I realize this is an old thread, but as someone who just started in this business about 8 months ago, and who just finished his 8th rehab (using all licensed contractors), I can shed some light on my learning curve...

The quick summary is: There is no *easy* way to learn how to estimate rehab costs, but with a good bit of effort and diligence, anyone can do it.

The first project I ever did, I decided to call five contractors to get bids; I put together a detailed scope of work and materials list, and had the contractors come out and walk the project with me. After three days of talking to contractors, I finally started getting the bids rolling in... The lowest bid was $45K and the highest bid was $75K!

I was flabbergasted and didn't know where to go from there, as I had only budgeted about $35K. Then I started talking to some other investors I knew, and I quickly realized something very important:

There are different types of contractors and not all types are good for investment rehab projects.

The five contractors I had give me bids were GCs who were mostly focused on residential remodeling and residential construction. They are the guys who will charge $50K to put in a new kitchen, and are probably worth every penny. They do schematics, they let you pick whatever finishings you want (and they provide them), they have their own project managers, suppliers, etc.

You can easily estimate the cost of these contractors using standard construction estimating software tools; many of them use these same tools to give you their quote.

Fortunately, there are thousands of other contractors (yes, many of them are licensed and insured) out there who can do just as good a job for a fraction of the cost. Sure, they may not provide their own materials, they may not draw up nice schematics, they may not provide their own project management, scheduling or oversight, but they can do the same $50K kitchen for about $10-15K.

You don't find these guys in the Yellow Pages (generally); instead you find them via references from other investors, at your local REIA meetings, at Home Depot shopping for materials, or you might just stop by a job stop you happen to drive past (assuming it looks like they're doing a good job) and grab the number off the back of the their truck or hand them a card. These guys don't have a lot of overhead, and can pass that savings on to you.

It took me a while to find a GC for my first project that could hit my budget, but I finally found a guy who would do it for $30K. He was essentially a glorified handyman who could do all the carpentry work, and who could call in specialists for things like painting, roofing, electrical, plumbing, etc. To this day, that guy is my handyman/generalist on all my projects.

I spent that first project learning everything I could. I asked every specialist as many questions as I could think of, I researched material costs for every item I used in my rehab, I asked for pricing from the contractors for everything from installing a window to replacing a roof.

By the end of that first project, I had a pretty good idea of how much materials would cost for any project moving forward (I created a materials spreadsheet that I took to Home Depot and copied prices off the shelves), I had a pretty good idea of how much the basic contracting tasks would cost, and I had a pretty good idea of how much time it took to do things like install hardwoods, install a faucet, replace a window, paint a house, etc.

I knew that even if I didn't come in exactly on budget or schedule on that first job, I would certainly learn enough that I wouldn't make any of the same mistakes on the next job.

Here I am on my ninth project, and I've gotten rid of the idea of using a GC (except on the very complex projects), and instead have hired my own project manager and then contract out to my own subs. I've probably gone through 50 different contractors in the past 8 months, and I'm finally starting to build a team of guys that are absolutely amazing. I have my landscapers, my painters, my roofer, my cabinet guy, my countertop guy, my flooring guy, etc.

The best thing is, because I use the same guys over and over, I know EXACTLY how much they charge for everything. And because I use them over and over, I get great prices. If I can measure the size of a roof, I know how much my roofer will charge me to replace it. If I can measure the size of my floors, I know how much it will cost to install hardwood, carpet, tile, or vinyl on those floors. I know how much it costs to install a new door, a new window, a new A/C unit, a new furnace, new appliances, etc. I can walk through a house now and estimate the rehab costs to within about 10% in about 15 minutes. Give me another two hours to put together a scope of work, and I can estimate the rehab costs to about 3%. Consistently.

AND 8 MONTHS AGO, I BARELY KNEW HOW TO CHANGE A LIGHTBULB.

Having said all that, here are some tips:

- Buy all your own materials. Better yet, have your contractors buy them, but you specify the specific items and where they should be purchased. This way you know EXACTLY what your material costs are.

- If you do a lot of flips, go meet the guys at the Contractor Desk at Home Depot. They are your new best friends. I now get all my materials for about 25% off retail price at Home Depot, because I exclusively shop there and they know me (and my contractors).

- On your first flip, get a referral from other investors for a good GC. Get him to give you an estimate on the project, and if you like the estimate (and him), get it in writing. Then use him as your GC. Ask a million questions, both of him and his subs. Figure out how long typical tasks take, and ask the subs how much they charge for things so you know for next time. Once you know that your sub charges $50 to install a pre-hung interior door, go out 10 other contractors how much they would charge, and you'll start to see a pattern.

- My opinion: Only deal with licensed and insured contractors. This protects you legally and financially in most cases. My painter didn't have workman's comp for his crew when I met him, but his work was fantastic and his prices were amazing. I gave him $1500 to get his guys insurance coverage so I could hire him -- today, he's done 6 projects for me, has made nearly $30K off me, and has saved me probably close to that same amount because he's so inexpensive. Win/win.

- My opinion: Always have contracts with every contractor. Both an independent contractor agreement and a signed scope of work.

- My opinion: Always get your contractors to fill out a W9 form for tax purposes. If they don't, you'll end up paying the taxes for them. If they're not legal and can't fill out the W9, then they're also not licensed and insured, so don't use them.

- Generally stay away from the lowest and the highest bids on a job. Always get references from contractors. Always ask to see previous work they've done.

- Never pay ahead of the work being done. If a guy says he wants 50% upfront, find another guy. The one exception is for jobs where there is significant upfront material cost (such as putting on a new roof). For those, make sure you're working with a reliable contractor who won't walk away with your cash.

- When dealing with a GC, always hold back 10% of the payment for 15-30 days after the project ends. Things will come up after the GC walks away from the project (leaking sink, stuck door, etc), and if you don't owe him any money, it can be difficult to get him back to fix it.

- Don't ever take advantage of your contractors. If you underpay or take advantage of your contractor on one job, he won't be around for the next one. Be fair, especially with the good guys you want to keep around.

I can probably think of hundreds of more suggestions (and many are on my blog), but you get the idea...

Good luck!

Old post, super useful, thanks for your insight J Scott.

Diana Duncan

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Craig Newchurch

Replied September 22, 2022 07:54

Quote from @Steve Doyle:

Diane is right on. If you are doing a project that requires more than 1-2 trades then a GC is worth the investment.

A GC will provide you with a guarenteed price, and a guarenteed standard of quality.

If you do try to deal w/ multiple contractors yourself w/ no experience count on spending 30-50% above your original estimates and fighting like hell to get them to finish their work to the quality that you expect or even finishing their work at all.

Until you get burned by a GC. Your advice has pitfalls as well. The difference in hiring a GC, which for 12-14% likely you will get a not so good one, and learning the ropes is tremendous. I do not think the OP mentioned they had a background in knitting so why tell them to stick to that?

The fact is, some people are capable of doing things and some are not. All people should try testing themselves, that is what creates success. Maybe the OP discovers a previously unknown passion for something they unknowingly are better than most people at doing.

I know some good contractors and I have been duped by ONE contractor. Any contractor claiming to only want 14% is going to likely cost you triple or more if you are dumb enough to go along for the ride. Contractors are not gods because any half wit or better can pass a test. In no way does that make them qualified to be a manager of any size project. There is a reason all the big contractor firms have estimators and project managers and assistant project managers.

The biggest concern the OP needs to address is exactly what they are addressing. How to know the fair pricing models for their market. That provides a basis for which they can have a safe guard against predatory GC's who might want to drive the price up and convince them they should be knitting and writing more checks because they are not a GC.

Please be respectful and think before you give people advice.

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BiggerPockets