Have you experienced this?
That awkward moment when you are set to close next week, and the home buyer’s inspector walks into your house. And sees the ceiling on the floor of the living room. That’s probably not good at all.
In this case, the buyer’s inspector called our realtor, the realtor called my partner and my partner called me. We figured it must have just happened because my partner was at the property two days prior. My first few questions were, would this delay closing, will the buyers back out, and will the buyers think the rest of the house would fall apart? My brain was racing at the moment. I was on pins and needles.
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.
Let’s start from the beginning of the deal. The lead came from an internet source from another wholesaler. The wholesaler was out of state, and he partners with me when he gets deals. I locked it up for $54k. I shot it out to my list for $64k. The highest offer we got was not really that good and came back at $58k.
So I told the other wholesaler, “Instead of us splitting $4k, how about I buy the house from you for $57k? And you keep all of the assignment.” He agreed and even offered to lend money on the deal. I declined and got the money from another source, which was much cheaper.
The house was a mess, as it needed everything literally. The good news was we could keep the current floor plan. As soon as you walked into the house, the fleas would jump on you and proceed to hug your pant legs because they apparently missed humans so much. The dog had been urinating in the house. The people living there did not have any electricity, hot water — or any running water at all. The owner had purchased the house for his sister-in-law to eventually refinance and cash him out. And, of course, that never happened.
As you can imagine, we had to do the whole outside of the house — new roof, new windows, new HVAC, and new siding. The neighborhood was ecstatic about this house finally being brought back to life. There was also a pool that could not be saved in the back. The previous owners had gotten dirt delivered to their driveway, but of course they never had the money to take the dirt to fill in the pool.
I’ve had some new investors ask me why I did not save the pool. The house is at a first time home buyer price point, and we listed at $159,900. We went under contract after two days for $157k. Since the property was listed at a first time home buyer price point, a pool is not a selling point due to the cost of maintenance and insurance. That would scare most of your buyers away. And besides, more children die from pools than from a loaded gun kept in the house.
Where to Spend, Where to Save
As far as the inside, it required all new lighting fixtures, a remodel of the bathrooms, new electric, and all new flooring; in a nutshell, we updated everything. The house came out very beautiful, and that’s why it went under contract after the second day. However, to save money, we kept the cabinets. We did paint them, put new fixtures on them and even though we were cutting corners, we still managed to go over budget.
Also, for my aspiring rehabbers, you never want to be cheap with things a buyer can see — for example, ceiling fans, appliances, door knobs and light fixtures. If a homeowner thinks you cut corners with the things they can see, they will also assume you cut corners with the things they can’t. The purpose of flips is to quickly sell and move on. You do not want to put a mediocre product on the market and have it sit for months. I’ve seen it happen before.
Again, this particular rehab is at a first time home buyer price point. So you don’t have to put granite in the house. These people are normally happy to see tile. What we did was use a very nice formica countertop that looks like granite. In the common area bathroom, we used vinyl flooring that is really nice, matches wall colors and looks like tile. I hope you get where I am going with this — it’s ok to be frugal, but make sure it’s high quality stuff for what it is.
In conclusion, we were still able to close on time. We were able to get the leak in the ceiling replaced. We bought the property for $57k, put $50k into it, and sold it for $157k. There were seller concessions given in that final price. Just know that things do go wrong when they are not supposed to, but don’t focus on the problem. Focus on the solution.
Flippers: What unexpected kinks have you run into lately? How did you overcome those challenges?
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