I get to chat with a lot of new investors through email, telephone, and Facebook, and one of the questions I hear a lot is how to figure out if they can actually buy the house and make MONEY buying it. Sure, we can guess here, guess there, I think the cabinets will be this much, or the driveway be that much. But how much is it REALLY going to cost me?
That’s the ticket. How much can I do the work for, and how fast can I turn the property?
How much can I buy the house for, what it is worth redone, what will it cost me to fix it up, and how long will it take me to sell it? And of course the final question: How much money can I make on this deal with all of those figures?
ARV (after repair value) – (Purchase + Reno + Holding Costs + Realtor Fees) = Profit
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
How I Estimate Numbers on My Properties
Through a lot of screwing up, missing things, living through jobs, learning from smart people, and doing the work, we get to know our costs. We learn how our GCs operate and bid their jobs, understand the sub contractors and work they can do, and what we need to look out for within all the different trades. I have been learning to be tighter and tighter on my budgets. Within the construct of my bids, as I walk through a property, I write up a list of things that basically go in two different categories:
- Regular Items: “Fix plumbing here, put a door there, change this fixture here, put in a vanity here, painting (although not “cheap,” you are probably almost always painting),” etc.
- Big Items: “Windows, hardwoods throughout house, kitchen cabinets, foundation repair, HVAC, granite tops, major framing and wall layout changes, deck,” etc.
Within these two categories, right there at the property I then write down an estimate of the number of windows times cost, the hardwoods’ approximate square footage, the linear feet of the kitchen, and a ballpark of the exterior and interior paint as I make my way through the rooms. For a bathroom in a rental house, I can do it for $1,500-$2,500 depending on the house. And for a fix and flip, I am usually into them for more like $4,500 – $6,000 depending on size and finish. I’d rather be over than under! Don’t get crazy with going over, just give yourself $1,000 for a vanity or whatnot depending on the kind of flip/finish you are doing.
Once I get back to my office, I have a one page “workup” that I put my numbers into. It calculates a total based on what I put into it as far as the costs. And then I also put in contingency amounts (you better — this will bite you if you don’t have contingency funds) and the holding costs, if any. I plug in for taxes, insurance, and utilities and add realtor fees — and then finally… my favorite line, profit.
Now, you spent just a couple minutes writing down items and ball-parking your property, you inputed those items into your workup in 60 seconds — and bam, you have a number to work from. As you get more and more comfortable, you can also have a really good sense of these costs hammered out on your notepad or tablet right there from the property.
You obviously need to know if YOUR numbers are correct with the GC you use or the subs who will be doing the work. Here is my modus operandi for GC bids.
4 Tips for Working With Your General Contractor
Ask Yourself: Am I REALLY Making an Offer?
If the answer in my gut is yes, I like the house enough that I will be making an offer if all the numbers work, I have a GC or two out and get a real bid. This takes a LOT of time on their end. Don’t waste your guy’s time. When I am ready to make an offer on a house, sometimes I go ahead and make the offer (don’t do this unless you have been locking down your numbers for a while — don’t get ahead of yourself!) and then let my GC know I need the bid within X days (yes, days, not weeks).
Sometimes these guys will ask how much time I need. Sometimes I say it’s a HUD property, and I can’t even make an offer until 10 days out and have them ballpark it for me. Be careful when you ask for this because it’s almost surely wrong. BUT you should at least have some idea: “We are in the $40k range” or “the $65k range.” Clearly, $25k could kill your deal! Or at least take all your profit.
Don’t Forget the Unforeseen
There are several things that come up just often enough to be easy to forget. For instance, this week I had a rental house we were renovating, everything was on budget, going well, and guess what, gas has been off for long enough that it needs to be inspected. I should have already pulled that from the gas company (my fault) — and then come to find out the gas line needs to be replaced. OUCH.
I couldn’t sleep. I was so pissed at myself! I hate making mistakes. It hasn’t killed the deal by any means, but it was well beyond what I had expected. I know in the future I am going to have a line item in my “pre-check” sheet to call the city utilities on the houses that have been vacant for a while and ask about their utilities so I can be sure I don’t get surprised with another gas line situation.
Check. No more gas line surprises. I hate surprises.
Another unforeseen situation is broken or ugly trees. Grading and dirt work. Servicing your HVAC or other systems within a house.
Make Sure You & Your GC’s Bid Expectations Match
One thing that came up within a job was the wall vents. I asked why they weren’t changed out, and he said they weren’t in the bid. We made them work for that job, and then I said, Always include them. I expect them to be there.
We learn, we work it out, and we do it better next time.
Or how about whether you have a shower door or not, and what kind of door. Say, a $700 shower door. I’ve had that conversation too. It’s definitely a more expensive problem. #lessonlearned
Have Open and Transparent Communication With Your GC
Within a large project (we have both a $95k project and a $47k project going right now), there are always variables. Always. Plumbing line needs to move. Or galvanized line has failed. Or subfloor is rotten. Or termites. Or trees. Or a deck you can’t salvage. (Yes, most of these are things I myself have dealt with.)
Both of my go-to GCs are good to work with on these kinds of things. For instance, one will suggest, “I have X dollars set aside for __________, but what if we do _________ instead?”
I love collaboration. I’m not too proud or too smart ever to hear another opinion. And when he asks me something like this, I always listen. You have a set budget, so use it the very best you can to get the very best house you can, to sell it as quickly as you can, and get OUT of the deal as fast as you can.
And it all starts with making sure you buy it right. Get your numbers, work up your deal, and don’t be afraid to pull the trigger.
What are you tips and tricks for quickly putting together your property workups, and do you have apps or other tools you use to do that quickly, accurately, and efficiently?
Leave a comment below, and let’s talk!