Before you can estimate how much the repairs on a property will cost, you must first take into account what the expectations are from buyers in that particular area of town. Further, if you were planning to rent out a property, the rehab would be geared more towards cost savings, reusing or keeping older features and making things durable when it comes to paint and especially flooring. When rehabbing for the purposes of flipping a house at a full retail price, buyers in today’s market have high expectations and expect to be impressed to some extent depending on the area of town. However, it is just as important to understand not to over improve or overspend on a property. Probably the number one rule of rehabbing and flipping a home is to remember that you wont be living there.
Another thing is “systems”. You don’t have to custom select colors and styles for each home you do differently. If you rehab every one of your flip houses using the same exact materials each time, the only one who will know is you and your rehab contractors, and those contractors will appreciate not constantly being thrown different materials at them.
This can greatly affect the quality of the repairs to be done, as well as the extent of the repairs. Therefore, let’s look at how a property would be repaired within each of the four Deal Quadrants.
When estimating the repairs on a property which will be retailed to a homebuyer, you must account for the added expenses of making the property look top-notch. For example, you’ll want to put in nice light fixtures, shinny brushed nickle door handles, nice carpet and so on. As for landscaping, you usually need to re-sod and put in some nice new plants.
If the property is in a lower or moderate income area, you’ll rehab it differently than if it is in an upscale or affluent neighborhood. As a result, the class-level of the neighborhood must be taken into consideration when estimating the repairs.
Estimating Repairs Properly
If you don’t know how to estimate repairs or what you are looking at, you REALLY need to get a professional rehabbing contractor to help you and even handle the entire first project for you. Rehabbing and flipping houses isn’t like what you see on the reality tv shows.
Estimating Repairs Quickly
One of the key parts of being a successful real estate investor is the ability to estimate repairs quickly without the use of worksheets or even a note pad. Most experienced investors do not even bother writing down an estimate. They can walk in the front door, through each room and out the back door, and do a fairly accurate repair estimate in their head.
Getting In The Ballpark
The purpose of estimating repairs is not to get an exact number on how much the repairs will cost, but rather just a ballpark figure so you can calculate how much to offer the seller. You don’t have to be right on the money; you only need to come up with a ballpark figure that is usually rounded to the nearest $1,000.
You don’t want to over analyze the repairs or start picking out colors of carpet or paint either. Your objective is to get a ballpark figure first of what the repairs will cost. Once the offer is accepted (and you know you have a deal), you can go back and get more specific.
In the end, even if you are off by a couple of thousand dollars on your repairs, it really shouldn’t matter when you take into account the cheep prices you’ll be paying for properties.
Low-Balling Repair Estimates
On some deals, the numbers may be a little tight as to whether or not you can buy a property, fix it up, and still have room for a profit. If you come across a deal like this, don’t purposely “low-ball” your repair estimate to make the deal work. You’re only going to get into trouble later down the road. So, if the numbers just don’t work, move on to another property.
Cutting Corners On Repairs
Don’t try to keep your repairs estimates down by cutting corners either (especially
when you are retailing a property). Many homebuyers are looking for a nice house. If you cut corners on your repairs, a qualified buyer may pass on your property. This means it could take longer to sell the house and your holding costs would be higher.
The same holds true if you cut corners when rehabbing a rental property. If the property isn’t nice enough, potential tenants will pass on your unit and keep looking. This means it could take you longer to rent a property out, thereby reducing your cash flow.
Doing Repairs Yourself – Getting Handyman Pay
Another way some beginning investors try to save money on repairs is by doing the repairs themselves. As the saying goes… “A penny saved is a penny earned.” However, if it costs eight or ten dollars an hour to hire a repairman and you do the work yourself instead, you are making eight or ten dollars an hour.
Most people have a limited amount of time they can spend as a part-time real estate investor. Therefore, you must allocate your time as wisely and as efficiently as possible. Do you think you can make more money as a repairman making eight or ten dollars an hour, or more money as a real estate investor out finding and doing more deals? The answer should be very clear.
In short, if you do repairs yourself, you will quickly grow tired of this business; and if you cannot afford to pay someone else to fix the property, then you paid too much for the house.
Include A “Hedge Factor”
Finally, you should always include what investors call a “hedge factor”. This means you should include an extra 5-10% on top of your estimate to cover any unforeseen costs, but be sure not to over estimate the repairs. Having high repair estimates can cause you to make a purchase offer that is too low and not competitive enough with other investors.
See Some Real Life Rehabs
To get a better idea of what all goes into rehabbing a property, look at some properties that have been rehabbed by other investors. Be sure to visit some rental properties as well as some properties that will be retailed. When talking to the investors, ask about what types of repairs they did and how much the repairs cost them, along with how long it took to do the repairs.
Most investors won’t mind you seeing one of the projects they are working on and nothing is better than learning from the real life experiences of others.