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Estimating Rehab Costs
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...
- 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.
- 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.
Only experience can hone this skill. It sounds like it would be worth it to find a investor-friendly contractor to add to your team.
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...
The nice thing about rentals is they generally require a less expensive rehab than a flip, and if you're a little off you just end up having to leave more money in the deal than you otherwise would.
I would suggest next time you have a house under contract getting multiple contractor bids on the same scope of work to get some good data on what various things cost.
It gets easier the more experience you have.
@Patricia Steiner Wow! Those are some great ideas! I met with a new Realtor last night to look at a foreclosure and we did a walkthrough, but he wasn't doing a lot of suggesting. It could be he is the wrong guy, but it could be I wasn't asking him what he thought. In any case, I love your ideas.
I can say that last year when my deal blew up I did learn a lot from that deal by talking to the inspectors as they did their thing. I also did a home inspection training many years ago, but I never did it as a business and hence never really got good at it.
Thanks!
You deserve a real deal investor realtor...interview a couple and look for the one that has a clientele of flippers/rehabbers/investors. And, keep building your empire. Please let me know when you get your next acquisition!
@Patricia Steiner Do you have any suggestions for the best way to find such a realtor and interview questions once I find them? I have tried on my own in the past and it seems too many of them "say" they work with investors, but that means they worked with like 2-3 and don't have the experience you are talking about. I need to find a rock star realtor that really has the experience you are talking about but I am not sure what the best way to find them is.
The realtor you're looking for will be the one you'll have to find; he/she won't have their photo on a bus bench or be the zillow premier realtor of the week. Look for a recent income property sale that closed - one that you would have liked in your portfolio now or in the future - and look to see who was the buyer's agent. That buyer's agent is who you'll want...that's the person who did the due diligence, probably found the property, etc. You can also call the new owner of a property that sold and asked who represented him/her. It will take a little bit of work on your part but it will get you to the results you expect and deserve.
@Michael Temple Experience is part of being able to estimate rehab costs. Another is to have your contractor accompany you when viewing the property. I have a contractor that doesn't charge me to estimate costs because we have a good relationship and he knows that I will use him on my projects. I also refer others to him. It's a win-win.
@Linda Lawson I have a contractor that I have used in the past who is OK, but not really what I need or am looking for. He will walk the properties with me on limited occasions, but he isn't that helpful as he throws out rough generalities as opposed to "it will take x to do this" kind of thing. I guess he is better than nothing, but I think I need to keep looking.
@Patricia Steiner I have found agents in my area who are both investors and agents. I always doubt if these are agents worth trying to work with. I always figure that if they are also an investor they compete with me and would probably keep the good deals for their own portfolio and only pass along the crappier deals to other investors. In my area, I can think of 2 agents that would be awesome to work with if they weren't also investors and grabbing up deals for their own portfolio.
Totally understand...I'm not suggesting that you work with someone who actively buys and sells for their own account; I have a hard time doing business with that group on behalf of my clients (actually I've never closed a deal with any of them because the truth always surfaces during due diligence; and that's why you do due diligence in the first place). Their main focus, at least in my market, is to churn properties with little regard to cash flow and valuation. Again, I get it and agree. That's not what I am recommending. Residential real estate is completely different than income and commercial. There are realtors who work primarily with investors; a lot of these folks are second career with backgrounds in banking, insurance, etc. Many own investment properties as long time holdings which makes sense...it's the walk the walk and talk the talk. Do your due diligence on everyone you bring on as a resource and set expectations. You're playing in a different league now so it will take more effort and time to find the right resources.
@Patricia Steiner that was kind of what I was thinking. I seem to find agents that say they work with investors and don't seem to be investors themselves (I met one recently), but as I mentioned earlier, I don't get the warm and fuzzies that they are the right person and that saying they work with investors isn't more of a marketing gimmick rather than real experience/skill. I guess the only way to figure that component out is to start using some of them and do walk through of houses and see what/how they approach it.
@David Greene in his new BRRRR book has what sounds like a great suggestion by calling real estate offices and asking to speak to the office manager. His take is that the office manager is compensated on overall sales for the office so if you call them and tell them what you want you are more likely to get paired up with a rockstar that in fact does work with investors because it is their best interest to pair people up correctly and grease the skids for more sales.
You need to bring in your own contractor since you are not well versed in estimated costs. Most materials, appliances are from China so you need to investigate the cost more closer.
@Michael Temple you could start spending chunks of time at your local Home Depot and Lowe’s. It is free to walk around the store and look at the prices of all the flooring materials, bath fixtures, kitchen fixtures, windows, appliances etc. It is also free to talk with the folks in there as well. At my local Home Depot there is a guy who also does independent contract work and he is a very good cost estimator for the labor end of things.
This has helped me tremendously and as I have been walking through houses lately with a friend of mine who has a lot of rehab/flip experience I have been able to come within a close range of his estimates.
@Kyle M. that is funny, I actually thought of doing this, but I wasn't entirely sure what I would be looking at or trying to absorb from doing it. I thought maybe going through and looking at kitchens and bathrooms and seeing if I could get an idea of good materials vs. middle of the road and low grade. Thank you for validating this thought to do this.