Estimating House Flip Repair Costs | How to

[Joshua Michael Hauman]

It is imperative in fix and flip that you get the budget down when taking on a project. Having the correct budget gives you a clear picture, helps you manage risk and understand the profitability of the deal. But you know that, that’s why you’re here. You’re here for the how to, so:

Step by step this is how its done.

1. Have a deal
2. Get it inspected
3. Get quotes
4. Include Permits, Fees, and Contingency
5. Maintain an Organized Budget Tracking Sheet
6. Review and Adjust Along the Way

Start with an inspection

There’s no substitute for an on-site inspection when creating a rehab budget. Estimating a rehab without doing a walk through is irresponsible. You don’t have enough information to make clear decisions. If you’re out of state have someone boots on the ground. We do this through agents, contractors or investor partners. Pay close attention to any major issues with the roof, foundation, walls, windows, plumbing, electrical systems, HVAC, and potential mold/pests.

One thing I always look back and wish I had done differently on my first projects was documenting the growth. I get a lot of satisfaction from looking back at past projects and seeing the before and after shots and having data on those properties. Photograph or video document the home’s current condition in plenty of detail. I keep all that on a google drive folder with the name of each property in a separate folder with subfolders for before and after.

Organize Repairs into Categories

Next, organize the needed repairs into categories like demolition, exterior, interior, kitchen, bathrooms, flooring, plumbing, electrical, etc. Breaking down the project makes it easier to collect pricing estimates. Also determine which repairs are critical versus cosmetic. This helps me allocate budget properly. We always want to ensure we are rehabbing above market because we take pride in our work and want to get the highest valuation possible. In my experience higher end renovations move faster than dated properties which is important so that we can dispo the properties faster and get back to redeploying the capital into other deals.

Gather Contractor Quotes

Researching what the average price is in your area is a waste of time. Material and labor rates can vary significantly by region but also vary significantly by contractor. I’ve found this especially true for specialized repairs like plumbing or HVAC. Gather a bare minimum of three quotes from licensed contractors. This provides more opportunities for you to find someone you would like to work with and greater accuracy and options for choosing cost-effective providers. It also tells you more about your local market pricing, which will come in handy later down the road as you do more deals as you gain experience and dial in your estimates. A lot of investors I’ve met simply don’t pick up the phone enough. You must make calls and talk to people who know more than you. Its really a numbers game. The more reps you put in the more information you have and operating with speed, options and clarity is what’s helped me expand and get the most out of my network. Ask contractors detailed questions to understand what’s included, best if they can provide a line-by-line scope of work.

Include Permits, Fees, and Contingency

Depending on the project scope, building permits and municipal fees may be required. Not all projects require permitting. Obviously, a new construction is going to be the strictest from this standpoint, like in the new development or redevelopments we do. That’s beyond the scope of what we’re talking about here. Permitting for residential renovations may apply in cases where you’re making additions or alterations. Basically, changing the building’s footprint. Examples would be adding a new bedroom, bathroom, garage, fence, awning, deck, HVAC as well as plumbing and electrical. To find out if you will need a permit, you can google the city where you’re doing the projects [Building and housing department]. On this website you will typically find a tab labeled Construction Permits. Contractors will know, if they aren’t sure or say they don’t pull permits for a project where you feel like a permit needs to be pulled or you see listed within that municipality that is a red flag. They also have a phone number listed for each areas building department where you can call and ask more specific questions.

Even after doing millions of dollars of deals there are still small things that we decide we want to change or add or don’t account for which can eat away at profits if you’re not careful. Some of the projects we take on are over 100k worth of renovation. In these cases, it’s difficult even for experienced investors to nail down every single cost with 100% accuracy in a rehab budget. I recommend building in a 10-20% contingency fund for unforeseen expenses. 10% on the lower end if you have a smaller more cosmetic project. 20% if its much larger or you have a lower level of certainty. Always operate with a margin of safety to maintain profitability. Renovations often reveal hidden issues. The contingency offers financial breathing room.

Maintain an Organized Budget Tracking Sheet

Use a spreadsheet to track estimated costs versus actuals across all rehab categories and tasks. Update this document continuously throughout the project. Budget tracking ensures you catch any inflated expenses early before they spiral out of control.

Review and Adjust Along the Way

If project costs exceed estimates in certain areas, meet with contractors to understand why and find solutions. Be ready to adjust budgets, make substitutions if needed, or delegate more work to DIY. Careful cost management is key for maintaining profit margins after you are committed to the project.