What software or method are you actually trusting for first-pass rehab estimates?

Question

I am not talking about the final contractor bid. I mean the stage before you pay for a walkthrough, when photos are incomplete, access is limited, and you are just deciding whether the deal is worth chasing. Are you relying on your own spreadsheet, per-square-foot rules, contractor relationships, DealCheck / RepairPricer / PropStream, or no software at all? Where does it still break down most for you right now: local pricing, hidden scope, ARV confidence, dispo confidence, or something else?

Rick Albert · Answer

The challenge here is literally every property is different. A great example is you can put a calculation in for flooring, but stairs cost more. You would have to get so granular. This is why some flippers focus on one type of property so that they can better control their costs.

With that said, you could do a high level spreadsheet where you input basic information and add a large contingency at the end.

Jeff S. · Answer

To clarify, @Ali Kalaei, are you asking when it makes sense to pursue a flip, or how to estimate rehab costs? If you’re asking whether a flip is worth chasing, nothing beats the 70% rule-of-thumb.

This rule-of-thumb is useful for quickly screening potential deals from the bad, and it works so well so that we make loan decisions involving our own hard-earned money with it. If a deal passes, our detailed numbers, which we always run, will show an acceptable profit for the borrower and a safe loan for us.

The formula is Max Purchase Price (MPP) = 70% x ARV - Rehab Estimate. For ARVs above about $300k, we use 75%, which typically yields about 12% to 15% of ARV profit.

The issue here is the rehab estimate. Without a walk-through, we see rehabs averaging 15% to 20% of ARV since COVID (10% to 15% before). This is not a rule-of-thumb. We always track our borrowers’
numbers, and these are what we actually see on average, even though I agree that all flips are different. To be conservative, use 20%.

Sorry to be a wonk, but substituting 20% of ARV for the Rehab Estimate:
MPP = 70% x ARV - Rehab Estimate
= 70% x ARV - 20% x ARV
= 50% x ARV (or 55% x ARV if ARV > $300k)

So, without seeing the inside, pass on deals priced well above 50% to 55% of ARV. A little over is OK, a lot is not. Ask an experienced house flipper, and they’ll agree that this is challenging.  Deals get done every day, but a lot of rehabbers are losing money now, so it’s best to be conservative.

No calculator needed - you can do this in your head. Recall that this is for screening only. Don’t buy unless you can walk inside.

Your local friendly private/hard money lender will usually have a spreadsheet they’ll provide which estimates all the expenses associated with a flip that you can use to compare against the 70/75% rule-of-thumb to confirm it works.

Best of luck to you, Ali.

Peter Mckernan · Answer

I am going off today's values of materials and labor. There is a price estimator for this larger inspection company I work with and they have an IA bot due the estimates. For traditional clients I have used it and it is always off on the cost, but it is a great tool for negotiating the repairs and everything. That being said, you/your PM needs to walk the property to make the right things know for the bid and rehab costs. Of Course things due come up, but you need to have this real time by real people getting the data to get the numbers accurate. Until robots are walking the properties it is on you to get the real walk in and do the estimates.

What software or method are you actually trusting for first-pass rehab estimates?

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