Is it less expensive to rehab in less expensive markets?

Question

Newbie here from L.A.  Obviously expensive to start flipping here, so considering starting in less expensive markets.  Here's what I don't get...  In browsing other markets, I often see wholesale listings that need 10k to 20k worth of work.  I never see this in L.A.  Everything needs at least 50k worth of work.  Here's my question: Doesn't it cost (more or less) the same amount of money to rehab a 3bd house in a less expensive market as it would in L.A?  It makes sense to dump 50k or more into a house if you're buying it for 500k and selling it for 700k, but how can you do that with a house you buy for 80k?  Not like you're going to turn around and sell it for 280k in that market.  Anyone shed some light?  Thanks.

J Scott · Answer

Rehab costs vary tremendously around the country.  Some of the things that impact costs based on location:

-  Material costs.  In some parts of the country, materials are a lot more expensive than others.  If you live in a state in the south east part of the country, you'll find that materials tend to be much cheaper than in the north and in the middle.  This is because the big shipping ports are in the south east, and from there, materials need to be trucked/shipped around the country -- the further the trucking/shipping, the higher the costs.

-  Insurance costs.  In some states (like California), insurance costs -- and especially workers comp costs -- are much higher than average.  In those places, using insured laborers/contractors will be more expensive.

-  Regulation.  The more regulation you have around building/construction, the likely higher the cost for labor in that area.  The less regulation, the less overhead cost, typically.

-  Cost of living.  In places where cost of living is high, labor costs will be higher than in places where cost of living is low.

Based on most of those things above, you're going to find CA renovation prices to be MUCH higher than in other parts of the country.  In fact, looking at prices between Atlanta (where I've done a lot of work) and San Francisco (where I'm starting to do work), I'm seeing some things than can cost 3x as much.

Verna M. · Answer

I have done a full renovation on a 90 year old home and started a second reno on my current house. I am on a first name basis with my local home depot pro desk, the delivery guys know my cell phone # etc. First  house was in Pasadena,  and my current house is in LA proper not far from Glendale.

First thing to consider is that we pay 9.6% sales tax right off the top on all goods. At least I do as a homeowner. I know in other states sales tax is much less (if they even have it!!), that right there can add 5% to the reno cost right there.  Do filppers have a wholesale lic to avoid sales tax? I have to look into this...

There is also pulling permits, and things like dealing with city occupancy.  My experience with pasadena was expensive and difficult to say the least.  I really wonder how the permitting costs compare to other states.

Now in Pasadena it's all old homes, just how it is.  I bought my home there "As Is w Disclosures"  And I also waived my right to a city occupancy certificate.  It  was 2003 and that was how every house in my price range was so I dealt with it. Also, I was young and stupid. :-/

So ten years later when I sell the house, I couldn't  get anyone else to waive that right.  I wanted to offered my buyers a credit towards closing to sign off on City Occupancy but my realtor said "NO WAY!" hahahahah....

the city had such a beef with my water heater and laundry hook ups. It took three different  inspections to get them to sign off. Luckily my husband was able to do all the labor and take care of dealing with the city and it only cost me time and not money.

Yes I was stupid and bought a trashed house,  but then again it's probably the same situation you would in a flip.

Before I bought the current house I live in (another destroyed rental property)  I educated myself on the City Code  before we wrote up our offer.   My husband and an inspector went over what needed to be done, we figured out the cost and wrote that into our offer.

We knew the seller wanted nothing to do with this property any longer and had no cash to dump into it. The more we could do for him the more motivated he was to sell to us. We had a financing contingency and I knew he was looking for a cash offer and probably could get one.

So it comes down to three things, I think.

Higher  taxes

Higher cost of doing business,

Older housing

ah...california... :)

Andrew Robbins · Answer

Thanks for the reply. Makes a lot of sense, and tells me I have a lot of reading to do! I guess I was speaking more to an apples to apples situation.  A 500k house in L.A. is truly a lower to mid middle class neighborhood house -- maybe what a 100k house would be somewhere else.  My question was more: wouldn't those two houses need the same amount of work since they are attracting the same type of buyers?  And wouldn't that same amount of work cost about the same in each market (ok, maybe it'll be a little more expensive in LA)?  And the 500k houses never just need 10k - 20k worth of work :)

Steven G. · Answer

I don't know the LA market, Andrew. But I imagine it has alot of good areas, and bad areas, but from what I have heard it has a lot more "expensive" housing vs many other areas of the USA; in particular the midwest. With higher price point properties....you do usually spend more making a house nicer. With high end homes...you have to do what I call a "class A" finish out. I am not talking about mansions here - just homes in nicer neighborhoods where 2 working professionals (a couple) might live...AKA an upper middle class neighborhood. In those areas - you have to do crown molding, granite in the kitchen & bathrooms, nicer carpet with thicker pad, nicer cabinets, etc to be able to maximize your ROI. So in nicer neighborhoods...yes, you spend more money on rehabs.

You also have class B, C and D properties (you see those ratings often in the apartment complex world, but I personally also apply them to single family homes). In a class C or D house - say an older lower income neighborhood - you would spend far less money doing a house the same size (as in a class A property neighborhood). In a house like that, you can probably get away with saving and painting the cabinets, putting in basic countertops, basic carpet, and cheap flat paint throughout the house - heck maybe even all white paint! You can literally see a difference of 200-300% in repair costs for a house of the same square footage, but in different neighborhoods/areas.

For more info...I recommend you read the book "FLIP: How to Find, Fix, and Sell Houses for Profit"

Is it less expensive to rehab in less expensive markets?

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