5 Tips To Help Improve Rehab Estimates
By JD Esajian on February 5, 2018
Fix and flip real estate investing is largely about the numbers. The better grasp you have on the numbers the better decisions you will make. Even a small increase from your initial estimate may not seem like much but has a huge impact on the bottom line. Conversely, a large oversight in the repair estimate can leave you searching for options and scrambling just to scratch out a small profit.
The first step in any rehab project is figuring out just how much it will cost to get the property from acquisition to completion. There are many moving parts to this, but it is critical that your numbers are as accurate and realistic as possible. It is not an exaggeration to say that everything you do is predicated on your initial rehab estimate. Here are five tips to help improve your next rehab project estimate.
- Core costs. There are many investors who will tell you that it is the seemingly minor costs that can get you in trouble. While this is true you shouldn’t dismiss the importance of recognizing your core costs. These are the costs that will drain a bulk of your budget and determine what you do with the property. Start with a careful evaluation of the roof, structure, electrical and plumbing. If you do not have contracting or home improvement experience it is a good idea to hire someone that does. You may pay a fee for their time but whatever you pay is worth the cost. Missing something with the structure could be an oversight that literally costs you thousands of dollars. The same is the case if the electrical needs to be rewired or the plumbing needs to be upgraded. Your four core costs will be the most expensive and the most important in helping shape your budget.
- Labor. There are many items in the world of real estate where it makes sense to pay to a professional. Even if you are handy the goal is not to simply make improvements but to make improvements that generate buyers. There are some minor items you can probably do yourself but for a bulk of the work you should consider hiring a licensed professional. While most of the labor costs are generic there are some specific costs that can fluctuate. If you do not have an existing relationship with a contractor you need to get at least three estimates. It is important that you ask for an itemized breakdown of everything they will do, including labor. If a contractor scoffs at producing this, it is a good idea to look elsewhere. They are either too lazy or too unprofessional to provide you with a basic estimate. Once you have everything spelled out you can compare apples to apples and see exactly what you are paying. Price is always important but how quickly and efficiently they produce an estimate is a good indicator of how working with them may be.
- Supplies, permits, etc. Anyone who has ever flipped a property before knows to expect the unexpected. There will always be costs, fees and issues that you don’t see coming. If you are still learning the ropes, you should talk to your contractor about exactly what items they need to proceed. The most obvious expense other than labor is materials. Most contractors include materials in their estimate, but it is important to find out. Ask about how they are paid, when they are delivered and what options you have. Choosing the right materials can make our break your project. The wrong countertop may not appeal to your market and leave you looking for offers. Only after you have every option should you commit. During this time, you should find out if there are any town permits that need to be paid for and filed and anything else that will be an expense. As you can see you are going to lean on your contractor and your team until you get a better idea of what you are in for.
- Carrying costs. If you have ever watched a rehab show on TV, you see how much they stress the importance of closing quickly. The reason isn’t to see how quickly they can finish the project but because time really does cost money. Every day you go without selling you are paying interest on your loan, taxes, insurance and utilities. Separately, these items won’t break the bank but added up they can make a dent. An extra month of ownership can literally cost you thousands of dollars that may not have been considered when you made the offer.
- Time. An often-overlooked consideration in any rehab is the amount of time you will put in and ultimately own the property for. There is something in the world of real estate called opportunity cost. When you put time, money, effort and other resources into a property you may not have the ability to act if a better opportunity comes your way. You may not be able to put a specific dollar amount on this, but you need to be able to justify every offer you make. If there is any doubt with your estimate you need to take a step back and get some clarification.
Like anything else, the more properties you are involved in the better you will be at generating estimates. Use these five tips to help improve your next estimate.