Episode 20: A Dummies Guide to Estimating Repairs for Your Rehab Project
Episode 20: Show Notes
When it comes to rehabbing properties it’s important to at least have a MINIMAL knowledge of the process to estimating repairs. This part of the process is where A LOT of beginning rehabbers can easily get stuck!
When we got started, we had next to NO background in construction or repair estimation…but we have learned ENOUGH that has allowed us to still be successful in this business.
In today’s episode, we’ve got 5 tips for you on how to estimate repairs without ANY kind of construction background, so you don’t get stuck during YOUR rehab process!
Here’s a Few takeaways from today’s episode:
- How to NOT let the construction process hold you up
- Why You Need to Know about the Rehabs in YOUR Area & what they can teach you
- Why You Should Reach out to Other Investors & how they can help you
- What You Need to Know About Your Major Expenses
- Our Simple ‘Bid Tip’ for Your First Rehab Project
- A ‘Quick & Dirty’ Repair Estimating Tip to Save You Time when Speaking with Sellers, to increase your chance of getting the deal
Episode 20 Transcript
Andrea: Welcome back to Spouses Flipping Houses. This is Episode 20.
Andrea: 2-0. I just told Doug, “I’m really tired. I hope I have the energy to do this podcast.” And he said, “Just slap yourself!”
Doug: Don’t you know when we’ve been on long road trips, and I had to drive all night because you’re sleeping peacefully next to me in the passenger seat, I would slap myself every 30 minutes just to wake up.
Andrea: That’s terrible.
Doug: It works!
Andrea: I’m just going to eat some candy. I think that’ll be better than slapping myself.
Doug: I was doing that too, but there’s nothing like a good ol’ slap in the face to wake you up.
Andrea: Whatever works, I guess.
Doug: Well, we’re excited. We’ve got a great episode today, again, we hope. This one is called ‘A Dummies Guide to Estimating Repairs for Your Rehab Project.’
Andrea: And it’s kind of appropriately titled because we don’t really have a background in construction.
Doug: Just say it. We’re dummies.
Andrea: Yep, pretty much.
Doug: We’re rehab dummies, and we especially were when we first started.
Andrea: Not anymore, but we were when we first started.
Doug: Right, and we’re going to give you some tips today on estimating repairs and learning the construction business enough to be successful in this business. You don’t have to be super knowledgeable about any one subject, but you need to know enough about everything in order to do it, so we’re excited to talk about it today.
But beforehand, we wanted to talk a little bit about what’s been going on this week with us. We had an awesome Sunday.
Andrea: Yes we did.
Doug: At least for me, being a lifelong Denver Bronco fan. I apologize for any of you out there who are Bronco haters, but great time watching the Super Bowl. It was kind of nostalgic for me to see my nine-year-old son there who has just in the last year become this huge football fan and watch the game with him.
And it reminded me of when I was nine or ten years old back in the 80s, but a little bit different outcome in the Super Bowls for the Broncos then. We were getting destroyed by the 49ers and destroyed by the Redskins, and just getting killed, so it was nice to have a different outcome for him and see him celebrate that.
But I thought there was a little lesson in the Super Bowl too, a little lesson in life. So you’re looking at me wondering where I’m going with this.
Andrea: I’m listening, I’m listening.
Doug: So coming into the game, the Panthers were favored. Everybody had the Panthers winning this game. They were 15 and 1 going into the regular season, and had just blown people out in the playoffs, destroying the teams, cruising on the way to the Super Bowl. And they’re the number one offense in the League, looking like they’re just going to roll over the Broncos, and no one really gave the Broncos a chance.
And you know what, the Broncos probably were under matched. I mean, the Panthers had more speed, more talent, probably physically a better football team than Denver was that day. But for whatever reason, the Broncos prevailed, and in my opinion, it just came down to who wanted it more on Sunday.
And you could tell, Denver came prepared, and they came ready to play ball, especially their defense. And you know, they won the game, and they won it pretty handily. So the lesson in life, I think there’s a lesson in life, and real estate, and business in that Super Bowl. You may not think you are the most equipped person or successful person in real estate investing.
Maybe you’re not the best negotiator; maybe you’re not the best with numbers; maybe you’re not good at estimating repairs; maybe you don’t have all of these skills. But the lesson is that if you want it bad enough, and you’re focused, and you’re committed, you can come out on top. You can be successful, so what do you think about that?
Andrea: That’s pretty good babe. You always find a way to relate sports to life.
Doug: Hey, sports is a metaphor for life. I believe that. Teamwork also is another thing, but anyway, there’s a whole other lesson in that one. But yeah, I had a great time watching the Super Bowl. We also had a change in our rehab that we’re doing this week.
Andrea: Yeah, we had a house that was a pretty light rehab, and we went through trying to look for ways to save money and not do too much to it, and so we decided to go ahead and paint the cabinets, which we do a lot actually.
Doug: Yeah, kitchen cabinets.
Andrea: And the counter-tops were decent.
Doug: Yeah, they were like a corian.
Andrea: Yeah, a solid corian all the way up to the back splash, and we thought you know what, those are good counter-tops. Let’s just keep it. We’ll do new floors and new appliances. We’ll paint the cabinets white. We do that a lot, but in this house for whatever reason, man when they sprayed that white paint on there, it just highlighted every crack and ugly thing on those cabinets.
They’re very, very old. They’re not standard sizes; they almost look homemade, and they looked terrible once they were painted. And so basically the house was done. The rest of the house looked fantastic, and the kitchen looked awful. And you just can’t sell a house that way for top dollar. So we are going back in and ripping out that kitchen, kind of a bummer.
Doug: Yeah, but you know kitchens, and bathrooms, and curb appeal are three of the most important things really in a house, and I think the curb appeal would get people in, and then they would walk around and go into that kitchen and say, “Oh. This is not…”
I think that can be one of those tiebreakers that you don’t want to lose.
Andrea: Yeah, it’s totally worth it to go back in and spend a little more, and I think in the long run, we’ll make a lot more because of it. But it just goes to show since we’ve bought and sold hundreds of houses that we make mistakes too.
Doug: Yeah. Important to walk through your house after the rehab and just take a look and try to look at it from a buyer’s perspective. They’re going to come in here and what are they going to see? And they would have really been turned off by the kitchen.
Andrea: I walked through it and was like, “Oh, no way.” And I had my assistant go to the house too just to get her opinion in case I was being too picky, and she was like, “Nope. Not good.”
Doug: So now it’s going to have a brand new kitchen. It’s going to have the dishwasher that wasn’t in existence before because this was like a 50s house. It’s just going to shine, and someone is going to love that, and this might actually help sell the house at quite a bit higher price, hopefully.
Okay, so let’s dive into today’s topic: A Dummies Guide to Estimating Repairs for Your Rehab Project. When we first started, we had zero background in construction or estimating repairs, zero experience. Now since then, Andrea has become our resident expert through her interior design training and also being our project manager. She has learned quite a bit.
And I’ve learned to estimate repairs on the fly and do a real quick estimate, just because we’re analyzing homes all day long and making offers all day long. So you have to have that skill to be able to that. And we’re going to talk about getting those skills today.
Andrea: Yeah, I think that for a lot of beginning investors, this is one of those things that can hold them up because they’re afraid because they don’t understand this process. And it’s just like anything else: you decide to go for it and you figure it out as you go.
Doug: Right, right. So we have five tips for you here on learning how to estimate repairs. Now again, these come from us being house flippers, not contractors. But this is kind of a practical way, I think, to go about learning it if you absolutely no idea where to begin. This is sort-of how we did it.
Tip number one: learn about the rehabs in your area. So, what do I mean by that? Well, are you in a high-end market or a low-end market? Are homes where you live million dollar homes or are you in a market where they’re $150-$200,000 homes? What part of the country are you in? Are homes in your area that you’re going to be flipping older? 100 year old, 150 years old, 30 years old?
Where we live, almost every house is between 5 and 20 years old. It’s kind of a newer area, so repairs can be very different based on all of that. Are the homes large, on large plots of land, and there’s a lot of landscaping involved as well or are they small, mostly smaller lots, less landscaping?
Maybe you’re in a desert area that doesn’t require that or natural landscaping is the norm. So just learn about your area and what might be unique. Another example of this might be if you, say, lived in the Palm Springs area. Well, you have a lot of mid-century modern homes out there that have a very unique style, and they require a certain type of rehab, finishing, and material in order to sell.
Andrea: Yeah, that’s a great example because that’s one where you can really get it wrong if you don’t know what you’re doing. If you bought a home there, and you’re not from there, you can really rehab it the wrong way to where it will not sell in that particular town. So researching your area is vital.
Doug: Yeah, and we don’t have these so much around here, but maybe back East you might have a lot of older, Victorian-type homes that would have a very similar reaction to the market. You’re really going to have to know what you’re doing in order to rehab those homes a certain way for what a buyer might be looking for.
Also, there could be other issues that you deal with in your area, like maybe certain areas have soft soil and foundations are known to crack and be a problem in a particular city/neighborhood/area. Or maybe you’re in an area that gets a lot of rain, and there are mold issues that you always have to be looking out for.
Certain things like that you need to know what you’re going to be dealing with in your particular market.
Andrea: Okay, tip number two for estimating repairs in your area is to ask other investors what they spent on their last rehab.
Doug: Good tip.
Andrea: And really what you have to do is go to an investor’s club meeting or an investor meet-up group and get to know some other investors. You don’t want to just go to someone that you don’t know and ask them that question, because it might be kind of personal.
Doug: They might feel threatened or something.
Andrea: You probably won’t get a good response, but if you are a part of these groups, and you’re meeting other people, you might get to a place where you could ask them and figure out what the spending norm is in your area.
Another thing that I always do, especially if we’re doing a rehab in a neighborhood where we haven’t done one before or in a new city, I will go through the comps that we find on the MLS that are in that surrounding area, and I will scroll through all of the pictures of the listings of whatever our competition is.
So I’m going to see that if they all have new cabinets, then we probably need new cabinets. Is their landscaping fantastic? Or sometimes, some neighborhoods we have are just dirt, so it’s okay if we have dirt. I’m also looking to see what style buyers are wanting in this area, so is it super modern or is it more traditional.
You can spend a lot of money and build a beautiful, very traditional style home, and kitchen, and bathrooms, but if you’re in an area where people want things super modern, it’s going to sit for a while. It’s going to be tough to sell.
Doug: Yeah, or you might not get as much for it.
Andrea: Yeah, so you need to look at the expectation out there by scrolling through pictures on the MLS, and seeing that this one sold really fast, it’s really modern. So did this one, so did this one— oh man, that one was on the market for 90 days, and it’s more traditional. Okay, bingo. I need to do a modern style home.
Doug: You can get a lot of good information by diving into the MLS and looking at those things, good tip. So tip number three: know your major expenses, know those pretty well. So what are the major expenses?
There’s a handful of them. First would be the first thing I look at when I drive up to a house or if I’m scrolling on Google Street View looking at a house, and that’s the roof. Roofs can be very expensive. Does a roof look worn, old? Is it a shake roof or something that’s going to be needing replacing?
Because if it is, you want to definitely account for that and that can be anywhere from $3-$6 per square foot, just depending on the roof. So know that could be a huge cost. Also, windows, and this is one of those things, again, by researching on the MLS to find out if that’s going to be necessary in your area, but if you need to do new windows, that could be a major expense too.
So definitely account for those, and that’s anywhere from $3,000 to $5,000 for a typical, average size house for retrofit windows.
Andrea: Yeah, but that is definitely one of those things where I would say look through the pictures of your competition. If they all don’t have new windows, you don’t need to do new windows. Save the cost.
Doug: You don’t need it, exactly. It just depends on your area, depends on the house. Another one would be heating and air conditioning. Once again, you may not need it depending on where you are, but if all of the competition has forced air and forced heat, and you don’t, you’re probably going to need it.
So that can be a pretty large cost as well. I would figure $4,000-$5,000 for an average house, depending on what you need there. Another one would be foundation. This one gets a little more technical, and this is the one that I think freaks people out the most. But if you have a potential foundation issue, that could be a minimal cost or it could be a huge cost depending on how bad it is.
So keep that in mind, and how do you look for foundation problems? Well the quick tip on that is to walk around the house and see if it feels level. Do you see places where the floor is protruding up or down? Are there major crack? You want to look for horizontal cracks in the drywall as well on the walls and above doors. Those are major hints for a potential foundation problem.
And another big expense would be a pool. A lot of areas don’t have pools, but out here where we live in the desert, there’s a lot of pools. And if the pool has been neglected or if the equipment is old, that can be a $3,000 to $10,000 fix to get your pool up and running like it should.
So those are just major repairs, major expenses that you want to note as you’re analyzing a house, walking through the house.
Andrea: Okay, so tip number four is to get at least three bids on your first rehab project. And there’s a couple reasons that you’re going to want to do that. Obviously number one is to compare prices, but number two is that this is going to give you an opportunity to basically interview several contractors.
There might be certain people that you’re just not going to work well with, and other people that you feel like you’ll work great with, and you’ll really hit it off. So you want to compare prices, but it’s also great to just meet several contractors. It’s nice to have a good, long list of several people you can call.
Doug: Right, yeah definitely.
Andrea: And then the other thing, if you have a chance and you’ve never purchased a rehab before, it might not be a bad idea to get a home inspection. We don’t really ever do this. I don’t know that we have ever done this.
Doug: I think early on we did maybe once.
Andrea: Maybe our first one, yeah.
Doug: First or second, one of those two.
Andrea: Generally, you really don’t have time. Once you get going and you’re in this business, you don’t have time to waste your seller’s time and your time with doing a home inspection. But, especially maybe your first time or two, to walk through the home with that inspector and see what they’re looking for, it would just be an education process for you to figure out what to look for in terms of repairs.
Doug: I think especially if you have a question about the foundation or something. If it’s an older home, and you just don’t know what to look for, yeah get an inspection on that first one, and then walk around with them. Talk to them; ask them questions. What are you looking for in a foundation?
You can get a good education that way so that next time you feel more confident.
Andrea: The tricky thing here is that back when we started, we were buying mostly REO Bank-owned homes, and they were vacant. So we could bring anybody through there that we wanted to. We could bring in 10 contractors if we wanted to. We could do two home inspections if we wanted to.
Nowadays, most people are buying homes directly from sellers, and if you have already signed a contract with a seller, and they’re ready to go, it’s going to make them really nervous if you bring three, four contractors through. And it’s going to make them really nervous if you bring a home inspector through.
So you have to really gauge your situation and figure out how you’re going to do that without freaking out your seller.
Doug: Yeah, you have to play that one by ear. But you know, like we said, especially on your first one, we recommend getting that done, getting bids, doing the whole thing because you want to make sure you’re not making a mistake, or getting into something that’s over your head, or have repairs coming in at 50 percent more than you expected, something like that.
Andrea: One creative thing you could do would actually be to bring a home inspector through your own home, and it would cost you some money, but that would be a great way to educate yourself on what they might be looking for. Same with contractors, even if your home is not in bad shape, you could just find out what it would cost if you wanted to change out these cabinets, or redo all of your flooring.
Just get some ballpark ideas, and then that way let’s suppose you do have a home under contract and you don’t want to freak out the seller, it’s just a good way to educate yourself.
Doug: Yeah, it’s great. Tip number five, so this is the way that I am typically going to estimate repairs now when I’m doing it from the computer or just walking through a house quickly with a homeowner or something like that. And that is to use a three-tier repair estimate model.
So, after years of doing this, and we’ve done hundreds of rehabs, it kind of boils down to thinking, for this type of house, we’d typically spend about this much money for a rehab. And we narrow it down to a real quick estimate based on price per square foot. So you’re not going to estimate based solely on that, but what we have is a three-tier system.
So we have a light rehab, a medium rehab, and a heavy rehab. Light rehab might be if the house doesn’t need much work, maybe it only needs paint, or flooring, maybe you’re just going to paint the cabinets. It’s a very light fix, either because that’s all it requires to sell or maybe it’s going to be a rental property for you, and you don’t need to go high upgrades on that.
But whatever the case, if you determine it’s a light rehab, ballpark right now we’re talking about $15 per square foot to do that rehab for the house. So, if it’s a 1,000 square foot house, $15 a square foot, you’re looking at a $15,000 light rehab for that property.
Now, you want to add in the major items on top of that. So let’s say it’s a light rehab, but you need new windows because that’s required in this area. You’d want to add that on top of the $15 a square foot, so it would be $15,000 plus another $4,000 to $5,000 for windows, so you’ll come in right around $19,000 or $20,000 on your estimate for that house.
Medium rehab would be about $20 per square foot. Now this would be a little bit stronger than the light rehab. You might be needing a new kitchen or a new bathroom, or both, maybe a little landscaping, possibly doing some more work like moving a couple of walls around or replacing some plumbing and electrical. It’s a little more involved, but it’s not a complete remodel.
This is probably the most common that we run into and again, it just depends on your area and your homes, but this would be $20 per square foot and again, add in the major items on top of that. So if you need a roof and you need to redo the pool on top of the medium rehab, make sure to add in another $10,000 to $15,000 on top of that.
And then of course, a heavy rehab you’re going to go $25 to $30 per square foot or more, depending. So this is something that’s going to need everything. It’s going to need all new interior/exterior landscaping, and most of the major items— add those on top of it. But we’re typically spending $25 to $30 or more per square foot for the heavy rehabs.
So again, very quick way to do it. Is it going to be exactly accurate? No, but in most cases when you’re making offers, going through properties, and doing this on a high volume basis, you just need to be in the ballpark. You need to be within about a five to ten percent margin there on what the actual repair bill will come in at.
You want to be as accurate as you can but without knowing everything and just doing a quick estimate, this price per square foot method plus adding in the major expenses on top of that seems to work pretty well for us. It seems to come in fairly accurate.
Andrea: Yeah, and sellers usually want an answer right away. They want to know what you will pay for their house, and so you have to be quick. If you’re sending out contractors to figure out what you can pay for their house…
Doug: Just to make an offer.
Andrea: …you’re going to probably lose out because somebody else can do this real fast.
Doug: Exactly, so you would use this method because you don’t want to waste time. You need to get a decision or an offer to these people. So that’s it. Just again to recap, the five tips. The first one was learning about the rehabs in your area— style, high-end or low-end, different things like that. The second tip was…
Andrea: Ask other investors what they spent on their rehab and scour the MLS checking out pictures of your competition.
Doug: The third tip was to know your major expenses— roof, windows, heating and air conditioning, pool, foundation. Fourth tip…
Andrea: Get three bids, at least, on your first rehab project.
Doug: And then the fifth tip was the price per square foot method. $15, $20 and $25+ for a quick estimate, so I hope that helped. That’s it for today. These are the methods we use, and just you know, I think the lesson here is don’t be afraid of this aspect of the business.
I think it tends to be one of those fear points that holds people back from even making an offer because they’re afraid they’re going to be so far off on this that they don’t what they’re doing. Get in there; get your feet wet; get estimates; learn from people, and you’ll get more comfortable with it really quickly, and it’s not that big of a deal to determine.
Andrea: Yeah, it’s totally a learn-as-you-go type of a thing. And eventually you’re going to look back and think, how funny, I used to be afraid of that.
Doug: Well, that’s all for today. We hope you enjoyed it. We’re going to go head out of here and check out a few rehabs right now.
Andrea: And eat lunch. Can we eat lunch?
Doug: And eat lunch, yes. So we will talk to you guys next week!
Andrea: Have a good week!
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