Estimating Rehab Costs before making an offer

[Leo Kotschenreuther]

Dear BP-Community,

I read J Scott's book about how to estimate rehab costs. That is a really great book and I find the technique he describes very helpful.

However I feel like there are a few items where it's going to be hard to estimate their cost by myself, even with the described technique. Specifically, I'm thinking about issues that will only become visible after an inspection by a professional. The items with open ended costs J lists in his book are septic, foundation, leaks below slab and mold issues. I'm sure there are possibly others like the plumbing or electrical behind walls.

How do you estimate the costs for such items before making an offer? After all I don't want to pay an inspector or contractor to get me a bid before I made an offer. That would slow me down quite a bit and cost a lot if I needed to make 100 offers to close on one.

Do you just estimate an "average" cost for those items and if something unexpected comes up during the inspection, would you just renegotiate the deal (making use of the inspection contingency in your offer)?

Or do you rather assume the worst case and estimate a high cost and make your offer based on that?

As always, I'm looking forward to hear your opinions!

[J Scott]

Hi Leo,

Those on your list are all renovation components that are very difficult for non-professional contractors/engineers to inspect and estimate.  Even I don't try to tackle some of those things (septic, some foundation issues, under-slab plumbing issues, etc).

What I would recommend is that you include the cost of the inspections in your analysis/offer, assume that there are no issues with these things, and then re-negotiate if your inspection turns up issues.

For example, to address the areas you mentioned:

- Septic:  If the property is on septic, budget $500 for an inspection, pumping and cleaning of the system. 

- Foundation:  If there is absolutely any concern about foundation issues, budget $250 for an engineer to take a look and write a report.

- Leaks Below Slab:  These are very uncommon, and would likely not be found by anyone on a casual inspection.  If you suspect this, you can likely have a plumber come inspect for free -- perhaps budget $100 for this plumber visit.

- Mold:  If you don't see or smell mold, I wouldn't budget anything for an inspection to target that specific issue.  Your property inspection would turn up any issues relating to mold.

In another words, you can factor in an extra $1000 in inspections for these areas, and include that either in your renovation or your fixed costs when analyzing the deal and coming up with your maximum purchase price.  When you submit your offer, make sure you have a due diligence period that gives you enough time to do these inspections.

Once you get the property under contract, have the septic company do their inspection, have an engineer visit if necessary and get your property inspector out to do a full property inspection -- if he is concerned about a major plumbing issue or mold issue, you can get those specialty trades out to take a look and give you an estimate.

If it turns out there is a bunch of extra work in these areas (or ANY areas) that you didn't expect, you go back to the seller and basically say, "Hey, there were hidden defects that I needed to bring in specialty contractors to evaluate, and here are the reports they provided.  Since you didn't disclose these issues -- you probably didn't know about them either! -- I couldn't have forseen this extra work.  But, unfortunately, it's going to cost me $X in extra costs to fix these things, so I can only make the deal work if we reduce the purchase price by $X."