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How To Accurately Estimate Rehab Expenses

One of the neat parts in watching your favorite real estate investor on TV is how they estimate rehab costs. In what appears to be a quick stroll through the house where they pull numbers out of thin air is actually based on years of experience, and hundreds of deals. Regardless of the show, or the investor, the budget drives everything you do in a rehab project. If your estimates are off, you will be forced to find capital and hope you can shift gears and scratch out a small profit. If you come in under your estimated costs you will realize a greater return and an increased bottom line. All it takes is one oversight with the property or underestimate with the repairs to completely change the numbers on a deal. Here are five tips to help you nail your repair estimates and improve your bottom line.

• Start with a plan. The more properties you look at the more comfortable you become with your estimates. It takes looking at dozens and dozens of properties before you really know what you are looking at. As you work to get to that point it is a good idea to have a property evaluation plan in place. There is no shame in having a spreadsheet or a detailed list of everything you need to look at. As we mentioned all it takes is just one mistake to throw your rehab into a tailspin. With just a little help you can be confident there is nothing that will escape your watchful eye. Every new property you look at you can add something new to your list. It is also important to take notes as you walk the property or as soon as you get back in your car. Walking blindly into a property and pulling numbers out of thin air is not the best recipe for success.

• Know the neighborhood. All properties are not the same. A property in one part of town is not nearly the same as one ten miles away. One of the keys to estimating rehab costs is knowing and understanding a specific market. Some areas it is ok spending more on higher priced appliances and better fixtures. Other markets are better off with practical upgrades that are more in line with buyer preferences. Blindly spending money does not work for every property, and it most cases can actually be a big negative. Before you even make an offer, you should look at recent sales and current listings. With the sales you should look to see if there is a common trend among properties that sold. Use these trends to your advantage and incorporate them into your property. You don’t need to make the property an exact replica of everything else on the market, but you don’t want to be too different either. The better you know the neighborhood and the preference of the buyers in the market you can tailor your work to it.

• Don’t rush due diligence. If you are a busy investor you may not have the time, or desire, to walk around every property for an hour. As valuable as your time may be looking and evaluating properties is a necessary part of the business. You can be swift in the property, but you should never be hurried. You should feel 100% confident that there is nothing you have missed or aren’t comfortable with. There are times when you may be willing to take an educated gamble with the property but at a minimum you need to be aware of the potential downside. Once you leave the property you should do your homework at town hall, with your attorney or with your real estate agent. There will be plenty of times when you will put work into a property only to have it fall out for a variety of reasons. As many times as this happens you still can’t rush the due diligence process.

• Room by room. Ok, now we can get down to the nitty gritty part of assigning a dollar amount to the work. Instead of using a blanket number you should add as you go, room by room. As obvious as it sounds you need to be realistic with what you want to do. You may want to knock down a wall and open the room, but you need to assess the potential return of doing so. Keep your numbers and upgrades in line with reality. In fact, it is a good idea to either inflate the costs as you go or add 10-15% when you are done. After you are done walking the property go back and add up your total costs for every room. If your numbers are too high look for ways you may be able to trim the fat. If you have a bare bones minimum number that doesn’t work for the market it is ok to pass on the property and move on to the next one.

• Its ok to ask for help. Where many investors get into trouble is thinking they know more than they do. You may have a basic understanding of kitchen rehab costs but if there is any variance you are lost. In these situations, it is ok to ask for help and seek the advice of an experienced contractor or handy person. They will not be available on every property but if you have cultivated the relationship they should be willing to make the occasional exception.

Estimating repair costs should be more than simply throwing darts at a board. You should be confident with every offer you make that you have done your homework and know your numbers.

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