This is a LONG blog post. But it’ll be one of the most valuable things you’ll read if you can focus and pay attention, without getting distracted by something else!
As someone who has done countless full rehabs and new construction projects, I get asked this question by my email subscribers and software clients all the time. I wish there was some easy answer to this question I could give to people every time, or some easy magic button software (which others claim to have by the way) but unfortunately there isn’t a super easy answer, formula or magic button here.
Moreover, I find that this is a question almost always posed by complete novices. Because as you start to gain a little bit of experience in doing deals, you’ll never have to ask some person thousands of miles away for magic formulas or estimating software! So I am going to help you right now to get to that point quickly if you follow my directions! So let’s go:
First off, let’s again agree that there’s no substitute here for experience. I mean, yes, you can use some basic rules of thumb or some generic estimating software to get in the right ballpark if you’re going to wholesale a deal to someone else and that may be good enough. As a matter of fact, later in this post, I’ll show you how to set up some basic rules of thumb. Understand this though, if you’re wholesaling: Most of your experienced cash buyers won’t rely on your estimate anyway and will create their own before pulling the trigger on a deal.
But if you’re going to rehab properties yourself, you MUST MUST ABSOLUTELY MUST understand your own market, what kind of finishes are needed in that market to rehab a property into a rental-ready state or to rehab a property into a retail-ready state, what your local contractors charge to do the work and which different suppliers you can go to for optimal pricing.
There are no no easy “one fits” all national methods or costs here that you can learn or plug in because of massive variations in pricing due to:
- Desired finishes
- Time of year/seasonality/cost of gas
- Prices of materials constantly go up – most suppliers have automatic prices increases every quarter or every 6 months of a few %
- Quality of your supplier relationships and your buying power
- Quality of your GCs and subs. Lots of variability in pricing there
So, here’s how you MASSIVELY shortcut your learning curve. Follow these steps:
- Take a good local general contractor through the property and get them to put together a detailed scope of work and rehab bid. As you walk the property, ask them lots of questions. Take the opportunity to learn and soak up as much as you can from them as you walk the property.
- The way you get a contractor there is by being straight up and telling them you’re going to buy this property and are looking for someone to do the work. Don’t tell them you’re looking to put an estimate together so you can wholesale the deal or anything like that.
- Even if you end up wholesaling the deal, you can refer this contractor to your cash buyer!
- Tell the GC you want them to itemize the quote they give you as much as possible. Couple of rules of thumb:
- All trades must be itemized separately: electric, plumbing, heating/cooling
- Break out other parts of the estimate by category: masonry, siding, framing, roofing, windows/doors, flooring, insulation, sheetrock, painting, kitchens, baths, etc.
- Preferably break out labor and materials separately. Note: Not all GCs will want to go to this level of detail or expose where they have the most margin built in, so be prepared for that!
- Now that you have your first detailed estimate from a General Contractor, you can take that and create what’s called a Scope of Work to give to the next contractor.
- You will often hear advice that you should get at least 3 different quotes, but the mistake most people make is they go and get 3 different quotes at the same time. What you may end up with in that case are 3 completely different sets of quotes. One will include roof but won’t include siding and landscaping, 2nd will include some parts that first one did but not others. So you’re not comparing apples to apples.
- Instead, get one good contractor to walk through and put together a full list of work needed. Make sure it’s comprehensive. Ask questions about why something is needed. Once you get the bid back, go through and get clarifications on any terms or items that don’t make sense. Use this to LEARN and soak up as much as you can.
- Now that you have that full list, create a detailed Scope of Work from that and give it to the next 2 contractors.
- This will achieve 2 things for you:
- You will end up with 3 contractor bids that are similar in terms of work to be done so you’ll be comparing apples to apples
- When you hand that Scope of Work to Contractor 2 and 3, you will already look like you know what you’re talking about vs. when you dealt with the 1st contractor because you’ll use the knowledge you gained from him to deal with the 2nd and 3rd
- Now, this is where things get fun. Once you have these 3 quotes back, preferably itemized and broken out, you can compare the 3 and hopefully find some commonalities of pricing. You’ll see that, for example, to refinish hardwood floors, it’ll cost on average $2/sq ft or to fully repaint the house, it’ll cost $1.5/ft in labor.
- Taking that info, you can easily create a template for yourself in a spreadsheet or a software like Rehab Valuator, so that next time you go into a job site and see that floors need to be refinished, you simply plug in a square footage and your rate is already populated, so that it spits out a budget price.
- If you just go through this exercise one time as I described just now, start to finish, you will be able to at least somewhat competently ballpark repairs in your market going forward, by walking through a property and plugging in all the itemized repairs that need to be done.
This is a Budget and Scope of Work Template inside Rehab Valuator Premium. You can create this template once for your deals, and then use the “Clone” function for every deal thereafter!
CREATING QUICK RULES OF THUMB:
- The exercise I just described above will massively help you learn, which is crucial when it comes to rehabbing your own projects. When it comes to wholesaling, you need to at least be able to ballpark repairs. As I said previously, most of your experienced cash buyers will NEVER rely on your exact repair estimates and will make their own assumptions. So I would not go through the trouble of putting together detailed rehab estimates for your cash buyers.
- Instead, you need to just be able to ballpark repairs in order to:
- 1) Make the right offer on a property to make sure you don’t overpay
- 2) Represent the condition of the property and potential profits credibly to your buyers
- So in order to do that, you need to set up some basic “ballparking” rules of thumb. For example, in my market I know that:
- Total gut rehab with both exterior and interior work will run me on average $60/ft for a rental and $70-$75/ft for a nice retail flip
- Total gut rehab with only interior work will run $40/ft for a rental and $50-$55/ft for a nice retail flip
- Cosmetic rehab for a rental will run around $20/ft (baths, kitchens, flooring, etc)
- If I look at a property older than 40 years and it hasn’t been updated in decades, it’s a definite gut job (have to tear everything down to the studs)
- Etc etc
- Setting up these “rules of thumb” will massively speed up your deal evaluation process, while preventing you from making costly mistakes.
- Go through this exercise one time and you will make massive progress in your ability to estimate repairs and value deals!