The costs for estimating homes for rehabilitation projects can seem like an arduous task. We can always find a reason not to pull the trigger because at the end of the day we can only calculate so much before we have to just seize the opportunity if one truly does exist. There are some variables beyond our control but having said that we can minimize the risk by appropriately calculating the exact rehabilitation costs or close enough to it to be covered by our buffer. In this article I want to show you how to minimize the risk of those unknowns by correctly calculating what we do know.
The first time we see a property we want to quickly eliminate the property as having potential if we estimate the rehab costs as exceeding the ARV(After Repair Value). If a property for example has a ARV of 50k and the repair costs are at or exceed this then of course we simply aren’t interested. Sometimes however we need to do quick math to arrive at this number. In this case we would use the following formula:
Cosmetic Repair Only(Paint, Cleaning, Landscaping)
$10/Sq. Ft.
Moderate Repairs(New Windows, New Flooring and above)
$15/Sq. Ft.
Severe Repairs(New Furnace, New Roof, New Walls and all above)
$20/Sq. Ft.
This quick math isn’t exact but can save you the time and effort from taking any further steps. Now that you have decided your interested it’s time to figure out how much we are going to offer on this house. Below I’m going to outline the steps you will take to estimate the repair costs using a SOW(Scope of Work).
The First thing you should do is to map out in broad terms such as counter, cabinet, painting and plumbing. Then you break down into each category what needs to be done and where. This means that if you need to replace all of the outlets in the house you need to have an idea of how many outlets you need to replace and in that case it would be placed in the category with electrical. As such you would follow suit with each category.
After you have determined what needs to be done and what materials you will need to do it you have to figure out the costs. In this case all materials are known costs so this just simply takes a little effort on your behalf. As for the contractor if your paying one to do it you will need to give him your checklist and he will have to make a determination for cost at that point. In some cases rehabbers will have the SOW done for them but in my opinion it is for your benefit to do it yourself so you truly know the cost for repairs. Active involvement in your Rehab projects is a necessity especially if your just starting out.
Now that you have an excellent idea of how much this rehab is going to cost comes the easy part. It’s this simple formula and out comes the purchase offer for the house:
65% ARV – Rehab Costs = Purchase Offer
Now we make our offer using this simple formula. In some cases you may want to include a buffer of a few thousand dollars for the variables I referenced earlier in this article however it’s not a necessity for each deal. In this case we have done a detailed rehab repair with the SOW so we have a very good idea of how much we will have into the property.
DO THE NUMBERS WORK?
If the numbers work then my advice is to BUY IT!!! If you hesitate for too long I will or someone like me. The moral of this is put your time in upfront and do your do diligence. Once you do and the numbers work offer on the property. Check out the Quick Rehab Tips article for more information on Rehabs.