Why does my quick and dirty rehab estimate not work?

25 Replies

I estimated a $20 per square foot reno on a 936 sq ft home. Isn't this supposed to include things like windows, doors, cabinets, bath, drywall etc. I thought the average for estimating was somewhere between $8-!5 dollars per square foot. Now im trying to keep costs inline and the numbers dont work unless i do all the work. i thought these figures were going to include labor costs. Whats the deal. It barely covers material if Im doing all the work myself. Whats the wrong?

This is discussed a lot around here -- you SHOULDN'T use per-square-foot pricing to determine your rehab costs.  Unless you're an expert at estimating costs, per-square-foot pricing is tremendously inaccurate.

Pricing will depend on:

- Location

- Type of house

- Level of finishes

- Time of year

- Type of contractors

- Your negotiating ability

- Lots of other stuff

If you don't take all of that into account, you can't come up with an accurate estimate.

You mention $8-15/sf -- in some places, on some types of houses, with certain level of finishes and certain contractors, I can do a full cosmetic rehab for that price.  In other areas, other types of houses, different level of finishes, and different contractors, that wouldn't even get me paint and carpet.

Spend some time reading other threads about how to estimate -- learning the methodology takes time and practice.  You can also check out the BiggerPockets book on estimating rehab costs...I wrote it, so I'm probably biased, but I think you'll find it to be tremendously helpful.

Take this for honest feedback and not kicking you while you're down -

If estimating accurately was as easy as simple (sqft * $$) you'd rarely see a contractor go out of business and investors would all fly on private jets to eat lunch in Tokyo, dinner in Paris and breakfast in New York. (Well, maybe that's just me)

Volumes of work, complicated programs, and probably millions of spreadsheets have been developed to work out estimating renovations and new construction. 

The only accurate way to determine true construction costs is careful planning followed by part-in-place estimation. 

Not being an expert in this area, it would seem to me there is a way for $/sqft to be tremendously accurate.  If you flip one house after another of the same type, in the same area, with the same contractors, with the same finishes, just calculate the $/sqft of your last rehab and there you have it.

Originally posted by Account Closed:

Not being an expert in this area, it would seem to me there is a way for $/sqft to be tremendously accurate.  If you flip one house after another of the same type, in the same area, with the same contractors, with the same finishes, just calculate the $/sqft of your last rehab and there you have it.

 Yes, if you have the project experience and cost history that suggests a certain $/sf is accurate you can use the $/sf price as a starting point...

The original poster did not have any cost history, and just blindly used a $/sf which is always a bad idea...

I always recommend performing a detailed cost estimate because no house is EXACTLY the same, especially when you are rehabbing...

Originally posted by Account Closed:

Not being an expert in this area, it would seem to me there is a way for $/sqft to be tremendously accurate.  If you flip one house after another of the same type, in the same area, with the same contractors, with the same finishes, just calculate the $/sqft of your last rehab and there you have it.

 Only in the wildest of imaginations can you expect to find the same thing/needs in two different properties of the "same type & area." Some will need only paint and carpet.  Some will have been lived in by well or poorly managed animals and some by people who live like animals.  Some will be remodeled and some will be all original.

While I think the expression, "it's not rocket science" is way overused in REI, it doesn't mean you don't have to think and be smart about how you do the business. The posters before me gave great advice that I think will help you understand that $/sqft will never be "tremendously accurate."

Use multiple methods to come up with an offer price range and take the lowest one.

1) 70% of ARV Minus Construction Costs.

2) Fixed Cost Method = ARV - Rehab Costs - Holding Costs - Closing Costs - Profit Accounting for Risk = Offer. If you use a per square foot, you need to also add a profit margin to account for the rehab risk. $5/sq foot = 12% profit, $15/sq foot = 16% profit, $25/sq foot = 20% profit, $40/sq foot = 24% profit.

These quick methods are used to make offers but you should always get a licensed and bonded contractor bid on the rehab and maybe negotiate your offer lower if you have an inspection contingency. I know that some people like to make the first offer stand on it's own. In my opinion, you make your money in real estate by being great at negotiation and we'll try to go for a 3rd and 4th negotiation from when we start. Depends on the seller through.

Please do not use square foot prices for actual budgets.  Square foot prices are only good for sanity checks at best.  As a professional cost estimator I NEVER used unit prices to go to contract.  Building a rehab budget is the same as going to contract.

I will keep this example simple.  Let's say that a 1000 sf house has the same size kitchen as a 1500 sf house.  For this example lets agree that cabinets, countertops, and appliances cost $10,000.

In your 1000 sf home that is $10/sf.  In your 1500 sf home it is $6.67/sf.

If $20/sf was derived from a 1500 sf home and you try to use that square foot price on the 1000 sf home, you have a $3300 problem.  So your $20,000 rehab budget already has a16% bust and that is just on one line item.

The smaller the house, the higher your square foot cost will be.

Thanks for all the great info. I will be more diligent in doing an actual real estimate of rehab from now on. I still plan to profit 15k if I do the work myself (estimated time frame 1.5 mths) on a 90k home. I hope everything works out.  Either way  I expect  a profit and schooling. Giving thanks in all situations. Thanks for the help.

Originally posted by @Cesar Saenz :

Thanks for all the great info. I will be more diligent in doing an actual real estimate of rehab from now on. I still plan to profit 15k if I do the work myself (estimated time frame 1.5 mths) on a 90k home. I hope everything works out.  Either way  I expect  a profit and schooling. Giving thanks in all situations. Thanks for the help.

 Hey Cesar,

One last tip...make sure that you track all of your expenses so you can start to create a cost database and cost history.

You can then use this cost history as a reference when putting together detailed estimates on your future projects.

Good luck!

@J Scott

I got your book and started going through it.  I'm looking at the Chart of Accounts.  Do you really keep track of all those cost categories?  I count 82 different rehab cost categories.  Your bookkeeper must go nuts.  Is there really any advantage to the detailed breakdown?  You're a very detailed guy, I like that.

And shouldn't all those COGS accounts be against a capital account until the flip is sold then become COGS accounts.  The Quickbooks book I have written by a cpa/atty shows all flip expenses against the property capital account until sold at which time it gets transferred to the COGS account.

The reason I ask is because I'm starting to JV with a flipper, I supply the money and he does the work and we split profits 50/50. I am keeping the books so I KNOW what 50/50 really is.

Price / sq ft on my last three rehabs has been 60, 78, and 87. Price per sq ft means very little sadly. an 1800 sq ft ranch and a 3600 sq ft colonial will have very similar roof sizes - so replacing the roof does not double in price. Both of these houses will have 1 kitchen as well - of course one may be larger, but the cost will also not double as a few more cabinets. You may increase from 2 baths to 3 baths, but again, not likely double. Stay away from using $/sq ft for estimates - it will get you into trouble.

Quick and dirty is just that - quick and dirty. It's OK to use as a very, very rough ballpark when first considering a property. But I would NEVER, EVER purchase a property with these numbers.

I might use it in a scenario like this:

You find out from a friend that he knows of someone selling his house quick and is looking for $185K. Your "quick and dirty" estimate puts an After Repaired Value of the property at $200K. Your "quick and dirty" estimate of repairs is approximately $15,000, because it is just "paint and carpet". You know you can easily be underestimating by $20,000 or more on the ARV and overestimating your repair estimates by $5,000 but would it even matter? You know, even if those better numbers were accurate that you'd still need to be at around $150K purchase price just to be in the ballpark. In this case you might choose to not spend anymore of your time analyzing this property. However, in the same scenario, if you think that the seller might consider accepting $120K, then you probably want to jump all over this potential deal. I would STILL do more due diligence and try to come up with better numbers but at least I know it is now very much worth my time on this property to do so.

That is the ONLY was I would consider using a "quick and dirty" approach. I can spend 2 minutes coming up with a QaD value and easily analyze 30 properties an hour. Or I can spend 30 minutes doing all necessary comps and repair estimates for every property I look at only to find that we are nowhere close. I will gladly spend 30 minutes or more only when I think I've got something to work with. There's a lot of "junk" out there. Your time is important and you need to sift out that junk as quickly as you can.

Originally posted by @Cesar Saenz :

Thanks for all the great info. I will be more diligent in doing an actual real estimate of rehab from now on. I still plan to profit 15k if I do the work myself (estimated time frame 1.5 mths) on a 90k home. I hope everything works out.  Either way  I expect  a profit and schooling. Giving thanks in all situations. Thanks for the help.

Even though you didn't estimate your numbers right, look on the bright side, you're still projected to make a profit. That's big! Usually, when somebody says they didn't get their numbers right, they lose big.

Much success to you!

Originally posted by Account Closed:

@J Scott

I got your book and started going through it.  I'm looking at the Chart of Accounts.  Do you really keep track of all those cost categories?  I count 82 different rehab cost categories.  Your bookkeeper must go nuts.  Is there really any advantage to the detailed breakdown?  You're a very detailed guy, I like that.


I'm tremendously quantitative and I'm a big fan of knowing my costs/numbers backwards and forwards.  So, I track costs as detailed as possible.  

As for time, I do my own books, and tracking categorizing LABOR:CARPENTRY:TRIM for a transaction takes only a fraction of a second longer than just tracking LABOR for that transaction.  If I write three checks a day, that's an extra 3 seconds to track in more detail -- well worth it for me...  :-)

As for putting my costs directly to COGS, this works because I track projects by Class, and my accountant itemizes the costs by Class.  All COGS associated with a particular Class will necessarily either be capitalized (house not sold) or realized COGS (house is sold).  

For most other businesses that maintain inventory (for example, I have a product development business as well), having a separate Inventory Asset account is a must...but by using classes, you can avoid it for simplicity with houses IF you purchase materials for use in a particular house (you don't hold it in inventory for later use).  Which is what I typically do.

Originally posted by @Account Closed :

Not being an expert in this area, it would seem to me there is a way for $/sqft to be tremendously accurate.  If you flip one house after another of the same type, in the same area, with the same contractors, with the same finishes, just calculate the $/sqft of your last rehab and there you have it.

So what about if you have 3 slabs of granite, and the other 5 slabs of granite, what about if one house, you need to replace all cabinets and the other just paint over them, what about you need to demo a fireplace on one, and the other just put stone coverings, what about if the other needs a full roof repair and the other is only a power wash? Tremendously accurate? Really?

I use classes as well to keep track per project based items, pretty handy, spits out profitability per project, and I know exactly how much my overhead is.

Never use square foot numbers.  Break everything down into its parts.  We always use the CSI Divisions to break our estimates down which is standard practice for the industry (Google CSI format if you don't know what it is).  This will help you break down the work into its respective cost codes. 

Every project is different.  Different location, different scope of work, different economy setting, different subcontractors....EVERYTHING is different.  

Break the project down and assign scheduled values to each activity.  

Originally posted by @J Scott:
Originally posted by @David C.:

@J Scott

I got your book and started going through it.  I'm looking at the Chart of Accounts.  Do you really keep track of all those cost categories?  I count 82 different rehab cost categories.  Your bookkeeper must go nuts.  Is there really any advantage to the detailed breakdown?  You're a very detailed guy, I like that.

I'm tremendously quantitative and I'm a big fan of knowing my costs/numbers backwards and forwards.  So, I track costs as detailed as possible.  

As for time, I do my own books, and tracking categorizing LABOR:CARPENTRY:TRIM for a transaction takes only a fraction of a second longer than just tracking LABOR for that transaction.  If I write three checks a day, that's an extra 3 seconds to track in more detail -- well worth it for me...  :-)

As for putting my costs directly to COGS, this works because I track projects by Class, and my accountant itemizes the costs by Class.  All COGS associated with a particular Class will necessarily either be capitalized (house not sold) or realized COGS (house is sold).  

For most other businesses that maintain inventory (for example, I have a product development business as well), having a separate Inventory Asset account is a must...but by using classes, you can avoid it for simplicity with houses IF you purchase materials for use in a particular house (you don't hold it in inventory for later use).  Which is what I typically do.

 So, if you have one receipt that spreads across several accounts, you break down the receipt total into different accounts?  e.g. Where I'm at we get a Dept of Water and Power (DWP) bill, you would dig into the bill and break the total down to water, power and trash?  Or a a contractors bill down into paint, trim and labor?

With regard to COGS, I guess your accountant "knows" to not expense rehab expenses unless the house is sold even though it shows on the P&L as an expense for the year?

Originally posted by Account Closed:

So, if you have one receipt that spreads across several accounts, you break down the receipt total into different accounts?  e.g. Where I'm at we get a Dept of Water and Power (DWP) bill, you would dig into the bill and break the total down to water, power and trash?  Or a a contractors bill down into paint, trim and labor?

With regard to COGS, I guess your accountant "knows" to not expense rehab expenses unless the house is sold even though it shows on the P&L as an expense for the year?

If I have one receipt that covers multiple houses, I'll break it up by Class -- assigning the correct amount to the correct Class (house).

If an invoice covers multiple trades, I'll break it up as much as reasonably possible, though I try not to go crazy (if a painter gives me a bid for two coats of paint, I won't break it up into two line items :).  But, if I use a GC, I'll get a line-item bid, and I'll assign the costs to separate COGS accounts as the line-items suggest.

I'm not as detailed now as I was before, as I know my costs pretty well now, and the extra data never really gets looked at.  But, when I was starting it, it was great to be able to see how much I spent on each line-item, even if I was using the same contractor for multiple different types of jobs.  This helped me really nail down my labor costs early on.

And yes, with respect to the accounting, my accountant has a list of all the houses we've done that year, and which are SOLD and which are NOT SOLD.  Those that are sold, all COGS get expensed and all those that are NOT SOLD, the COGS are moved to WIP on 12/31.

Again, not technically the way you should do things (and not the way I do it for my product business), but it makes things a little simpler and with the number of "products" being sold each year only in the dozens, it doesn't really add any work for the accountant.  In fact, it was his recommendation when I started, as I was new to QuickBooks and he thought it would be easier to manage the accounting this way (it was).

@Cesar Saenz I use quick estimates in my initial filter of properties to determine whether a property warrants additional attention. It's sort of like an initial filter. If you're doing a quick and dirty estimate, you should also adjust based on the condition. Attach a higher multiplier for houses that need more work. You also have to adjust for the type of house you're doing. There is a definite difference between a luxury house and a place you're going to turn into a rental. If you're wholesaling/flipping a house, you don't need an exact estimate. If you're going to be rehabbing the house, you should definitely get a contractor's estimate and in many cases a couple of them just in case. 

Based on your current situation, you should figure out whether or not you want to do all the work yourself or find someone else to do it, take a loss and move forward. In essence you need to figure out if its worth to spend more of your time on this place or find another deal to make it up on. Best of luck. 

our company does 6 to 8 estimates a day and base on what you are doing there is no SQ price are a one all # that fits, when we do cosmetic job we can do 12-16Sf and that works but when you get more in detail are over cosmetic its best to do a line by line estimate will give you a better bid and more accurate then add 10% to that line by line you should be fine.

Since my professional career is in contracting I have a good grasp on how most contractors generally estimate and it is an art and each trade is different. Also if you are in it for the long haul there are some good estimating software options out there that are reasonable ($200) if you have the time they are a great learning tool. Just don't get caught up in every detail or it can be overwhelming. Painters for example will take the sq. footage of wall space : example 10x10 room will have 40 Linear feet of wall by 8' height this is 320 sq ft. of painting area. If it takes 1 coat primer and 2 coats of paint they will have painted 960 sq ft of wall. For example Glidden paint says you can get 400 sq ft. Per gallon. 1 primer @ $20 + 2 paint @ 25 + Misc tape etc $15 = $85 and labor is usually by how many hours they think the guy will be there and if they are sending an employee they want to cover his 8 hours for the day. Let's say labor rate is $35 you are at $280 for labor + $85 in materials you could easily at $365 if it's just one room and obviously there are other variables but this is an estimate. If you have multiple rooms and are using the same paint color and go with a single coat there are some big savings. The employee can prime multiple rooms then come back and paint where he started the primer. Most contractors look at things like this and use it to determine how many days his guys will be there. Most do it by days because it's not efficient to be going to multiple projects a day and if there isn't a full days work the still estimate it in 8 hour increments. The big picture is if you think like a contractor who will be bidding your work your estimate will be closer to theirs.

If you are rehabbing a property and entering the money spend as COGS your financials are all wrong. Really - are you satisfied with your Profit & Loss - seeing the number in RED.

Taking that report to your accountant, bank for loan - any place is going to be inaccurate even the IRS.

Did you know IRS can demand to see your accounting software?

Gita Faust