House Flipping - Preliminary Analysis - Rehab Cost
Hello BP!
I am new to real estate investing and working towards my first deal. I have a question about the preliminary analysis on house flipping. I am going through wholesale lists and reviewing comps for the properties in my price range. So I have the purchase price and the ARV. The wild card that I am missing is a preliminary cost for rehabbing the property to get to my ARV and seeing if the property is worth taking a look at to firm up the rehab numbers.
I am thinking of possibly adding a certain cost per square foot or even a certain percentage of the differential between the purchase price and the ARV but I don't have a clue where to start. Any suggestions are appreciated!
Do you get photos of the houses, or no? If not, then there is zero way to get an idea. Pictures don't even give you a great representation, however it is how I base my initial review off. I do a baseline rehab cost on the photos alone. If it lands me ballpark into a deal, I schedule to see the place. Without photos, I wouldn't even know where to start to estimate a rehab cost.
@Jonathan Batson As with everything, depends on your market. Without pictures it's basically a crapshoot so you can start with 60-65 cents on the dollar and visit those properties. If they still don't pencil then you'll have to change your criteria accordingly. You probably won't find any at that range, so you'll have to start with what you can find.
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Developer
- REIkit.com
Pictures it is, thanks guys.
@Jonathan Batson, First question to answer yours is; Have you purchased the best 2 books for a new investor to learn about purchasing and rehabbing homes is from @J Scott, The Book on Flipping Houses and The Book on Estimating Rehab Cost" . I love these two books and have probably sold 25 copies of each for J Scott. Read those two books to learn where to gain the information on costs. Ask some people in the business at a REI meetup group who you can get with to go with you to do walk thru and ballpark these repairs. If your deal goes through, he can do a more detailed evaluation during your inspection period. Look and Listen & Learn. Finally, get the big box stores like Lowes, The Home Depot apps, whatever is in your area and look up costs of supplies. You will gain a knowledge to do your own walk through for the initial cost to rehab. And last but not least, When you receive your first scope of work rehab cost, double it, if the deal works you will be okay. This is until you can walk through a home and estimate the costs in your head and be correct. Best of Luck to You, looking forward to seeing your success.
@Tom Keith, Thank you sir. I will read the book right after I finish the book on rental property investing by Brandon Turner. I appreciate the advice and support!
If you are a newer investor and can't estimate rehab costs on your own - you really need to get a contractor involved. You have got to get accurate costs. The rehab number may be the most important, because if you are under financed from the beginning you could end up losing your shirt. Many contractors are going to give you low numbers. You will likely get low numbers from the seller as well. You need realistic costs and then you still need 10-15% in reserve to handle any other problems.
You may even have to pay a contractor to assist you. In the end, put everything in your contract for the work.
I invest myself and I also work with investors all the time - if there is one thing I know it's that you can't buy too high and then use the contractor or the rehab costs to make your deal work. If you squeeze too hard on these you can get all kinds of residual issues. Even pinching the contractor will come back to bite you.
I would be more concerned with finding someone to assist in estimating rehab costs than I would be with the other numbers on this deal. When you find that person or persons, then refocus on this particular deal.
Thanks for the good advise @Ritch Bonisa. It is appreciated!
@Jonathan Batson, 1. Don't trust wholesalers ARV's, you have to find your own! Easiest method - look for sales (not list) prices on same street with same BR/BA, sold in the last 6 months. That is my quick and dirty method. I will expand to the entire neighborhood if things look good, but still 6 months.
2. You HAVE to view the property to see what the numbers would be. Without eyes on it's a guessing game and one you don't want to play with real money.
I'll see if the ARV comapred to cost is in my ballpark. If so, I'll go view it, take notes and pics, and then input into HFS that calculates all my costs to see if it is viable.
As a 1st timer, after you have calculated all the expenses you think you will have, add $5-10k and then another 10%. There are so many expenses that you cannot even think of as a 1st timer.
Best of luck!
Chris
That is great @Tom Hurford, just what I needed for my preliminary analysis!
You are welcome. If you happen to come down from Kittredge to the DTC, let me know and I can show you our operation and some of the properties we have going. Be sure to spend a lot of time upfront lining up your GC/trades, they can be challenging in the mountains and many front range guys won't make the trip. It would be bad to close on your property and then be delayed because you can't find help.
Great advice @Tom Hurford, I'll send you an email and we can set up a time.
Originally posted by @Ritch Bonisa:If you are a newer investor and can't estimate rehab costs on your own - you really need to get a contractor involved. You have got to get accurate costs. The rehab number may be the most important, because if you are under financed from the beginning you could end up losing your shirt. Many contractors are going to give you low numbers. You will likely get low numbers from the seller as well. You need realistic costs and then you still need 10-15% in reserve to handle any other problems.
You may even have to pay a contractor to assist you. In the end, put everything in your contract for the work.
I invest myself and I also work with investors all the time - if there is one thing I know it's that you can't buy too high and then use the contractor or the rehab costs to make your deal work. If you squeeze too hard on these you can get all kinds of residual issues. Even pinching the contractor will come back to bite you.
I would be more concerned with finding someone to assist in estimating rehab costs than I would be with the other numbers on this deal. When you find that person or persons, then refocus on this particular deal.
I would disagree regarding finding a contractor to help you get your rehab numbers. If you want to be a rehabber and run a successful business (after all, this us a business), then you can't rely n others or in this case pay others to do this task. In flipping, there are two factors that are the most important in the numbers and that is the rehab analysis and the ARV analysis. This is your business and YOU need to know how to do it. Perhaps at some point in the future when you are experienced and looking to scale up, you can hire others for these tasks but ultimately, you need to learn them first before you start buying.
@Will Barnard, when estimating an ARV do you analyze the comparable homes using a appraiser worksheet for your particular area similar to the screenshot below?
Originally posted by @Jonathan Batson:
@Will Barnard, when estimating an ARV do you analyze the comparable homes using a appraiser worksheet for your particular area similar to the screenshot below?
Fantastic question. Yes and no. No I do not use a spreadsheet per se as you posted, however, I do analyze each comp and adjust the value just as an appraiser would based on differentials in lot size, square footage, bed and bath counts, design and layout, condition, amenities, year built, etc. I did create my own automated system that does most of this for me after I plug in the facts and I also do it by hand once I get a deal locked to double check the numbers.