I was surfing the BiggerPockets Forums last week when I came across this post. Being that I had a few minutes and we are in the middle of a rehab myself, I figured that I would jump in an assist a fellow investor.
“I have a question for the experienced wholesalers out there. How does someone, with no construction background estimate the rehab cost of a house.”
“(Would) 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?”
So essentially this poster was asking how to estimate rehab costs for a house with no construction background. Let me ask a few other questions.
- If you didn’t have an automotive background, would you buy used car and try to sell it to a mechanic to fix and resell?
- If you didn’t have experience with yachts, would you buy a used yacht and sell it to someone who was going to fix and resell yachts?
- Or how about if you didn’t have experience with airplanes, would you buy a used plane and resell it to a plane rehabber?
Hopefully you answered no to the above questions. How is it any different with a house? In order to have success in buying anything used and reselling it to someone that will fix it up, you have to understand all of the things that they will do to fix it up and resell it.
Going back to the plane rehabbing, I was actually discussing this topic with a friend recently. One of his mentors just started a business flipping planes. Now… did he buy $1,000 course or jump on an internet forum and suddenly started buying and selling used airplanes?
No, he did not.
He actually partnered with another guy who had in depth-knowledge or the commercial airplane industry. He then learned and understood the entire process from someone who had gone through it before he went out and found his first deal.
Can you imagine if he just went out on his own, found a used airplane, tried to estimate what it would take to repair and started offering this as a deal? I can’t imagine it would have gone well. And it is no different with a house.
Now this topic is not new, but it bears repeating.
IF YOU DON’T KNOW HOW TO REHAB, DO NOT START WHOLESALING!
There, I said it. But don’t just believe me, here are some quotes from other real estate investors and experiences wholesalers.
And here a few related articles on the topic.
- Thinking About Real Estate Investing? Skip Wholesaling
- Newbie Alert – Don’t Buy Into the Wholesaling Hype
- Is Wholesaling A Strategy For the Beginner Or the Experienced Investor?
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
How to Estimate Rehab Costs with No Construction Background
Now I try to educate and provide actionable steps whenever I can. So here is the response that I gave to that forum poster.
1. Understand/Learn From Your Customers
If you want to sell someone something, first step into their shoes and understand them. J Scott has written 2 simply amazing books from a rehabber’s perspective (The Book on Flipping and The Book on Estimating Rehab Costs).
Pick up both of J 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.
2. Understand All Steps & Costs
Create a list of everything that a rehabber will need to do. Then 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.
3. Think Like a Rehabber
You have to evaluate a potential deal the same way that your customer would. 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.
4. Find a Deal & Market It
Now that you understand your customer and their process, use that to find a deal that meets their criteria and flip it to them.
What are your thoughts on this? Should people have experience in something (ex. rehabbing) before trying to sell to their customers? Or is it ok to to start with something (ex. wholesaling) without having experience with their potential customers?