Wholesalers: Having Trouble Estimating Rehab Costs? Try This!

by | BiggerPockets.com

When I started out as a real estate wholesaler, I knew I didn’t have the same experience level as a contractor. So, I had to ask myself, “How do I estimate the rehab cost of a property with no experience?”

Have you asked yourself this question? If so, then this article is for you.

If you’re having trouble estimating rehab costs, wholesalers, try this because it really works for me.

I talk with a lot of beginning wholesalers, and this is one the most frequently asked questions. I can comfortably say it’s in the top 5 questions newbies ask. I remember this struggle myself, but after many underestimated rehab projections, I was able to gather the correct information from a few knowledgeable sources in my market(s).

So let’s jump right in and get started.

As previously stated, I was wholesaling and guessing at the rehab cost. Honestly, it seemed as though every rehab was $30,000. Seriously, this number made sense until I began to get so many low offers from my buyers. They wanted the deal, but at the right price. For a while, I would justify my error (arrogance) by stating to myself, “OK, this is not the buyer for this deal.” I was so wrong. Let me stop here to say — when you don’t know something, do not be afraid to ask the right people the hard questions.

Related: How to Set Goals as a Newbie Wholesaler (& Actually Achieve Them!)

So for every problem, there is a solution, right? I began to ask all of my buyers and contractors, “What is a simple but justifiable way to estimate the rehab cost on a property?” I found out I was making it much more harder than the process needed to be.

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A Refresher

Let’s review some of the basics. For every wholesale deal, you need the following )and please add in the comments section if I missed one of the basic elements): You need to be great at marketing, you need a good deal, and finally, you need good buyers. This are the extreme basics. Where many people trip up is knowing whether they have a good deal. It’s not too difficult marketing to get your phone ringing with sellers and buyers. Once the phone is ringing, how do you know you’ve found a deal?

The problem newbies face is calculating the ARV and knowing the rehab costs. For the sake of time, we will assume you know how to find the ARV, so our focus will be finding the rehab costs. As stated before, there is a formula for this. The formula will vary in each market, but by asking a few questions on BP or asking knowledgeable investors in your area, you will find the formula that works.

The Formula

To estimate the rehab cost, multiply the square footage of the property by the rehab cost per square foot. For example, the property is 1,500 sq. ft., and the cost of rehab in your area is between $15-$30 a sq. ft. You will be able to find the rehab cost. So let’s go over that again. The property is completely trashed; this is not just a cosmetic rehab, so we will allow for $30 per sq. ft.

Multiply 1,500 x $30 = $45,000 rehab cost.

Let’s take it a step further and add the ARV to the equation.

[$250,000 (ARV) x .70] – $45,000 rehab cost – $10,000 wholesale fee = $120,000 (MAO)

Yes, I know 70% ARV is difficult to find in many markets. By knowing your market, you will know what percentage to use, just as you will learn what rehab cost per sq. ft. to use. In the example above, if the property had some updates and was not a complete gut job, then you would use $18 sq. ft., for example, as the rehab amount.

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Related: The #1 Reason Wholesalers Get a Terrible Reputation (& How to Change That!)

Conclusion

If you’ve found another way to justify your rehab cost, please share. I’m not saying my way is the only way, but it is a simple and effective way. If you have more questions or need more clarity, ask in the comments section below.

How do you calculate rehab costs?

Let me know with a comment!

About Author

Marcus Maloney

Marcus Maloney G+ is the Executive Officer of Equity Realty & Investments as well as 3rd Generation Management & Holding LLC, both are family owned and operated real estate investment firms. The firms' goal is to provide affordable solutions in real estate while providing exceptional opportunities for community redevelopment for the residents of Phoenix, Arizona and Chicago, Illinois. You can follow Marcus on Twitter

26 Comments

  1. Rick Santasiere

    Love the article, and the simplicity behind the math. My only concern is that for a newbie to take this and use it without taking 100% of the property. The $30/square foot amount might be ok for flooring, walls, ceilings, kitchen and bath’s, but I am fairly confident (depending on your market), that you could easily double that if you need roof (one – three layers….), siding, windows, exterior maintenance and landscape projects, like removing trees, leveling yard, drainage, etc… Thank you for sharing this Marcus. As a fellow investor and real estate broker, I always love hearing new insights!!

    • Marcus Maloney

      Rick,

      Great input Rick and I agree with you point of view, this is the reason why I tell people it is depending upon the market and how trashed the house truly is. If you are trying to wholesale or flip a “Zombie” house it would be completely different because there will be additional repairs that need to be made such as re-piping, new electrical and such. But for a traditional house that is beat up and unkept these figures normally justify the rehab cost.

      Thanks again for providing another point of view.

  2. William Boyce

    Great Article, thank you Marcus. As I newbie I would love to know what are the differences beetween ‘completely trashed’ and ‘got some work done on it’? What would be an example of each if it is not to much to ask.
    Thank you and best regards

    • Marcus Maloney

      William,

      Completely trashed is a hoarder house with mold and 20 cats. This would mean every surface in the house need to be touched and replaced. When I mention trashed it means the property is really not habitable for a sane person.

      Some work was done to it means that it was updated 10-15 years ago and it could be used as a lower class rental in its current condition. Its habitable but need to be updated.

      Hope this helps

    • Marcus Maloney

      Andrew,

      Your inspection as a wholesaler is to basically go in and view the property and take pictures for marketing and also the inspection period provides you an opportunity to cancel the contract if you can not find the end buyer. You are not doing an actually inspection by your there to view the property and confirm what the seller told you about the property over the phone. Let me know if your unsure of what I’m referring to or just PM me

      “Enjoying the Journey”

  3. Delilah Fleharty

    Hi Marcus, this was a great article and thank you for explaining it so clearly! I am a real estate agent. If i bring a flip investor to a wholesaler, how will my commission be factored in? Won’t an extra 3% in addition to the wholesale fee hurt the seller’s bottom line? They’re already getting hit with selling their property at a deep discount. Forgive me for the amatuer questions and thanks a million!

    • Marcus Maloney

      Delilah,

      Wholesalers inform the sellers they will receive a net offer, for example a wholesaler put the property under contract and offer the seller 150k cash. When the wholesaler then market the property they will market the property 150k + wholesaler fee net to the seller. This way the seller and the wholesaler is not obligated to pay any closing cost. When it comes to a Realtor they will then add their commission on top of the net purchase prices. Its typically not the full 3% but the Realtor will add their fee. So in essence it would be 150k net to the seller + 12k wholesale fee + 4k Realtor finders fee. The numbers would still have to make sense to the cash buyer, but normally if they are working with a Realtor they are use to paying close to market so an offer market deal with a Realtor’s finders fee is still a deal for them.

      Hope this helps “Enjoying the Journey”

  4. Norbert Powell

    Thanks for the post Marcus! But can we not skip how to determine ARV lol. This is an aspect I have been struggling with.

    Just for practice and gaining familiarity with my market, I’ve been looking at new listings in my area (I know typically my leads wont come from the MLS) and trying to run numbers on them to determine what price I would need to get the listing at to be a good deal.

    After I obtain a radius report on the subject property, I try to pick my comps from those properties.
    At this point is where I kinda get stuck. Adjustments are usually necessary to determine ARV and I want to know if I am going about this the wrong way.

    I have actually met with an appraiser to try and get the adjustment metrics i.e what to add or subtract from the sold comps to get what my subject would be worth if we put the same work into in it. But I get the whole “there’s no hard and fast rule or number” or “it depends”. Basically telling me I’m not an appraiser and I should leave the appraisal work to the professionals.

    So after that ling winded expression of my troubles, lol, can you please share your method of calculating ARV for houses on MLS or not?

    Thanks

    • Marcus Maloney

      Norbert,

      Sorry for the late response. Calculating ARV is somewhat subjective. You are on the right track what you are to look for is properties SOLD within a .5-1 mile radius within 10 year build and like kind (1 story with 1 story) (brick with brick). So you have to find a property in the general vicinity that is vary similar. Its also good not to cross major streets. You don’t have to be perfect at because appraisers are not even perfect this is the reason why the appraiser said what he/she said “it depends”.

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