Estimating Rehab Costs – Part 1
The most common question I get from new investors is to accurately estimate rehab costs for a flip project. While I could spend many, many articles discussing how to assess rehab costs yourself (and I will, I promise), I wanted to spend some time discussing how a brand new investor might go about getting a rehab estimate without any knowledge of construction.
The first step, once you have a property under contract, is to get a qualified property inspector to visit your property and do a full inspection. Within a day or two of the inspection, the inspector will send you a full report listing all the problem areas of the property. Once you get that property inspection, there are two things you can do to get a reasonable rehab estimate:
- The easiest thing to do is to call a couple General Contractors and let them know that you are planning to purchase a house to rehab, and that you’d like a “pre-purchase rehab estimate.” Let them know that you’re willing to pay a few dollars ($30-50 is pretty standard) and if/when you get the house, you’ll consider them to do the work. The GCs will come out the property, and based on what you tell them needs to be done, they should be able to give you a ballpark estimate (within about 10%) of the total rehab cost.
A couple things to keep in mind when doing this:
- Not all GCs are alike, and some are used to doing high-end renovations while others are used to working with investors. On my first project, I got bids ranging from $30K to $80K (for work that I could probably get done now for $20K) because I was talking to the wrong kind of contractors (they mostly did high-end remodels for homeowners). Try asking other investors who they recommend in your area, or at very least ask the GC if he is accustomed to working on investment rehabs.
- The estimate the GC will give you will include the overhead associated with having him manage the entire project for you. This overhead cost could range anywhere from 5-25%, depending on the GC. If you plan to manage the project yourself (hire your own subcontractors), the total rehab cost could be considerably less than what the GC estimates.
- Now, let’s say that you plan to manage the rehab yourself, and want to get a more accurate estimate of what the costs will be without GC overhead. First, you need to break down the rehab into parts that will be sub-contracted out to individual contractors. Then bring in those individuals for estimates on those parts.
For example, get a plumber to give you an estimate on things like replacing toilets, faucets and hot water heaters. Get a flooring guy to give you estimates on replacing carpet, wood, or vinyl. Because you will likely be hiring these contractors to do the work if you get the project, you shouldn’t expect to have to pay for these estimates.
The big question a lot of people ask is, “What contractors should I be working with?”
On a typical project where, you will want to find/consult with some subset (or all of) the following contractor specialities:
So, when you create your list of work items (your Scope of Work), break things down into these categories.
One more tip —
If at all possible, you should try to find a great handyman to help you out. A really good handyman can do a lot of the stuff other contractors can do, but at a fraction of he price. For example, you’d probably pay a plumber about $50 to replace a faucet and an electrician about $70 to replace a light fixture; a handyman would probably charge you about $20 for each of these items. In fact, a great handyman can do a lot of things, including basic plumbing, electrical, carpentry, painting, drywall, flooring, etc.
Just don’t get into the habit of trying to use a handyman for things where you need a professional. For example, no matter how good he is, you probably don’t want your handyman to replace your roof or rewire your house (though many will say they can). And for things where finish is really important (like hardwood floor installation), you probably want to entrust the work to a professional in that area, who will be a bit more attentive to detail.