is gut rehabbing a good estimate?

39 Replies

so i was reading this http://www.biggerpockets.com/forums/67/topics/21771-gut-rehab-costs and got the definition of a gut rehab

"A major restoration project on an old house or other building, ripping out plaster walls back to the studs and rafters and replacing them along with some or all of the trim,"

on that link it said something like a gut job is about $40 a square ft.

so if i am really bad with estimating repair costs, could i just do a 1400 sq ft house and multiply it by $40? 1400*40= 56k. so that 56k would be the the estimate of the most i would be spending on repair costs?

200k (ARV) * 70%(my profit) = 140k

140k-56k (max repair cost) =84k

now obviously 56k seems like wayyyyy toooo much unless the property has completely gone to crap... but is that the most it could be?

@Account Closed  

I have no advice for you concerning the repair costs...however...

The 70% is not your profit. The remaining 30% is. The 70% rule is when your total investment (purchase price, repair costs, closing costs, and any other expenses up until the home is resold) is 70% ARV.

For example...

Purchase price = 30k

Rehab cost = 30k

Additional expenses = (we'll use 10k to keep the numbers even)

ARV = 100k

So now you take the sum of all of the expenses...

30k + 30k + 10k = 70k

70k = 70% of 100k (ARC)

So all in all, you spent 70k to acquire and and repair the home back up to it's ARV of 100k.

Once you sell the home, you make back your 70k and receive roughly 30k profit. 

I would use your example but a purchase price was not given. 

Hope it helps.

Damon 

It is very difficult to estimate rehabs by the sq-ft. This method is ROUGH at best.

56k would be a light rehab for us, we are currently doing a project with a construction budget of over 150k. We are spending over 10k in interior doors and trim, paint sheetrock and insulation are going to be another 10k, so its easy to see how this stuff can add up. You need to price out what you are actually doing, then add 10-20% (more when starting out) as a reserve for any extras that may pop up along the way.

Construction labor costs are very regionally specific, and level of renovation is also determined by the neighborhood.

Also a gut rehab is a very tough starting point but you will learn a ton from teh process.

Based on your area of the country houses may be OLD which generally means plumbing, electric, HVAC, which means sheetrock and insulation. Construction costs more than most people think.

@Steve Wilcox

i am just looking for a way to estimate repair costs. i dont know any repair costs so it is hard for me to put a house under contract or even make an offer

As @Steve Wilcox  said, there are a lot of variables. Does it even have central air in it, and would a buyer expect it there? How modern is the electrical? You might be expected to bring it up to current code in a gut rehab. Other code issues such as width of stairs and hallways can become an issue if that has to be changed. Some locations will totally grandfather even in a gut rehab, others say once you start renovating a "room" it must be brought up to code. Modern electric, accessibility, hard wired smoke and co2 detectors, plumbing, etc, etc. 

@Walt Payne

im just trying to find an easier way to estimate repair costs. i am no contractor and have no idea how prices run. i went to home depot to look at prices of things but that comes nowhere close to what it would cost for installation and everything..

so how do i figure out repair costs if i have never been in construction

@Account Closed  There are a lot of ways to answer that question. My opinion is one that is not always popular here. I feel that you basically should not be buying a rehab that exceeds your ability to estimate. Sure, even the experienced guys get bit sometimes, but they know there will be unknowns and add in a fudge factor to account for it. 

So how do you get started? Several ways. Start with a smaller project, and build complexity in a way that you can understand. Team up with someone experienced. Maybe a contractor who wants to invest. But just hiring a contractor when you don't know the scope of work is risky. If you team up with an experienced contractor and he has a vested interest he is much more likely to care about what gets done and the quality and cost. Sure, hiring versus splitting profits sounds attractive but you are asking for trouble. Find an experienced partner, or start slower.

Due to the variances in rehab costs from market to market, use local contractors to build out an estimate sheet. Build a guide that allows you to break costs down a little further. You'll probably still end up with a range of cost per sq ft, not of home but of surface. Sheetrock, paint, roofing, etc. Also bear in mind it's more expensive to replace glue down vinyl with tile, than carpet with tile. Same for replacing paneling with Sheetrock, lots more finish work at all doors and windows due to thickness of material.
There are many good short cut methods to estimating, but they don't work very well if you don't have a good understanding of actual cost beforehand.

I'll give you a way to get started. Somewhat against my better judgement, because I still think you should have taken earlier advice. If you had taken my advice to take a licensing class when I first gave it, you would have a license by now and be showing houses daily, maybe making some money, certainly making contacts and experience.

But anyway, here is the advice: Flip land.

Permit applications in Southern New Hampshire are up. People are looking to build again. As you probably realize, there is a big difference between a lot ready to build on and a chunk of raw land.

Getting raw land on some sort of owner-financed deal is not that hard. So find a $20k or so piece of raw land. Get busy with permitting (things like getting permission for the driveway cut-in from the road, perk tests, maybe septic design.) Buy a decent light-duty chainsaw (I suggest a Husquevarna 455, with a 18 inch bar). Clear a driveway and start to clear out a place for the house, on the best location on the lot (look for a slight rise, and in most towns around us, you want to be back a bit from the road.)

Cut the trees you drop into cordwood and split it. You should get about $180 a cord, cut split and delivered, for green wood right now. Or just cut it into 16" rounds and put an ad on craigslist offering it for sale to people who will pick it up. You could still get almost $100 a cord. You can probably clear enough doing that over the next couple of months to cover the payments on the owner-carry note.

By the end of the summer, if you work reasonably hard, you should have a lot worth a fair bit more than the raw land you started with. Plus experience with dealing with the town and state on permitting. Plus some credibility with local real estate types as someone who has actually done something.

I did this when I was about your age. Cleared about $8000 for a hard 9 weeks of work. But that was more than 20 years ago.

There is no easy way.

If you have no skills as a contractor, I would hire someone that is skilled and offer that person hourly work from 15-35/hour or a daily rate of 200-250 a day for 7 hours of work and a 1 hour lunch for large jobs.

Work with them on the weekends as their helper and try to learn everything you can.  If you are not there to monitor and work with them, you cannot know for sure whether they worked.

Once you are skilled enough with home repairs, you can lead the projects yourself and hire help for a lower rate if help is desired.

You will probably save tens of thousands of dollars over haggling with contractors over large jobs and make some good contacts along the way who you may trust in the future to work independently.

@Richard C.

actually i just finished my EMT testing and my firefighting testing will be done soon. i am going to be getting my real estate license over the summer most hopefully

I would say it is a good way to get a rough estimate. I would say call a few contractors and see if they will give you their price per sq ft for labor on certain items (ie. Flooring,Painting(interior/exterior), Drywall for 1500 sqft home, siding ect..) keep in mine these are all estimates also but may get you a little closer to a accurate number. You can use that to vet some of the contractors you might use also. 

J Scott wrote an excellent book on how to estimate rehabs, and it's sold on this site.  It is worth the money to read.  He wasn't a contractor either, when he started out.  I highly, highly recommend that book.

@Account Closed  

 - Not necessarily.  What if that house is in a location where that 1400 sq-ft house would typically have a $40,000 custom kitchen?  Just for the kitchen?

On the other hand, I couldn't image spending $56000 on any rehab in the target area that I work which has typical ARVs in the 70s or 80s.

Originally posted by @Derek LeBlanc:

im just trying to find an easier way to estimate repair costs. i am no contractor and have no idea how prices run. i went to home depot to look at prices of things but that comes nowhere close to what it would cost for installation and everything..

so how do i figure out repair costs if i have never been in construction

You're looking for shortcuts and there are no shortcuts when it comes to estimating (at least not at first)...

In my opinion, the best way is to break the rehab down into all the major components and then break the components down into specific tasks.  All of these specific tasks together make up your Scope of Work (SOW). 

Each line-item on your SOW will consist of some material cost and some labor cost.  For each line-item, you can get an idea of the material cost by visiting your local big box store, building supply shop, online retailer or talking to other investors.  For each line-item you can get an idea of the labor cost by talking to contractors or asking other investors who are familiar with contractor pricing in your area.

Then you add up all the labor and material costs for all the line items and you have your budget.

If you dig around, you'll find a lot of posts I've done going into more detail about this (both here and on my website).  And, after you've exhausted the free resources, if you want more, BiggerPockets has an entire book devoted to the topic (that I wrote).

If you're looking for a quick and easy answer, you're not going to find it.  If you're willing to do some study and some work, you'll find that estimating really isn't that hard once you have a framework.

@J Scott

i went to home depot a few weeks ago and got a price of everything in the store. i gotta talk to contractors now

thanks

Do you have a list of what you plan to talk to contractors about? 

In other words, do you have your framework for how to break rehabs into their major and minor components?  If you don't have that, talking to contractors isn't going to be much use.

For example, there's a big difference between asking an electrician, "How much do you charge?" and asking him, "How much do you charge to upgrade a typical service from 100 to 200 amps?  How much do you charge to replace a typical panel?  How much do you charge to run a new circuit?  How much do you charge to install a fixture?  Etc..."

It's all about the framework.  Without that, you're just flailing in the dark hoping to get some useful information...

@J Scott

no i do not have a list. i dont know what to ask. i tried googling it and this is the best i could find

http://www.houselogic.com/home-advice/contracting/five-essential-questions-ask-before-hiring-contractor/#.

1. Would you please itemize your bid?

Many contractors prefer to give you a single, bottom-line price for your project, but this puts you in the dark about what they’re charging for each aspect of the job.

For example, if the original plan calls for wainscot in your bathroom, but you decide not to install it, how much should you be credited for eliminating that work? With a single bottom-line price, you have no way to know.

If you get an itemized bid, it’ll show the costs for all of the various elements of the job, including:

  • Demolition and hauling trash
  • Framing and finish carpentry
  • Plumbing
  • Electrical work
  • HVAC
  • Tiling or other floor covering installations
  • Lighting fixtures
  • Drywall and painting

That makes it easier to compare different contractors’ prices. If you need to cut the project costs, you can easily figure your options. Plus, an itemized bid becomes valuable documentation about the scope of your project, which may eliminate disputes later.
Contractors shouldn’t give you a hard time about itemizing their bids. If they resist, it’s a red flag for sure.

is that something i would follow or do you suggest something completely different.

A lot of contractors are not going to want to waste their time going into all of the details of a project when they could be out banging out some nails and making money.  Sometimes it is hard to tell how long a project will take, so they will throw some large numbers out there and hope to get lucky.  Then when you get an estimate that you feel is within reason, the contractor will have you sign a contract and ask you for a deposit to buy materials.  So you sign a contract and give him a check for the materials.  You realize a couple weeks later that you are not going to see the guy again because he just drank through the material deposit.  This is why it's important to either hire someone reputable and pay more than you probably should, or you can work with someone very closely who is skilled enough to get the job done and is trustworthy enough not to generate work where there is actually no work that really needs to be done.

I think the short answer is simply "no", "gut rehabbing is NOT a good estimate". While it can be vital to have a worst case scenario in mind when making an offer, simply using a from the hip "full rehab" number just misses the mark.

You need to be making informed decisions with realistic numbers. You might try separating the systems to gain some control of the scope and pricing of your rehab. Imagine a top down approach. Its pretty easy to look at a roof and make a reasonable guess on useful life and potential repair costs, next look at major systems; AC/Heat, plumbing, electrical, itemize these out. Interior and exterior wall repair, paint, flooring come next, etc... remember the old joke about how you eat an elephant....its one bite at a time. By breaking these systems down you will quickly get up to speed on costs and you can find select subs to do the work while you ride supervisor over any work you can't handle yourself.

@Michael Hassell i understand the roof. its fairly easy to tell.

major systems such as ac/heat, plumbing and electrical, how do i tell if it needs updating?

paint job is fairly easy to tell.

flooring- how do i tell if it needs new flooring? how do i know which flooring to use?

can you add the etc etc.?

walls- how do i know what walls are good and what is bad? the last property i had, my partner said the walling was outdated but i forget what it was

windows- if its not vinyl make it vinyl

I hate to say it all comes down to experience...but it really does.

On major systems consider age, stroll youtube or manufacturers websites to learn how to estimate the age of an air handler or furnace. Get the first folks that estimate a roof for you to demonstrate how to gauge the life left in a composite shingle. Learn some of the big warning signs in regards to electrical (aluminim wiring or older knob and tube....not that I see much anymore but it is out there, that stuff will require replacement most likely).

You can look at a floor and tell me if its serviceable right now. Its easy to measure the square footage and get an installed quote from any number of suppliers, home depot offers this in most markets.

I don't know what your partner meant about outdated walls....and that's completely subject to my budget and intended use, but rarely would I find the average house in need of full on wall replacement (though it does happen). I'm more concerned about how much patching to do, water damage, anything funky that a hack re modeler has done, that sort of thing.

Again, it depends on my intent, but I wouldn't move to replace windows unless that fit within the scope of my intent. I've bought and sold houses that had perfectly serviceable wooden windows.

If I was 20 and starting out again I would find a place to learn. I did this by volunteering with habitat for humanity. In my area that was a bunch of knowledgeable old guys that were glad to have my then strong back. I learned the basics of electrical installation, drywall, and framing that way. I only went when I had the time, and I met some useful contacts.

LOL, I already suggested that Derek work on a habitat house. He responded by insulting me. I don't think that is the sort of magic ju-ju he is looking for.

Originally posted by @Richard C. :
LOL, I already suggested that Derek work on a habitat house. He responded by insulting me. I don't think that is the sort of magic ju-ju he is looking for.

What's the old advertising adage? You have to be exposed to a new idea 7 times before it clicks? I was 20 once, found a few good mentors too, I'm sure at times I was a PITA. :)

@Derek, You might do well to interview a few home inspectors. Find a reputable one that's willing to let you go with him/her and ask questions. Heck, offer to pay them to go along on some of their inspections, I think you need a local guiding hand.

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