Remodeling Costs: Exploring Common Mistakes

One of the biggest mistakes that new house flippers make is underestimating the costs of remodeling. Failing to properly account for the costs of various renovations can eat up a flip’s entire ROI. Before you secure your house flipping funding and buy your first rehab property, make sure you’re not guilty of these common cost estimation mistakes.

• Relying on your gut rather than an estimate

You’d be amazed how often new house flippers make this mistake. They think to themselves, “We’ll need new floors in here. That should cost about…” and then they never bother to check prices or get estimates from contractors. They just assume that their estimate is close enough. Trust us: it’s not.

• Believing estimates

Another big mistake is thinking that a project that’s estimated to cost $8,432 will actually cost $8,432. Whenever you get an estimate, you need to round those figures up. $8,432 rounds up to $10,000. When a contractor gives you a price estimate, add ten to twenty percent to their figure right away. This isn’t because you think you’ll get swindled. It’s because everyone in the world of construction is an optimist, and they shouldn’t be. Rounding up will help you account for delays, unexpected price hikes, and those little costs that no one remembered to factor in.

• Failing to value your own time

If you’re planning to keep costs down by doing certain projects yourself, that’s great. But don’t forget that your time has value. Just because you’re not paying yourself to lay tile doesn’t mean there isn’t a cost. Remember to account for time spent on your flip that you don’t get to spend elsewhere and what those hours will mean to you.

• Failing to account for labor costs, insurance, and permits

Don’t forget that a lot of the renovations you do will require permits, and permits take time to get and cost money. You also need to remember to factor in any liability insurance, worker’s comp, or other types of property insurance that you’ll need to take out to cover your rehab projects. And remember that labor doesn’t come cheap.

• Running out of cash

This is a big one. If your rehab funding doesn’t include cash for renovations, you’ll need to make sure you have enough liquid cash to keep all of your renovations moving forward. Even if you’ve budgeted for all of your projects correctly, if you’re not able to pay a sudden influx of invoices all at once, your whole project could stall. Look for rehab loans that explicitly include funds for renovations to help avoid this problem.

• Expecting costs to remain the same

Just because you were able to paint this flip for $700, don’t expect the cost to remain the same for the next flip. Material costs vary. Items go on sale and get discontinued. Remember to buy in bulk whenever possible to help keep your material costs low, and recycle from one flip to the next. But don’t simply copy your costs from one flip spreadsheet to the next – variation will always occur.