Estimating Rehab Costs

[Michael Temple]

Just looking for some general advice here. I just submitted an offer on a property in a neighborhood I know very well as I already have one really nice rental there. As a result, I was able to peg the ARV perfectly. What I was not able to do so well is estimate the rehab costs. I struggle with this even using the BP calculators. Here's why...

1. Estimate WHAT should be done. I can walk through and see problems, but figuring out which ones must be done and which ones are OK to get full or near ARV offers when it is finished is a constant struggle. I tend to go higher than I probably should on my repair costs just because I am probably factoring in stuff that doesn't need to be done to get a full priced offer.
   
2. Once I rough out what should be done I just don't feel I have the solid experience to get those numbers figured out on my own. I am always afraid I am going too low on something and it will be far more expensive than I thought in reality. So I think I go too high on these estimates, but my thought is I would rather go high and still make money rather than go low and try and be super competitive and find out I went too low and screwed myself.

This offer I just presented is waaaay off from the current asking price. ARV is 160K. They are currently asking 124K and I am offering 90K, which includes holding costs and rehab of 30K, leaving me with a profit of 25K if I did it right. which I just don't feel confident if this is too high or too low.

Bank has asked for all highest and best offers to be in by 3:00 today. I fully expect to lose out to others as I am sure multiple offers have been put in. This seems to happen to me a lot. So I really need to figure this out. I am concerned about trying to get aggressive on it when I am still pretty inexperienced on flips as that is a way to almost ensure I lose money, but I also keep losing every deal so that is a guarantee that I don't make anything.

I should probably add I had a property under contract last year that I thought was a good deal, went through the inspection and found out something that was in plain sight (electrical) I passed over as not being important until after the inspection and found it due to the what needed to be done and how it had to be done was, in fact, a 15K expense I simply overlooked. I learned from that, but I had to back out of that deal to save my skin. 

Any tips you BRRRR or Flippers could share to solve these issues would be appreciated.

[Patricia Steiner]

Michael, you're sure going about this the hard way.  Here's a couple of recommendations:

1.  As a buyer, you don't pay commissions so why not engage a realtor who works with investors to add bench strength to the process.  An "investor realtor" is skilled at identifying code violations, ROI on improvements (the "not worth doing" versus "gotta do"), market rent, and valuation. Those realtors also have contractors who assist in estimating costs. And, the realtor can also tell you whether your offer is wishful thinking or competitive. You're cheating yourself by not having the right resources on your team. This business is too complex and ever changing to ever be the guru.

2.  Rental sameness.  I use the same paint color, same cabinets and counters, etc., on all my rental properties. It allows me to know my cost and turn a vacated rental over very quickly.  

3.  Learn.  Don't get an inspection - stay with the inspector and have him explain what he looks for and why.  Know what a double tap breaker looks like...know what is required by code (like an exhaust fan over a stove).  

4. Market intelligence.  How do like rentals compare with yours?  Are you over-improving (an investment sin) or are you making improvements that tenants don't really care about? A pedestal sink in a bathroom looks great - but tenants hate them because there's no counter space.  

By adding some bench strength, creating a rental model so you know your costs, and proactively learning the business - you'll be more efficient and profitable.  I appreciate your intellectual honesty in sharing your experience.  We've all been "in the weeds" from time to time in this business.  Fingers crossed on your pending offer...