You’ve heard the stories…
Wholesalers are bringing offers like this:
They’re way off on their rehab estimates and they have to walk away from the contract because they underestimated rehab costs and presented too high of an offer to the seller; an offer that no cash buyer will touch. Here’s a Bigger Pockets post on rehab horror stories because of underpricing the repair cost.
If you’re on any cash buyer lists… you know exactly what I’m talking about.
The flip side of that exists too. Where you OVER estimate rehab costs and you come way too low on your offer and no seller accepts it.
Accurately estimating repair costs is a skill set that every investor must know very well if they want to be in this business (regardless if you’re off-market, a wholesaler, or a flipper who gets deals from the MLS). There are books and courses solely written just for this particular subject because—let’s face it—nailing rehab costs when you’re new at this, is daunting and challenging.
So, here at Ballpoint Marketing, we believe in first copying what other successful people are doing (when you’re starting out), to quickly gain momentum and success. So, we looked at what our most successful clients are doing, and we asked our own staff and owners (yes, we use our own mailers to invest in real estate), and we came up with 5 of the most popular methods to accurately estimate rehab costs.
Let’s get started…
1. Average Price per square foot (less accurate, but fast to learn)
A lot of investors function with this “rule of thumb”. It might be $25 per square foot or $50 per square foot. It all depends on your market and the cycle. There are a lot of cons to this formula, but it can be a quick way to get started today in figuring out rehab costs in a jiffy.
To get a feel for what should be a good “price per square foot”, talk to local rehabbers. Ask them if they have a price per square foot on rehab costs. Or, see what other rehabbers are paying for their rehabs and then calculate it out yourself. This does take “groundwork” in talking to people (you’re an investor, you SHOULD be talking to people), but if you do this a handful of times, you’ll get an average “price per square foot”.
The Cons:
Each house will be different and the average price per foot can change dramatically if a house needs foundation repair, a new roof, or a new HVAC system. An average “price per square” foot might only cover paint, flooring, cosmetic bathrooms, and cosmetic kitchen, and you’ll overlook bigger items that can rack up your rehab bill fast.
Pro tip: Instead of having a total “average price per foot” you can break it up into “categories”. So for example, if the floor needs to be replaced, you have an average square footage for that category. We’ll jump into more details regarding “categories” in the next section.
Pro tip #2: You can also have 3 separate average square-foot prices that fit depending on the intensity of the rehab project. For example (strictly an example and these numbers are not to be taken literally):
- $25 a square foot for a cosmetic rehab.
- $30 a square foot for a cosmetic rehab plus some maintenance (some plumbing, exterior repairs, electrical panel, etc). $
- 40 a square foot for a complete gut (plumbing, HVAC, roof, etc).
Now, let’s move on to a more accurate, but difficult method to learn…
2. Category method (most accurate, longest to learn)
In this rehab estimation method, you’ll look at the house in “parts”. This is the method that the Bigger Pockets book on estimating repairs, generally uses:
Here’s a list of general categories you’ll need to know:
- The flooring
- The kitchen
- Appliances
- Bathrooms
- Paint (Internal and external and drywall and siding repairs can be clumped in here)
- Landscape
- Roof (and soffit work)
- HVAC
- Plumbing (septic as well)
- Foundation
- Clean up/Haul away
- Electrical
- Demo
- Carpentry (fixing stairs, doors, patio, finish work, decks, etc)
- Pest control (Basically tenting the house)
- Windows (replacing windows is pricey, so it gets its own category)
- Concrete(Cracked driveways can be a hefty bill)
Many investors will have their own list of categories that may differ from this one, but this is generally a complete list of items you might run into.
This method is not an “overnight” checklist. You’ll have to do some leg work to attach a price to each category. That leg work comes in the form of asking GCs and subcontractors, talking with other investors, getting bids, etc. Yes, it’s a lot of work… but this is your job from now on, and skill set you must learn if you choose to be efficient in this industry.
Here are a couple of ways to price out categories:
Three-tier pricing
Some investors have a three-tier structure for some categories, for example:
- Light rehab
- Medium rehab
- Complete replacement
And then, for each category, they have a general cost for each either based on a “bulk pricing” or a “price per square footage”. So for example, if you need a complete replacement for all the flooring and it costs you $7.00 per square foot for complete replacement, you do the math and that’s your cost for that category.
Pro tip: This is a “10,000-foot view” of rehab. Mastering this will make you an advanced pro in your industry. And with this knowledge, you can also learn which deals to AVOID. Here’s an article that explains rehab items that you might want to avoid (or at least know how to spot and price them), from “Flip This Ugly House”
Now… that was the most difficult method for estimating rehab items; it takes the longest to learn. No matter which method you take on, you’ll eventually start to get better and look at rehab projects in “parts”, using some form of this Category Method.
Let’s start looking at easier and less difficult rehab estimation methods, and move on to the “Category Method’s” cousin…
3. Per Room Method (Less accurate, difficult to learn)
Very similar to the “category method” but you price out per room; living room, kitchen, master bedroom, outside, etc.
This can be a very quick way to come up with a rehab cost if you need to present something to a seller on the spot. And you would have the same “bulk pricing” and/or “price per square foot” formula you’d use for the “category method”.
The only con to this is that most contractors don’t price out per room, but by the entire square footage of the house. So you won’t be on the same “par” as contractors.
If you’re not sure how to find out what the square footage of a room is, first measure out the length and width of the room with a measuring tape, then Google “square foot calculator” and use any of the free calculators online to estimate the square footage.
Here’s what a square footage calculator might look like:
4. The GC method (Very Accurate, Fastest method, but most expensive)
Another very simple way to overcome the fear and difficulty of estimating rehab costs is by bringing a trusted GC (general contractor) with you. This is a quick and easy way to get an accurate rehab cost, tomorrow.
A general contractor is someone who is (typically) licensed, runs construction projects, and hires subcontractors for all the repair items. The good ones have a very deep understanding of prices and length of time for a rehab project.
The only con to this is that you’re at the whims of one contractor. He can be the most expensive contractor on the market, or he can be the worst (underestimating costs dramatically just to win a bid and then has to bail on the project because he realizes he’s not getting paid much), either way, it’s a risky solution where the only solution is working with a GC that has high referrals from other investors or one you’ve worked with.
To find a good GC, you might want to visit your local REIA.
5. Reverse Wholesaling (Very accurate, but slower than the GC method)
This is probably one of the fastest and most accurate ways to get started in estimating repair costs. This is more of a wholesaling strategy than a method of estimating rehab costs. However, if done correctly with the right person, you don’t have to know ANYTHING about construction and still present a good offer to your seller that is almost guaranteed to get sold. If you’re not familiar here’s a brief explanation:
Reverse wholesaling explained
This acquisition strategy try’s to almost completely eliminate the risk of having to walk away from a seller because you can’t find a buyer. Instead, you have a buyer from the very beginning—before you even start negotiating. This strategy can be a great way to eliminate your fears of underestimating/overestimating rehab costs because you’re getting a quote directly from the cash buyer before you send an offer in.
Here’s the gist:
- Network to find a (real) local cash buyer.
- Rub elbows with him, take him out for coffee; You have to get to know him first.
- Open up to him about how you’re getting started finding off-market deals and that you’d like to filter these deals to him.
- When you find a deal, and before you give an offer, call your cash buyer to meet you at the house.
- Ask him how much he would pay for this house, and how much the repairs will cost.
- Present your offer to your seller based on your cash buyer’s estimate.
- Sell the deal to your cash buyer.
That’s a quick and easy way to move a deal.
Of course, some people will fear that the cash buyer will just go around you. And the truth is, there’s no way of preventing that from happening. But the flip side to that is, that there are hundreds of eager cash buyers out there, and there are a lot more ethical cash buyers than scammy ones. Word travels fast in this industry, so seasoned investors know that. That last thing they want is another investor spreading a rumor that they backstab people.
After a while of doing some reverse wholesaling, you’ll start to see some patterns in construction costs and start gaining some knowledge of your own.
Here’s a step-by-step video from Ryan Dossey, who started his 8-figure acquisitions business and real estate portfolio with reverse wholesaling:
Using Software
There are lots of software out there that help estimate repair costs. Though I didn’t add that as one of the 5 methods because it’s much better for you to have your own feel and understanding of it rather than relying on calculators.
However, if you’re stuck in a bind, and quickly need an estimate, we do recommend this rehab calculator that people on our staff use. There is a cost, but it has some really great reviews. That link btw, IS an affiliate link where we may or may not get paid a commission.
Tools you need to help estimate rehab costs
Regardless of what method you choose to use (even if it’s a mix of them), you’ll need a few things:
- A checklist
As you’re inspecting a house, you should carry a checklist. This does two things: A.) It keeps you organized; If you try and do everything off the top of your head, you’ll forget about the windows that need replacing, or that possible leak. B.) Makes you look professional; Have you ever had a carpet cleaning salesperson come in with no clipboard, or “system”, or staggering around not knowing what to say? It doesn’t look professional and lowers your value. Here’s a video that shows you an example of a rehab estimation checklist.| - A clipboard
To hold your checklist, contracts, and “credibility packet”. - A calculator
You don’t want to try and calculate the price per square foot in your head. While you’re inspecting a house, you want the full attention of the inspection (making sure you don’t miss anything), and you want a calculator to do the “thinking” for you when it comes to calculating numbers. - A 25’ (or bigger) measuring tape
You’ll need to measure out some rooms to figure out the square footage. - Camera
You’ll want to take pictures of any serious repair items to show a GC or another investor. - A network of investors
In case you’re stuck trying to figure out rehab costs, you can just give them a ring.
Advanced tip: Know your market like a pro
This advanced tip isn’t a “tool” but it’s an important part of estimating rehab costs. Because each neighborhood and city in your market has a different “demand” for what a house should look like. For example, there might be one neighborhood that is stellar; it’s a higher income bracket, with white-collar jobs. Sometimes, homeowners of these neighborhoods demand higher-quality material. In that case, you’ll have to bump up the cost of rehab. The opposite is true… you don’t want to over-rehab a house and pay more than what you have to.
This is true for market cycles too. Here’s an example: in a recession-type of market where there are few buyers and lots of other houses to compete with, you’ll have to bump up the quality of your flip to outshine the other houses.
This goes for different assets as well. If you go with the “category method” or the “Per room” method, that cost is going to change from MFUs to SFR. They might seem obvious to some, but you’ll be surprised at how many investors intermingle rehab costs of different assets.
The Truth About Estimating Rehab Costs
As everyone is looking for “quick fixes” and quick “rules of thumb”… the truth is there really aren’t any concrete ones (except for the “avg price per foot” but as I mentioned, there are some big problems with that). Knowing what a house will cost to repair is part of your job as an investor. You NEED to learn how to do this. And it takes time. It takes experience. And sometimes… it takes making some mistakes. But hopefully, this guide gives you a starting base to NOT make any major mistakes where you’re OVER estimating repairs and can’t get offers accepted, or worse: underestimating construction and costing you a fortune.
To learn how to find these fixer-upper homes, off-market…
… Grab our free Marketing Guide below: