Estimating rehab cost, putting on a good offer

[Ramysh Bito]

Hello, I am a Dutch RE Wholesaler and i am having trouble putting on a good offer. I am still fairly new to this business, but want to make it a real business. I am seeing myself as a real estate entrepreneur, rather than an real estate investor (for now). I have had some leads now and put on offers. But because the house prices are so high in the Netherlands and (maybe I haven't seem them yet) people aren't accepting my offers, around 70% ARV yet. I'm having trouble estimating rehab cost. Can anyone in the Netherlands or Europe help me? What is a good rule of thumb in Europe/ the Netherlands to live by? Because of this i have bought a book Taxatieleer vastgoed 1. This can help me give a property a better value. I hope someone can help me!

[Jos Van der Sluijs]

Hi Ramysh,

I'm also in the Netherlands, but from Amsterdam, a completely different market.

I think you should always start with rehab costs and your ARV but I never use 70% ARV because it doesn't tell me much. It assumes you spend 20% of the ARV on rehab but I don't think that is the case, at least not most of the time. I always use hard numbers. Let's say I think ARV € 275.000 and renovations costs me € 60.000 I also like some profit so let's keep € 30.000 extra (you also have selling costs, but let's forget about those for now).

€ 275.000
€ 60.000
€ 30.000
€ 185.000

€ 275.000 / 70% = € 192.500 you just gave € 7.500 of your profit away. If something unexpected happens and your rehab cost are 10% extra you have another € 6.000 less profit. Leaving you only half of what you would like to get to even take the risk of investing. Most investors here are going for a 10% minimum profit.

The other way around is also possible. Let’s say you can get the ARV of € 275.000 but you only need some new paint and flooring so your rehab is only € 10.000 You would still love to get a € 30.000 profit so you can pay:

€ 275.000
€ 10.000
€ 30.000
€ 235.000

using only the 70% ARV you would miss out on the € 30.000 profit. Of course you could start with the negotiation at € 192.500 to get even more profit but stopping there would not be the best thing, assuming your rehab costs and ARV are accurate.

I would really invest in yourself and your team to make sure the rehab costs and the ARV are accurate. From there you take the amount of profit you need and a little extra for if you messed up the ARV or Rehab costs.
At auctions prices used to be around 80% of the free market value (normal selling price of the building in normal condition). Now days I see them go for 100% of the free market value. Investors put them straight back on the market hoping somebody will overpay a little making them a € 10.000 profit, but that’s no way to start you investment business.

So educate yourself in ARV and Rehab Costs in you market.

Jos