When investing in real estate, a lot of new investors struggle the most with accurately estimating rehab costs. Before getting a property under contract, you just need to have a close enough ballpark estimate in order to get past the analyze stage and make an offer. As long as your estimate is within 10-20% of the actual rehab estimate that you get during the due dilligence period, it will be good enough for this stage of finding and analyzing deals. So where do you start? How do you estimate the rehab of a very distressed property? Here’s some options you can choose from.
1.) General Contractor
Probably the best option for someone who is new to flipping houses who has no construction experience. Find an investor friendly GC who has plenty of experience to come inspect the property, walk him through the renovation specifics and add-ons, and give you an estimate. There are good and bad contractor so for more information see my post on hiring contractors.
It is your job as the investor to determine what the end product according to what sells in your market such as what type of counter tops to use and how to reconfigure the floor plan then pass that information onto your GC. You will have to pay him a small fee of $40-$80 for an hour or two of his time, but it will be worth it for his insight.
Keep in mind that the general contractors estimate will include his fees for managing the rehab which will be 5-25% depending on the contractor. If you want to manage the rehab yourself the estimate will be a lot less. Don’t be afraid to ask your GC what his fees are.
2.) Sub-Contractors Bids
If you have some construction and rehabbing experience then you could just cut out the general contractor and manage the rehab yourself. A general contractor is pretty much a manager in construction. Some of them actively participate in the construction but their main job is to manage the project, the sub-contractors, acquire permits, and anything else that needs done to ensure that the project gets done on schedule.
You can save a ton of money and get valuable experience by being your own general contractor in your rehabs. Sub-contractors are the experienced tradesmen that specialize in a specific craft. With some basic construction knowledge you can walk through the house and determine what needs fixed and compile a list of tasks for the rehab.
This list of tasks is called the scope of work (SOW). Check the major mechanical systems to see if they’re working. Once you have your scope of work start calling your network of sub-contractors to start getting bids. If its a simple task such as laying new carpet in a room you might be able to get an estimate right over the phone by giving them some simple information and the dimensions of the room.
For more complicated issues schedule a time they can come out and give you an estimate. They will usually give you a free estimate just don’t expect them to run all over the place without ever hiring them. There are specialist craftsmen in just about anything you can think of.
Here is a list of common sub-contractors:
- HVAC technicians
- painters/ Drywall Finishers
- flooring specialists
3.) Do It Yourself
If you feel like you have enough construction experience and have a good overall knowledge of all the different components of housing you could do all of the estimating yourself without the guidance from the pros. However, this is probably going to be the least accurate estimate and you might have the tendency to leave things out or overlook things. But then again, if you think you can get within that 10-20% of the actual number then by all means give it a shot.
The more rehabs you’ve done the easier it gets to estimate prices, but if you move to a new location the prices can very dramatically depending on where you are. All you do is create your scope of work and go down the list to estimate each item.
You could do this using HomeAdvisor’s True Cost Guide or one of the other cost estimators. Home Advisor has a pretty good cost estimator that estimates based on the location you enter and really goes into specifics.
Another way you could estimate the rehab cost if you have some construction knowledge of what materials are used to complete each task then you could go to Lowes or Home Depots websites to add up the cost of materials. Then add in the labor costs. Materials will account for 15-25% of the total rehab costs, while labor will account for around 75-85% of the total rehab costs.
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