good at understanding what needs to be done and what things cost. That really varies based on your expertise and experience. If you are new to fix and flip I would get them involved very early in the process.

Thanks

New Flipper in Philly: How do you handle Rehab Estimates before the offer?

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