How to estimate rehab costs prior to purchase or offer

Question

So, I am looking at doing my first rehab. Are there any tips for estimating how much the rehab will cost? Would it be frowned upon by the seller to get some contractors out to take a look at it and provide estimates before purchasing it? If this would be acceptable, what would be the most proper way to handle this?

I like the contractor estimate idea because I know when I was a commercial banker we'd commonly ask if people had estimates for the renovations or improvements that they wanted to do on a particular project or if they were eyeballing it. So, I'd feel even more prepared to take my packet into the bank if I had that estimate because people very commonly tend to underestimate the cost of the renovation. But, I am not sure how to approach that with a seller prior to either offering or closing on the property.

Thanks in advance,

Christopher Woodland

William Harvey · Answer

@Christopher J Woodland If you check out my signature you can get an article going over estimating rehab costs in-depth.

If the house is off-market and the seller is someone you are directly dealing with, then it likely wouldn't be courteous to bring contractors prior to going under contract. We never bring contractors until it is under contract because most leads never turn into anything so it wastes the contractors' time, and also it's a bad look (in my opinion) to be planning a renovation and talking about how you're going to tear down walls, change the flooring, etc in front of the seller. This is likely their largest asset with lots of emotion tied to it so I feel it's best to wait until under contract. And even then, we never discuss anything directly in front of the seller.

I'd just be overly conservative with your first rehab estimate, and above all else, focus on nailing the ARV. It's much easier to recover from a botched rehab estimate than from a botched ARV estimate. Good luck!

Sarah Hatton · Answer

As others have mentioned it's an integral part of the flip process to have GC(s) walk the property before putting ANYTHING under contract. There are more sophisticated ways or running rehab numbers but here's a quick cheat:

Major metropolitan areas (LA, New York City, Miami, etc):

Mid grade upgrades: $50-75 per sq. ft.

*smaller properties use high end of range*

High end upgrades: $100 er sq. ft.

If the property is located somewhere like the suburbs of Virginia or Illinois (just naming a few — really any mid range metropolitan area) the cost of rehab can go way down. We've seen projects done for around $35 per sq. ft.

Hope this helps!

Matthew Paul · Answer

A word of warning on taking a GC to a property thats not under contract .  If its a good deal , the GC will buy it .  Remember the last 5 years have been a boom for contractors . they are flush with cash and looking for investments

Wale Lawal · Answer

@Christopher J Woodland

Anyone working with the fix and flip real estate investment strategy will tell you that the cost of rehabbing a house varies dramatically from property to property. Some properties only require cosmetic repairs, while others may have extensive underlying damage. With time and experience, you’ll learn what kinds of investment properties work best for your real estate investment strategy. You’ll also get better at knowing how to estimate rehab costs loosely, just from doing a property walkthrough. However, you never want to skip the steps outlined in this article. Even the most experienced real estate investors can make mistakes, and they can be costly.1. Complete a Home InspectionFirst, get in touch with a professional home inspector and have them walk through the home with you. It’s their job to be thorough and to notice potential issues with the home that you might overlook. Ask questions, talk to them, and get recommendations for local contractors. If they’ve been in business a while, they might have good contacts.2. Make a List of Repairshow to estimate rehab costs listThe next step is to make a list of repairs.Based on the home inspection, make a list of repairs and replacements that need to take place before the investment property will be sellable or rentable. Your inspector should provide you with a detailed report of the home walkthrough.When making your list, organize it into different categories, and prioritize the work that should be done. Consider your investment strategy when prioritizing work. If you are planning to buy and hold, maybe it’s worth investing in replacing certain appliances, knowing they will likely break again at some point in the future. However, if you plan to sell, you can save money by doing a simple repair.The general rule is to repair whenever possible, and only replace when necessary. Sometimes, real estate investors can get so carried away with creating a beautiful home that they overspend where it’s not necessary. This is a surefire way to kill your budget and eat away at your profits.Another way to prioritize cosmetic work is to put yourself in the future homeowner’s or renter’s shoes. The most important parts of a home are the bathrooms and the kitchen. On the other hand, a living room probably doesn’t need a full makeover. It’s likely that a fresh coat of paint and mid-price flooring will do wonders. A better place to spend your budget is on updating an old kitchen.Related: Real Estate Renovation: How Will It Affect Your ROI?3. Get Estimates on RepairsOnce you’ve determined the scope of work that must be done, you can begin to estimate repair costs by asking professional contractors for quotes. If a quote a contractor gives you seems high, don’t be afraid to ask around for others. After getting some quotes, you can begin to add up the numbers. If a contractor gives you a price range, it is best to use the maximum price in your rehab projections. This will help you to avoid nasty surprises in the future.You will be able to come up with your own range for the total cost of repairs as well, spanning from work that is absolutely necessary to additional work you’d like to complete to raise the value of the home. Keep in mind, there are almost always surprise costs when rehabbing homes, so be sure to add some wiggle room in your budget for any additional costs that could come up along the way. 4. Conduct a Comparative Market AnalysisSo, you’ve learned how to estimate rehab costs accurately and conservatively, but how does this help you determine your profit? A rehab price is just a number until you give it context within your project.In order to determine whether or not an investment property can turn a profit with your strategy, you will need to subtract your renovation budget from the after repair value of the property. The after repair value, or ARV, is the total value of the property once it is in a habitable – and marketable – condition. It is found by adding the value of the distressed property and the value of renovations together.Conducting a comparative market analysis is the only way to double-check what a distressed property will eventually be worth. For this, you will need to get your hands on real estate comps. Comps are properties that are similar to your investment property in that they:Are located in the same neighborhoodHave the same number of bedrooms and bathroomsAre roughly the same square footageHave a similar yard sizeAre about the same ageHave similar features (pool, garage, etc.)

All the best!

Devin James · Answer

Hey Christopher J Woodland,

It is customary to have a contractor walk a property & give you a estimate during your inspection period. That is part of inspecting the property, I have gotten multiple deals under contract and backed out once the estimate came back higher than expected & the seller would't come down in price.

Once you get the property under contract, just let the seller know that you are going to have inspectors & contractors take a look at the property. First you need to find a contractor who will be able to give you an estimate within inspection period. Then, once you get the property under contract, you can walk the property with your contractor & ideally they will be able to get you an estimate before the end of the inspection period. If the estimate is higher than expected, then you try to negotiate the price down to make the deal work.

Hope this helps!

Fe F. · Answer

Awesome article, by the way, thanks for sharing!

Jared Trindade · Answer

The vast majority of my investors meet their GC's at the property and walk it together. In most investor circumstances sellers are fully aware that the investor will likely want to view the property prior to making an offer. So you'll have showing options and vacant (typically on lockboxes) style of viewings on the majority of properties you want to check out. Depending on the avenue of how you fund, what type of agent you use, where you source the deal from may give you different access points. For example- if you buy from a wholesaler, and prior to making an offer on the property you ask the wholesaler if you can view it, a time is agreed upon to meet, you, your GC, and the wholesaler meet there (sometimes seller is present, sometimes not), at which point you walk the property and talk. Then run numbers, confirm with your GC on their bid, and where the math adds up- you make your appropriate offer based on what you did see. Depending on your contracts, you may or may not have a contracted due diligence period. A non-contracted due diligence period, does not mean you cannot do it- typically means you have a bit less time, and no right to back out of the contract if you don't do your own due diligence and find something during the closing process you don't like. Resulting in fees typically if someone were to do so.  If you have a contracted due diligence, then you carry it out then.My advice, always ask if you can view the property in any capacity prior to submitting an offer.May be controversial to some, but I know many investors I work with don't mention their GCs, they just show up with their GCs, and walk it together. It's almost the same as if your friend or family attended it with you in the eyes of a seller. I just wouldn't mention specific rehabs elements in front of your seller by any means, keep that conversation for afterwards when you and the GC can dig in. Prep your GC for that understanding as well. If someone frowns upon you wanting to make sure you are doing due diligence before submitting a fair offer, then they aren't trying to sell it.Alternatively, you can watch shows like 'This Old House' and go walk your local Lowes, and Home Depot. You can get a pretty good idea of pricing for specific items. From there you walk a few properties with GCs get some quotes on what they charge to do XYZ. Now you can start estimating based off your own knowledge of what things may cost. If new roofs in your market can get put on Sub 1500 SQ ft houses for ~$11,000 after talking with GCs and learning prices, then you can go to a property with 1365 SQ ft, go "Needs a new roof, probably ~$10,000 with my guys." - I believe you understand exactly what I am getting at here. At the end of the day, a great team is super important, but understanding it yourself will always protect you more. So while outsourcing in the beginning is a must, I recommend deep diving into this personally, as it is one of the most important numbers you will determining for all deals. Always down to connect and chat more if you like. Hope this helps, and I wish you the best of luck in your investing!Cheers!

Michael Mannino II · Answer

Hi Christopher! You'll want to know on average how much $ per sq ft the house is going to cost to rehab for the cosmetic repairs (kitchens, bathrooms, paint, floor, etc +labor), we estimate about $35/sq ft, however this can vary depending on your supplies and crew. You'll then also want to have an idea on cost for bigger things like roof, windows, foundation issues, electrical, mechanical, plumbing (well/septic?), etc. If you get a good system in place for yourself and your contractors from the start, this becomes a very quick process and you will be able to scale your flipping business much more easily. DM me if you'd like, I'd love to chat more about how we do this in our business!

Forrest T Schue · Answer

That's an interesting Idea to generalize a price to a square foot. I like it, for estimating rehabs before you can get your GC in there.

Jaylon Cockrell · Answer

During the inspection period, have a contractor or qualified person to walk the property and give you an estimate/bid for work needing to be completed.

I'm a loan officer at Capital Fund 1, we lend up to 90% of purchase price & 100% of rehab costs in CO TX AZ & TN.. then 30 yr DSCR & ground up construction in ALL 50 STATES... I have some templates for estimating scope of work If you'd like them.

Reach out anytime if you'd like to run #s on any deals or have some questions!

Best, @Christopher J Woodland