Rehabbing Scope of Work: Understanding Costs

Repairs are a wild-card in the rehab process, and you’ve got to be as accurate as you can to give yourself the best chance for maximum profits. For each property, you will need to decide the level of work you want to do on the house. Use the following categories, listed below from least expensive to most expensive. I didn’t include costs, because they are dependent on your area. For instance, a basic rehab may cost $10 per square foot in Ohio, but $100 per square foot in California.

  • Basic Rehab: This takes the least amount of work necessary to get the house in a livable condition. For a basic rehab you’ll do a full clean-out of the house and lot, and paint and carpet. Work goes fast and the house is usually sold to a retail buyer for a low price, or an investor looking for rental property.
  • Standard Rehab: This is the most common project you will undertake. Make sure that all the work you do for a standard rehab is congruent with the neighborhood standard.
  • Remodel: This is a standard rehab on steroids. In a remodel project, you are replacing and upgrading throughout the house. You also may be removing walls and widening spaces. You may even decide to make changes to the layout by adding rooms, increasing the size of rooms or moving bathrooms, etc. This represents the most work, the most risk and potentially the biggest payoff.

So how do you determine a quick work estimate? While back in your office, you should have done some number crunching based upon the information you got from any research you’ve already done on the property and the neighborhood. The numbers will change, but you need a place to begin.

To determine cost of repairs after the walkthrough, you have two options; Bring your contractor on the appointment to give you an estimate of the repairs. The benefit to you is accuracy. The drawback is that it’s expensive and can take a few days for the work estimate to be completed. When building a relationship with a contractor they will want a fee for their time. Later, after you’ve established a history, most contractors will waive the fee because you’ve proven your worth and they want to keep their crews working.

Your second option is to do the calculations and estimates yourself. If time is of the essence, you might even work up the numbers in your car with your calculator. You have other appointments to see, and projects to manage. You have a couple of options here. The first is to use an online software program that will quickly generate an estimate, based upon the cost of materials and labor in your area (ex. HammerPoint Project Estimator in OpenRoad). The second is to use some generalities based upon what you know it takes to rehab a kitchen, a bath, etc. You might also use the square footage to determine costs, which will require some research into pricing. To shorten the learning curve, network with other rehabbers in your area to see what type of rehab they normally do, and what their cost per square foot is.

Keep in mind, you could have three contractors come out to the property and provide you with three very different work estimates. So while a contractor’s estimate improves your odds of getting an accurate figure, it’s not fool proof. The key is to get a figure that is close. You can have your contractor inspect the house later to fine tune numbers. Just be sure to leave a clause in the contract that gives you some protection should a major repair you overlooked suddenly appear.

Factoring Hidden Costs

Beginning rehabbers who use the offer formula I’ve recommended often make the mistake of believing that the repairs are the only significant costs. Not so. The offer formula is useful to generate a fast number that puts the investor in the best position, should the project hit some roadblocks or take longer than anticipated. In essence, it will always generate a lower offer than what could be necessary, but you’ll find that you’ll need the extra padding.

The additional costs that you need to be aware of include:

Buying Costs: Whenever you buy real estate, you incur the costs associated with transferring ownership. This includes title insurance, conveyance fees, inspection, and appraisal; however, it does not include the cost of money used to make the purchase. Often, these fees will be paid by the seller, but it’s a good idea to “Pay all seller closing costs” as a way to provide additional value to the homeowner. Usually this works out to 1.5% of the purchase price.

  • Holding Costs: Some properties will sell faster than others. You never want to be caught in a position where you didn’t account for the possibility that your house would take longer to sell than expected. Holding costs include property taxes, insurance, utilities, and any maintenance costs. You also may have association dues should the subject property be part of a homeowner’s association. To determine a rough estimate of what your holding costs will be, multiply 1.5% by the purchase price.
  • Cost of Money: Unless you have considerable savings, you’re going to need to borrow funds for the purchase and rehab or the property. Consider the following questions:
    • How much money do I need?
    • How long do I need it?
    • What interest and fees will I need to pay?
  • Selling Costs: These are the costs incurred when putting the house on the market and having it sold:
    • Real Estate Agent Commissions (Typically 6% of sales price, with 3% to the listing agent and 3% to the buyer’s agent)
    • Closing costs (Usually 1.5% of sales price)

Depending on the volume of properties you wish to rehab and sell per year, you may decide either to sell the house on your own, or enlist the help of an agent. If your company is churning out rehab after rehab, you will want to spend your time managing projects, investigating leads, and filling up your pipeline; therefore, using an agent is probably the best. However, if your business is small, perhaps only rehabbing one house per quarter, you might prefer to sell the house on your own and save yourself the costs of paying commission.

Again, the formula I recommend will put you in the best position to make an offer that safeguards you should something go awry. At some point early in the process you will want to take a closer look at the costs of the project. This means getting a more accurate repair number from your contractor, as well as including the additional costs outlined above.

To learn how you can profit from successful real estate rehabs, visit today.

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