Gut Rehab Costs
CA · Member since 2008 · 25 posts · 3 votes
Gut Rehab Costs
Most Popular Reply
Investor · San Diego, CA · Member since 2008 · 62 posts · 32 votes
18yPS, my last post was in thousands. If you want to see what you can do for $50/ s.f. check my site and look for "the abandonded house" Complete gut down to the studs with a mid/high end finish out including all new mechanicals, roof, windows, exterior stucco and landscape. Good luck!
61 Replies
Diane,
Wow, I'm not quite sure where that last post came from?
First, when I was talking about some contracting companies looking for huge margins, I wasn't talking about your company. I don't know you, and I don't know your company. I'm not sure why you got so defensive about that comment, but the truth is, there are many contracting companies (not so much anymore) that work on big margins and lower volume.
Next, you seem to be implying that the "business" you're operating is somehow different than the "business" others who have posted here are operating. Again, I can't speak for the others, but I like to think I'm operating a real business (I've held senior management positions at a couple of the largest companies in the world, so I certainly know what it means to run a business). Like you (and others here), all of my employees have insurance, as does the company as a whole. We all make very good money, live in very nice homes, keep a lawyer on retainer, etc. I know how to track and manage multiple income streams, expenses, my ROI, and my cash flow...it's almost as if I have a "real" business.
As for your comment about confusing "cost" and "price," because I don't have contractors as employees, my price IS my cost. I don't care how much the contractor is paying for insurance, vehicles, wages, etc...all I care about is how much he is charging me to complete a task. That price is my cost. No more, no less.
The fact that I require my contractors to carry workman's comp and general liability affects THEIR costs, but not mine. You employ contractors through your company, so you need to differentiate price from cost...most of us have the luxury of not having to do that. Certainly I have business costs over and above my contractor costs, but again, I know how to run a business (and even wasted a bunch of money on an MBA to make sure of it :).
It very much sounds like you want to bash the rest of us because we are seeing rehab costs much lower than you are, and you assume that it MUST be because we don't operate our businesses correctly.Instead of assuming that the issue is with how we run our businesses or treat our employees, perhaps you should take a more introspective view of your own company and costs structures.
Sorry if that was a little harsh, but I felt your post was a bit too preachy and "holier-than-thou" in attitude...if I misunderstood your intent, I apologize...Mr Scott, I like your style - anyone can do a kitchen for $50,000 but for $6500 - that's an accomplishment. My kitchens usually run $8000 including granite. Granite over laminate is a huge selling point - I use a company called "Nature Stone" they install UBA TUBA for $25-28 per foot - there maybe a franchise in your area.
- 17yCurt DavisBusiness MemberFlipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
I guess the real question would by why would you ever want to do a rehab this extensive? Just find another deal.
Curt Davis - KAIZEN Realty538 Reviews Keep it simple - painting and decorating is where the profit is. If you have to calculate HVAC, plumbing, electric ect... buy another house.
Of course you could tear it down - then you become a builder not a renovator - and you have to take a pay cut!
- Investor · San Diego, CA · Member since 2008 · 62 posts · 32 votes17y
Originally posted by Tim B:
Keep it simple - painting and decorating is where the profit is. If you have to calculate HVAC, plumbing, electric ect... buy another house.
Of course you could tear it down - then you become a builder not a renovator - and you have to take a pay cut!Carpet and Paint...? thats Montelongo style. We are on some Jeff Lewis level sh*t here. Good luck trying to pull down 100k on your carpet and paint rehabs, not going to happen. Those are good for newbies to get started but major renovations and adding square footage is where it's at for the pros. The houses that need hvac, plumbing, electrical are the ones that make you the money.
- Investor · San Diego, CA · Member since 2008 · 62 posts · 32 votes17y
Originally posted by Curt Davis:
I guess the real question would by why would you ever want to do a rehab this extensive?
answer: to get a huge payday.
- Architect · CAMDEN, NJ · Member since 2008 · 59 posts · 8 votes17y
Wow, I'm on the fence with this one. I see both sides of the story from Diane and Scott.
If your going to do it by the book then Diane's numbers are accurate, but I have done jobs where $25 - 50 psf was accomplished using lic & ins. contractors.
I see alot of unlicensed work going on and its really the developer's neck on the line, but im just a lonely architect who knows nothing in the construction field ;)
when wearing the developer's hat, yes i get my maximum for the cheapest price , within reason of course, but that is why i have a leg up in the developing world :)
in conclusion, i see both sides of the argument but it comes down to the bottom line and that's reality.
Originally posted by RAY BROGDEN:
If your going to do it by the book then Diane's numbers are accurate, but I have done jobs where $25 - 50 psf was accomplished using lic & ins. contractors.
Whoa...what makes you think that I'm not using licensed and insured contractors?
In fact, if you look at some of my other posts (as well as my website/blog), you'll see that I'm probably more strict on my contractor requirements than 99% of the investors out there.
For starters, I require proof of license, proof of both general liability and workmans comp insurance, W9 for all new contractors, Independent Contractor Agreements for each project, including draw schedule and Scope of Work, lien waivers, insurance indemnification agreement, and references.
In addition, I never pay contractors ahead of work done, and if I'm not 100% happy with the work they do (i.e., if I wouldn't move my family into the house myself), they never work one of my jobs again, and it gets fixed.
Also, I always consult my GC on when to pull permits, and for any major plumbing, electrical, HVAC or structural work, I will always pull permits.
Does that mean I overpay? No. Just because I *could* pay 10x as much as I do to get this from my contractors doesn't mean I need to. Plenty of high-end remodeling companies would love for you to believe that it can't get done any cheaper, but trust me, it can. And it can be accomplished "by the book" and without cutting corners.
How do I do it?
I treat my contractors well. They give me very good prices, and I never negotiate them down. I use my contractors on about 20-25 jobs a year, so they have steady work. And I recommend them to my friends, neighbors and colleagues; in fact, most of my contractors probably spend 90% of their time working for me or someone I recommended. I don't spend on a GC unless one is needed (for permits, here in Atlanta). My contractors get bonuses when I sell a house, so they have incentives to finish quickly and with high quality.
Here's an example: I had a painting company that I used and loved. The head painter decided to go out on his own with a couple of the other guys and asked if I would use him on future jobs. I told him he needed to get workman's comp for his guys and general liability insurance. He said he was saving up the $2000 to do it, and would let me know when he had it.
My next job, because I really liked this guy's work-ethic and didn't want to lose him, I wrote his insurance company a check for $2000 to get him his insurance, and gave him the job (plus got him a couple other jobs with other investors I knew). That gave him the start he needed and his business has taken off.
He will forever give me great prices on the work his company does, and I will forever recommend him to everyone I know (even though it means he's hardly ever available anymore :). It's a win/win.Sure, had things not worked out, I would have thrown away $2K getting him insurance, but instead, that $2K "good deed" has probably saved me $20K over the past year.
- Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes17y
Reading J Scotts reply, it sounds like he is acting as GC.
So he will carry errors and omissions insurance, liability, workers comp, business auto ins....he will perhaps have an office worker answering phones, and a CPA, a lawyer. Its his butt if the company/project loses money or builds the wrong project or even the right project in the wrong location.
We have remodelers in our biz peer group who will wear many hats and be paid for only one. They will conduct sales, marketing, legal, accounting, office management, etc. But only be paid to do carpentry.
Make sure for every hat you wear, you get paid. If you are painting or doing carpentry, doing project management, sales....GCing your project....you should be getting paid for all of that. Those are job costs and costs of business. If you do not carry or cost them, your profit numbers are fiction and short term.
Make sure you are making enough to cover the cost of your team, even if its still just you. Eventually when your investments grow you will actually have to pay that pro you hand your hats off to.
Cheers folks.
Diane Menke Originally posted by Diane Menke:
Reading J Scotts reply, it sounds like he is acting as GC.
While I'm not personally acting as GC, I have a full-time project manager who essentially does, though he doesn't have a GC license (so he can't pull permits).
So he will carry errors and omissions insurance, liability, workers comp, business auto ins....he will perhaps have an office worker answering phones, and a CPA, a lawyer.
Yes, that's very true. My company carries all necessary insurance, we have a CPA and attorney on retainer, we have a full-time licensed real estate agent that works for us, and we have an assistant to deal with the office stuff.
But, even if I did hire a full-service GC/construction company and was paying a lot more for rehab costs, I'd still need to have all the necessary insurance, a CPA and attorney on retainer, and would still have an assistant.
How would having a GC eliminate the need for any of that stuff?
In fact, by hiring a full-service construction company, I'm actually paying for all these things twice, both for my company and the overhead for theirs!
Not having a GC only adds risk if my company does a poor job of scheduling, a poor job of selecting contractors or a poor job managing the subs. Luckily, we're pretty good at all of those things.
Its his butt if the company/project loses money or builds the wrong project or even the right project in the wrong location.
I'm not sure how this is relevant. If I had a GC, would I suddenly no-longer be responsible if my company/project loses money or if we build the project? It's my investment company, and if I make bad investment decisions, I'm 100% to blame, not the GC or anyone else.
There is no GC in the world that would (or should!) take responsibility for my bad judgment or decisions.
Diane -
It sounds to me like you believe that there is only one right way to do this -- you hire a construction company that comes in to do the job, and you just accept the fact that you end up paying more for the management, scheduling, insurance, overhead, payroll taxes, etc that comes with hiring a full-service company.
All I'm saying is that there is another way that is just as correct. And my way can be much, much cheaper because I'm paying for most of those costs anyway with my company, so by actually hiring the subs myself, I'm avoiding having to duplicate these costs.
I agree that for someone who doesn't have the structure in place to support their investing (i.e., insurance, legal representation, construction knowledge, etc), hiring a full-service company is probably a great way to start.
But, if you're going to do this as a business, it's much, much smarter to build these elements into your company, and not pay the overhead of hiring full-service for everything you do.
Could Walmart be as profitable if they hired other companies to come in and stock their shelves, run their cash registers, etc? Of course not...they pull the core activities of their business in-house to cut down costs, and only pay third-parties for the things that are not within their core competency.
I do the same thing. And the big piece of the puzzle that is outside my core competency is the actual rehab work, which is why I hire out the sub-contractors. The hiring, scheduling, management, etc is well within my company's core competency, so I don't waste the money hiring that out.
- Architect · CAMDEN, NJ · Member since 2008 · 59 posts · 8 votes17y
Scott, i never said you were not using lic. & insured companies. I was just stating that Dianne's numbers are reasonable for our area as well as the 25-50 number with out a formal GC company representation on a project.
yes, you could be walmart and diane could be target. :)
Originally posted by RAY BROGDEN:
Scott, i never said you were not using lic. & insured companies.
Nope, you didn't...
But Diane certainly implied it multiple times...I was responding to her posts, not yours... :)
Diane claimed that in her area the typical cost for the type of remodel Tom and I are doing is $70-80/sq ft (see her post above). Not only do I think this is about double what you need to pay (Walmart vs. Neiman Marcus, not Target), but also if you're paying those prices in THIS MARKET, you're really going to go broke in a good market when contractors are charging higher rates again.
I have no problem with people paying those prices (I don't really care, in fact, I prefer my competition to over-pay), but I thought it was important that the OP understood what he could be getting if he shopped around...and that it didn't require lowering your standards.
- Real Estate Investor · dc, Washington D.C. · Member since 2008 · 392 posts · 89 votes17y
Originally posted by J Scott:
While I'm not personally acting as GC, I have a full-time project manager who essentially does, though he doesn't have a GC license (so he can't pull permits).Yes, that's very true. My company carries all necessary insurance, we have a CPA and attorney on retainer, we have a full-time licensed real estate agent that works for us, and we have an assistant to deal with the office stuff.
Although I agree with most of what you wrote, I'm curious why you outsourced most of the rehab work yet didn't also outsource the rehab project management. After all, it appears that your core competencies are in investing and managing the overall process. Am I missing something? Hey Dory -
The first employee I hired was brought on to do two things:
1) Be our in-house mortgage specialist. He used to run a mortgage company and works on referral with a big broker in the area, so we can funnel all our buyers through this broker and have full control over the financing end of the deals (plus get a kickback from the broker in the form of a referral fee);
2) Perform general tasks, such as helping with marketing, finding contractors, paperwork, etc.
Turns out he has quite a knack for (and interest in) Project Management, and wanted to PM our first couple projects where we didn't use a GC.
He did a fantastic job, and now runs that part of the business (all the rehab). He works on salary + commission and is much cheaper than a GC, and as long as I'm paying him for full-time work, I'd rather he manage the projects than just be an errand boy.
This wasn't the original plan, but has evolved into something that works very well for the business -- and saves us money.
- Contractor · Philadelphia, PA · Member since 2008 · 183 posts · 17 votes17y
Scott,
I never meant to suggest you were doing anything illegal in your business model. I'm really sorry if that came accross.
If you hire a GC or any sub, the price is the price. They make a mistake they take the hit not you. So its a nice way to make scheduling problems their problem. In fact you can attach a deadline to the contract after which you can collect damages.
In our area we DO have builders, developers and remodelers who DO break the law in hiring their practices. They will skip permits and build all kinds of things that are not to code or are even very dangerous.
I have read dozens of BP posters who call themselves investors but who really only get paid at sale of property for their investment dollars. They don't get paid to do the work they do, or for the materials they buy for that project or other job costs they encounter.
Seems to me Scott that you do have a construction wing to your current investment business. I don't know your volume. Doesn't matter really. But you might want to reach out to local remodeler professional networks like NARI or Remodelers Advantage to see about what their standard accounting and business models are.
In this way you can run your remodel company as a separate entity from the realty firm or other businesses you have going on. I know of 2 investors who did this and made huge improvements on their earnings afterwards.
Might be similar for the realty end of your biz? A biz peer network? I don't know anything about this end.
All the best to you. You certainly are wearing many hats.
Diane Menke
Originally posted by Diane Menke:
If you hire a GC or any sub, the price is the price. They make a mistake they take the hit not you. So its a nice way to make scheduling problems their problem. In fact you can attach a deadline to the contract after which you can collect damages.
I guess I just don't see it that way. If we miss a deadline or go over budget, I *DO* take the hit. Missing a deadline on one house can impact cashflow, can impact the ability to move contractors to another job, can impact our marketing plan, can impact our staging side of the business, etc.
While a GC may want to move onto the next job, and there may be penalties for missing a deadline, ultimately my business suffers more than the GC does if he screws up, and a financial penalty just doesn't make up for all the ramifications of missed deadlines.
It boils down to the fact that nobody cares about my business like I do or my employees do, so the things that are most important to the success of my business and that are within our core competencies (scheduling, budgeting, etc) are kept in-house. Other things can be outsourced where appropriate.
I have read dozens of BP posters who call themselves investors but who really only get paid at sale of property for their investment dollars. They don't get paid to do the work they do, or for the materials they buy for that project or other job costs they encounter.
I'd love to hear more about this...
I don't get paid until a house is resold, regardless of how I structure my business. Sure, we own a separate business entity for the Realty part of our business and a separate business entity for the Staging side of the business, but regardless of how money flows from one business entity to another, at the end of the day, money is only made when a house is sold.
If my investment business pays my wife's staging business to stage a house, if the staging business makes a profit off this, it's just an accounting trick. The income statements of the two businesses will net out regardless of how money flows (unless there are specific tax advantages, but I don't think that's what you're talking about).
Can you explain to me what it means to "get paid to do the work they do, or for the materials they buy for that project or other job costs they encounter?"
Moving money between business entities is a great way to track the success of various parts of the business, but unless there are tax advantages to it, I'm just not sure how it generates any additional income.
But, I would love to hear more!
Seems to me Scott that you do have a construction wing to your current investment business. I don't know your volume. Doesn't matter really. But you might want to reach out to local remodeler professional networks like NARI or Remodelers Advantage to see about what their standard accounting and business models are.
We'll do about 25 houses this year, so our volume is about 2 a month.
In this way you can run your remodel company as a separate entity from the realty firm or other businesses you have going on. I know of 2 investors who did this and made huge improvements on their earnings afterwards.
Again, it's not clear how any additional profit can be generated just by creating multiple business entities...but please, please explain...
All the best to you. You certainly are wearing many hats.
Actually, no, I'm not. That's the key to my business. Delegation to employees of the things that are core to our business and oursourcing of everything else.
The only two hats I wear are "Property Acquisitions" and "Employee Management". I am responsible for finding projects, analyzing them, and then completing the acquisition. I'm also responsible for hiring employees and managing them. I spend about 30 hours/week on all parts of our real estate businesses combined. And my goal is to be down to about 10 hours a week by the end of the year, but still generating the same level of income (we have a baby on the way).
My project manager is responsible for everything that happens between the time I close on the purchase the time that the rehab is complete.
Then my wife is responsible for all design decisions, staging, marketing, and selling.
We have an assistant who handles my wife's paperwork (my wife is a real estate agent), making/receiving phone calls, etc.
Then we outsource all the accounting and legal work.
Many people want to wear all the hats in their business, and then find that certain things aren't getting done well (they're not good at everything) or they're burning themselves out (doing too much and working too many hours).
My model is to hire people who have the right skills to do the jobs that we need done, and then scale the business without me being a key employee. As long as I can hire well, and as long as I can create scalable, repeatable systems and processes, I should be able to build a sustainable business that barely even needs me.Then I go on vacation for the rest of my life... :)
- Real Estate Investor · dc, Washington D.C. · Member since 2008 · 392 posts · 89 votes17y
OK, that sounds more like it! :)
Originally posted by J Scott:
Originally posted by Diane Menke:
In this way you can run your remodel company as a separate entity from the realty firm or other businesses you have going on. I know of 2 investors who did this and made huge improvements on their earnings afterwards.
Again, it's not clear how any additional profit can be generated just by creating multiple business entities...but please, please explain...
Diane,I'm still looking forward to your response on this! I'm really very curious...
Thanks!
- Residential Real Estate Broker · Bronx, NY · Member since 2008 · 86 posts · 5 votes17y
What would be the average cost in rehabbing a gutted house in Philadelphia?
- Real Estate Agent · Tampa, FL · Member since 2009 · 456 posts · 123 votes17y
I'm confused what is the difference between "general contractors" and the kind that you guys are using?
Originally posted by Corey Demuth:
I'm confused what is the difference between "general contractors" and the kind that you guys are using?Hey Corey -
Read this:http://www.123flip.com/education/the-3-types-of-contractors
Short submission:
Say -- you can purchase a Multi Family house with 13 units and 9,250 sqf. for $105k.
Say -- the after repair value determined by appraiser is $320k.
Say -- this house needs a complete interior rehab, most of the units are stripped to the studs, need all new plumbing and electric.
If I took $50/sqf. I need $462k for the rehab, this is impossible.Any concepts?
- Real Estate Investor · Vancouver, British Columbia · Member since 2009 · 44 posts · 11 votes17y
Uwe,
you say it is impossible...but look at the cost per sqft to build new...anywhere from 75-150$ / sqft depending on location. If you strip it down to the studs a large percentage of new build cost is incurred. $35-$45 /sqft is reasonable for complete gutting depending on finish level.
Originally posted by Uwe Siegert:
Short submission:
Say -- you can purchase a Multi Family house with 13 units and 9,250 sqf. for $105k.
Say -- the after repair value determined by appraiser is $320k.
Say -- this house needs a complete interior rehab, most of the units are stripped to the studs, need all new plumbing and electric.
If I took $50/sqf. I need $462k for the rehab, this is impossible.
Any concepts?
Here are some numbers to chew on...Let's say you wanted to do this ultra-cheap -- low-end everything. Depending on your location, you would probably be looking at the following for 10,000sf and 13 units:
- Sheetrock, Tape, Mud: $25K
- Paint on Fresh Sheetrock: $25K
- Cabinets/Countertops: $25K
- New Plumbing: $25K
- New HVAC: $25K
- Appliances: $25K
- Bathroom Tubs/Vanities/Mirrors/Toilets: $25K
- New Electrical: $20K
- Cheap Flooring (Carpet + Vinyl): $15K
- Exterior/Interior Doors: $5K
- Windows: $5K
- Electrical Fixtures: $5K
- Plumbing Fixtures: $5K
- Water Heating: $5K
- Trim: Door Knobs, Outlets, Switches, etc: $5K
- Permits, Dumpsters: $5KThen, add on the 10-20% overhead of having a GC manage it all, and you can see that it's easily on the order of $275K, or about $27/sf.
This is for low-end interior gut rehab, and doesn't include exterior rehab, and doesn't include any of the higher- level of finishings you would want to use in a house that you would be retailing.
Add those things in, and it's easily $30-40/sf, which is the number that I generally use in my area.
@J and G :):
Thanks for your response, now I have a problem, why is the ARV of the property lower then the investment? No one lend me $462k for a rehab (if $50/sqf), when the house has a lower value.
What is wrong here? I need a new appraisal (constructive to the rreal rehab costs). Do I have this right?
The property is in Ohio.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.