I have a question for the experienced wholesalers out there. How does someone, with no construction background estimate the rehab cost of a house.
I know J Scott wrote a book on it, and I will likely pick that up, and I have read in another book, that making a spreadsheet (or having one available) with all of the common things found in each room is a good way to start.
So if the kitchen needs (for example):
-new tile floor
I would just measure everything, write down the materials that are already in there (i.e - granite countertops), and price it out at Home Depot or something?
As for the labor costs - how do people usually go about estimating that? I feel it could get very expensive, and/or time consuming having a bunch of different contractors come out and give quotes, or even more expensive, a GC.
Any input or methodologies on this subject that you all have employed succesffully would be so much appreciated! Thanks!
I believe that you should determine what the after value repair value is from realistic comps and work backwords. If you are a house flipper as I am you need to be aware that it is easy to get carried away but you will not recover and credit from an appraiser when you are selling it. If you are a buy and hold investor, you may find it easier to rent with all the additional upgrades but you still have to recover the money the extra improvements cost you. Economic payback period. You need to determine what needs to be done and what that will cost and what you would like to do and what that will cost. And proceed from there. You make up your budgets for the scope of work and then start getting contractor estimates and then determine how to proceed. Food for thought.
@Rich Wahl - Everyone may not agree, but here is my honest feedback. Don't start with wholesaling. That's like asking someone with no automotive background to estimate the cost to fix a car that they found abandoned on the side of the road. If you want to learn more, check out a blog that I wrote in the past - Thinking About Real Estate Investing? Skip Wholesaling
With that said, here would be my recommendations to answer your question.
- Pick up both of J Scott's books. Read the rehabbing one first, then read the estimating one. J does an extremely thorough job of detailing the rehab process and every potential aspect of a renovation.
- Create a detailed spreadsheet (maybe using J's book as reference) for every potential aspect of a renovation. Call around and get quotes on some of the major ones (ex. cost per square for a roof replacement, either tear-off or 2nd layer). Put these in your spreadsheet.
- When evaluating properties, work backwards like most rehabbers do. Determine the ARV, multiply by 70%, the subtract out all of the rehab costs. Multiply your estimated rehab costs by 20% for your fudge factor. If you really want to be great, actually have some contractors come out to the property to give you quotes.
- Now that you have a vetted deal, start marketing it.
Again, I would recommend that you not start with wholesaling if you have no experience in renovations.
While knowing the ARV is a must I feel in any situation you are going to be fixing a home, I'm referring specifically to wholesaling and the process other wholesalers use to estimate rehab costs.
What I would do to the house, likely is not going to be what the buyer would do to the house. I'm sure if there was a huge whole in the wall, we'd both agree that has to be replaced, but since I am basically pricing this out for someone else, What process have people used?
By the way, I just bought and downloaded J Scott's book, on page 11 so hopefully that will help!
Another thing... you have to be familiar with your area and the quality of houses for your ARV. If you houses demand granite an you put in corian in your estimate sheet, your estimates will be off
"What I would do to the house, likely is not going to be what the buyer would do to the house."
@Rich Wahl - This needs to basically be the same. To the point in my last post, you can't have corian on your rehab estimate if the area/ARV demands granite and your rehabber will use granite.
One nice thing about a forum is the varied points of view. If you are selling homes retail the "Buyers Agent" is attempting to provide the best house for the least amount of money. If you are attempting to wholesale the buyer needs to feel comfortable with what he/she is buying. Putting lipstick on a pig usually doesn't work to well. The quality of product you are providing, is what your reputation is built upon and sets a standard that you expect from your sub contractors as well as the quality they will provide. As rehabbers we are attempting to bring the house up to acceptable standards within realistic financial guidelines. Speech over.
Awesome thoughts in all these replies IMHO. Education is your best defense which will lead to a great offense. "Wholesaling" is a very interesting term. Before leaping read/learn and maybe mentor with a "Wholesaler" first before getting in the "Game". The people here at BP are a great source as there philosophies and methodologies seem to vary at times but have many simialrities . I am not sure there is one right or wrong answer but after a while you will start to see a pattern in many that seems to work better than others. Those are the platforms I would use and build my strengths upon to achieve my goals. "Just my opinion"
Gina, John, Tom,
I really appreciate all of your input and feedback. I do have a lot of education left before jumping in, I know enough to at least know that! I have the basic concept down of what I need to do, simply look at the comps in the direct neighborhood and see what a majority of those houses have for features. Obviously you wouldn't put a Granite counter-top in a house that has a $55k ARV in a bad area.
I was thinking of having a GC come out with me the first time and show me the ropes. I've read that they tend to cost about $350 to do a full assessment? Is that about accurate?
Also, is there such a thing as "over pricing" the rehab cost. Obviously you could do that, but I feel like the buyer, when he does his/her walk-through would be relieved that it is over-priced and think the deal is even better. This isn't something I would do on purpose, but if I had to lean towards one-side of it, I think this one is better.
Thanks guys, this is extremely helpful.
@Tom Sylvester Great feedback! Im new to the game as well so reading that kind of drove home what I had kind of came to the conclusion of already. My ultimate goal is to be a buy and hold investor for passive income in order to have a retirement I can be proud of, but the more educated I get, the more I realize I don't yet have the funds needed to start buying and holding. What do you think about starting out with flipping a few houses then buying to hold? I think if I can find a private lender that would except less than 20% down I may be able to get started sooner rather than later.
Please give me your thoughts. Also, may I send you a colleague request?
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