Rehab estimating as a new wholesaler

Rehab estimating as a new wholesaler

Will BarnardPro Member
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

A new colleague of mine here on BP has asked me some questions via PM and I thought it was best to present his questions and my answers in the public forum for all to benefit from. This will also give him and others the opportunity to ask follow-up questions right here.

Question:
I am in the midst of getting my foot in the door. As it stands I stand alone in this world and am working with the very limited resources I have with my day job. I have educated myself on wholesaling strictly through BP and Google as my only mentors as I don't expect anyone to mentor me in a cutthroat industry where duplicating your efforts only breeds competition. What I have done is formed my own LLC and am working on a wide variety of marketing strategies. I have my own 800#, website (being designed), and blog for both building buyers list and marketing sellers. I've studied wholesaling as extensively as possible as well as all of the contracts I will need. So I'm pushing hard for my dreams.

My pricing knowledge on rehabbing costs is pretty non-existant though. Since my capital is very limited I know I will not be able to afford inspections initially for every house I feel might be a deal I was planning on planning on finding a good contractor who might run through the house for say $50 and quote me a price for both rental pricing and flipping pricing.

When I read your thread I noticed your upgrades were pretty fine tuned. You had an eye such as an interior decorator for what you knew would bring in the good profits. What I don't want to do is get a contractor and he quotes me a price on rehabbing with a different eye (you mentioned granite and he might just see regular countertops etc) then the average investor would see. I don't want to lose people on my buyers list because I quote a price that is very different from the price an investor such as yourself would see. Does that make sense? My question is do most contractors have your kind of eye for rehabbing a house because I want an accurate rehab cost to keep my buyers list happy.

Thank you for your time and advice.

Answer:
Building your team is an important aspect to becoming a successful RE investor. As a wholesaler, you stand at a disadvantage for using contractors because you are not keeping the home to give them the work. That being the case, you need to become an expert on analizing the costs yourself.

Here is what I would suggest: Spend many hours at Home Depot and/or Lowes to familiarize yourself with costs on typical rehab items such as flooring (carpet, tile, travertine, etc), toilets, bathroom vanities, sliding mirror doors, interior doors, baseboards, door casings, light fixtures (celing fans, etc) paint costs + paint supplies (tarps, brishes, rollers, etc), windows, sliding glass doors, kitchen cabinets and countertops, sod, trees, plants, bushes, ground cover, etc. Most of the items will also have a tag for installation costs. These costs are typically much higher than you should pay, but having the figures as a high start point will be helpfull to you. Just know you should never pay more than that and should really never pay that much for each item.
I then suggest you look right here on BP for some of us rehab pros who have posted spreadsheets about costs. These spreadsheets give average per sq. ft costs for tile installs, carpet installs, kitchen remodels, etc.
Then you should attend your local RE investment clubs and speak with other rehab investors. Some will give you valuable insight to costs, contractor contacts, etc.
Another option is to find a contractor who could be willing to take you with them to properties they are estimating rehab costs at. Use any and all of this new found knowledge and go practice. Just like anything else, practice makes perfect!
Go to many REO listings and have the listing agent show you the property. Bring your notepad, pen and tape measure.
Walk the home and identify what is in need of repairs. Typically, you will be painting both in and out, replacing flat panel doors with the new 6-panel doors, new carpet, new tile in wet areas, sometimes kitchen remodels, door casings, baseboards, etc.
Using your tape measure, get an approx. sq. ft. number for carpet area, tile area, etc. Count how many doors need replacing, ceiling fans, and closet mirror doors. Once you have an item list of repairs with approx. measurements, go back to your office and calculate costs. Many investors have cost spreadsheets which has all possible repair items on them with average costs. They plug in the areas needing repairs for the subject property and then add it all up.
I have been doing this for so long and so many times, I can walk in to a home and get a rehab budget right there on the spot and in my head because I know the costs. At some point in time after you have done this long enough, you will be able to do it too.

As to granite or no granite, contractors eye or your eye, don't worry so much about that right now. Concentrate on the basics first, then as you advance in your education/experience levels, you can fine tune with the smallest of details.

Inspections - Never pay for an inspection upfront, Here is what I do and what I have taught previous students - Evaluate your expenses on your own and base your offer on that and your analysis of the ARV, make your offer based on that. The second you get an offer accepted, you THEN bring in your contractor to give an actual written bid, hire an inspector and get the report. Only after you are under contract do you spend this money and effort with thrid parties.

As a wholesaler, you have a bit less to do in that you will not be having a contractor come out or hire an inspector. Only if you keep and rehab the home yourself. Give your wholesale buyer an itemized list of repairs you have seen in need of repair for the subject property with your price estimation. A good rehab buyer can then see your itemized list and decide from that if their cost would be higher or lower than your number. Providing this is taking your efforts a step further than most others setting you apart from the wannabies and your investor buyers will appreciate the added service. YOu also need to determine if the investment will be a buy and hold or a flip. What you fix for each will vary. On buy and holds, an investor will spend much less and just usually place the lipstick items, with a flip, they usually want to dial in the home perfect for easy and quick re-sell and at top dollar at exit.

Remember, you are not entering the RE business, you are entering the people business and it requires great service and creating great relationships. You should also build a large database of buyers and get specific criteria for each of them. You also want to verify that they have the capital to close as to not waste either of your time.

If you have any other questions feel free to ask.

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Flipper · Phoenix, AZ · Member since 2009 · 973 posts · 679 votes
15y

I've met quite a few Realtors that could use a good education in rehab costs as well. Maybe someone should write an article about it. :idea:

See this reply in the discussion

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  • Real Estate Investor · Garland, TX · Member since 2010 · 86 posts · 34 votes
    15y

    Excellent advice Will.

  • Flipper · Phoenix, AZ · Member since 2009 · 973 posts · 679 votes
    15y

    I've met quite a few Realtors that could use a good education in rehab costs as well. Maybe someone should write an article about it. :idea:

  • Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    15y

    We have a contractor on our team. He does more than just estimate rehab costs though. Since he is on our team he always gets something when we sell.

  • Homeowner · Knoxville, TN · Member since 2011 · 207 posts · 73 votes
    15y

    Awesome post Will. Thanks for the time it took to spell all that out.

  • Private Money Lender · OK · Member since 2010 · 163 posts · 32 votes
    15y

    Great post Will thanks. After reading it I went to look for one of the spreadsheets you referred to on Google. Typed in "property rehab costs spreadsheet" and right on the 1st SERP of Google was a BP thread by J Scott where he provides one. Here's the BP thread url http://www.biggerpockets.com/forums/67/topics/51045-basic-rehab-analysis-spreadsheet

  • IN · Member since 2010 · 16 posts · 4 votes
    15y

    Here is a webinar replay that I found really helpful in estimating rehab costs quickly and easily.

    http://www.onlinemeetingnow.com/replay/?id=82dbd16f20

  • Private Money Lender · OK · Member since 2010 · 163 posts · 32 votes
    15y

    I got a question. You stated in your answer to go through REO's with the realtors and practice assessing the damages to get better handles as to what the rehabbing cost will be. Without bringing an actual contractor or inspector with me, how will I know if what I see are actually problems that need replacing or touch ups? How will I know if I found everything or missed very important segments that are primary areas needing rehabs? Coming from very little to no experience with carpentry or any acual rehabbing how do you get better if you could be missing half the things that are wrong.

    I know you also stated to see if you could find a contractor who would take you through with him on his jobs, but is there a way to make the REO visits work without anyone to point out the areas you missed or may be in error? Thanks!

  • Will BarnardPro Member
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    OP
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Great questions Michael!

    To the first, it is a lot more simple than you think. Look at the walls and see if it will need drywall repairs, texture coating or just new paint. Same with exterior, if the stucco is peeled off in places, you can blend in areas, but often times, it is best to re-stucco the entire section to avoid blending problems.
    Look at the flooring, usually, you will need to replace carpet, for teh tile on floors, if teh grout looks good to your eye and the tile is not butt ugly, and if it is not cracked at all, you can keep it, otherwise, count on replacing it. Check the balance of the finish work such as modlings and doors and see if they need replacements or not. Same with windows. If you have the 1950's wood framed slide up windows and a few are cracked or in bad shape, count on replacing all the windows in the home. Kitchen, usually, I do brand new stainless steel appliances, almost always. For the balance, if teh cabinets look good to you and you would be happy using them as if it were YOUR home, then surely you could keep them. If the counter top sucks or is formica, count on putting in granite.
    Landscaping is easy. If it has a sprikler system, you are good. Just calculate the sq. footage of grass area for your sod estimate and add in some flowers, plants and trees to color it up. Add in 10% for contingencies.

    It is entirely possible for you or even me to miss things like major plumbing problems hidden behind walls or under homes. It is also possible to think teh roof is good when it is in need of repairs. The key is to get most of it right and have a contingency clause in yoru offer (inspection period) If you uncover some major item missed in your initial walkthrough, you can back out or re-negotiate, no harm, no foul. Also your wholesale buyers will certainly appreciate the efforts and one item missed, but caught by them will not ruin your good name.

    For the second question, perhaps you can find a contractor and form a relationship with him. Tell him you are building a rehab business and to start, your first few transactions will be wholeslaed, but upon raising some more capital, you will keep the next and give him the work. (of course you should stick to your word). With that in mind, it is possible for him to spend a few hours with you on multiple occasions to preview 4-5 homes in an area and do a quick estimate (not hard bid). This will give you that added expereince you are looking for.
    You could also find another rehab investor such as myself, but in your area and go with him/her on a few, letting them know if you can get some rehab estimation training from them, you will be searching for deals to wholesale and give them first crack at all of them.

  • Private Money Lender · OK · Member since 2010 · 163 posts · 32 votes
    15y

    That was actually something I had originally planned before seeing the necessity of having to learn to assess and value it on my own. When bringing in a contractor I was gonna get a bid for fixing up to renting standards and fixing up to sell and then shop him in with the whole deal letting the end buyers know if they were interested the particular contractor was already familiar with the property and was ready to go if they were interested in him doing the work.

    Seemed like a good way to learn more and attempt to give back at the same time should the end buyer decide they would use their services. All great feedback thank you.

    So basically when assessing you should start out by looking for the sore thumbs and the little things will come over time?

  • Will BarnardPro Member
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    OP
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y
    Originally posted by ljace79:
    So basically when assessing you should start out by looking for the sore thumbs and the little things will come over time?
    Basically yes. The little things are the things that you will learn first and quickly - paint, flooring, windows, etc, the big things like roofs, AC/furnace, plumbing, electrical will come with time and experience.
  • Dallas, TX · Member since 2010 · 56 posts · 2 votes
    15y

    Just thought I'd toss in what I have learned so far with regards to rehab costs. I was in the same situation for quite some time, unable to come up with estimates, and trying to form strategic partnerships with general contractors who would give me a written estimate that they would honor if my buyer hired them.

    Anyways, about a month ago, another wholesaler in my local area told me his rule of thumb - a full rehab, excluding foundation repair (which is common in Texas), should cost at or below $15 per square foot with a cost competitive general contractor, and closer to $17-$19 per square foot with a more expensive GC.

    I took this rule of thumb and ran with it, comparing it to all of the emails from other wholesalers that I receive, and it holds true, at least in DFW. All of the wholesale deals that come across my email are about $12 - $14 per square foot.

    So I'm using $15 per square foot and moving forward with that - all of your cash buyers should be coming up with their own estimates either through their own experience or with their GC anyways. If I overshoot the repairs, then I should just end up with a more satisfied buyer because he has an extra few thousand in profit.

    If the house looks like it needs only half of a rehab, I might use $10 - $12 per square foot. Either way, I am not taking the time to itemize the rehab costs, I just want a quick and dirty so that I can market the property. I want to spend that time getting more houses under contract!!!

  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y
    Originally posted by Travis Hughes:
    Anyways, about a month ago, another wholesaler in my local area told me his rule of thumb - a full rehab, excluding foundation repair (which is common in Texas), should cost at or below $15 per square foot with a cost competitive general contractor, and closer to $17-$19 per square foot with a more expensive GC.

    In my experience, that is *extremely* low for a full rehab...are you sure you don't mean an interior *cosmetic* rehab?

    When you add in things like rewiring, replumbing, roof replacement, HVAC replacement, siding replacement, replacing all windows/doors, replacing cabinets, replacing tubs/showers, etc, things tend to get much more expensive, even in lower-cost rehabs and areas where labor is cheap.

    Personally, I'd use $15/sf for a full interior cosmetic rehab, but for a *full rehab* (including all the stuff listed above), my numbers are closer to $30/sf.

    That said, as a rehabber, you probably want to be much more precise than just a price per square foot...as a wholesaler, this *may* be good enough, but it's still important to know when a rehab will be $15/sf versus $20/sf...on a 2000 sf rehab, that's a difference of $10K.

  • Will BarnardPro Member
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    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    Rules of thumb are great for quick calculations, however, in the game of rehabbing and wholesaling, you need to be more precise.

    As Jason mentioned, a full rehab at $15 per sq. is not likely. On top of that, costs in DFW are different than costs in CA or FL or GA, or (you get the idea).

    Secondly, you can have two properties of equal size and location, one home with a completed kitchen and no need for anything there, then another with a full kitchen replacement needed. These two subject properties will have an entirely different cost per sq.

    Using a price per sq. average for your estimates as a rehabber or as a wholesaler could have your estimate off my tens of thousands causing your "evaluation" to be inaccurate, resulting in you not making money, losing money and/or losing credability as a wholesaler.

    Take caution in this approach. There are no shortcuts on the road to success. You must learn all the details involved and how to do them right in order to succeed. Doing so will get you on the right path quicker and more efficiently.

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