How to Accurately Estimate Costs for a Rehab Deal

Estimating costs for a rehab project can be daunting at first, especially if you’re not a numbers person and don’t fully understand all of the costs that can accumulate throughout a project.  This was one of the tasks that held me back from doing my first deal because I was concerned I’d leave something out of my initial budget that would cost me in the end.

In my opinion, there’s no better way to identify the costs of a rehab than by building your rehab team before you get into a deal.  You’ll have the time to properly vet each team member to ensure they understand the investing business and that they are properly qualified for the job.  Time is money when you are rehabbing so you don’t want to be in a situation where you’re closing on a deal without a having a contractor in place.

The costs of a rehab extend beyond the expenses that you pay to your contractor.  They include the costs to purchase a property, the costs you’ll incur while you are holding the property and the costs on the sale end.  These are all very important to factor into a deal because they can add up quickly and really eat into your profit or worse…put you at a loss.

Okay, so maybe you’re new to real estate investing and don’t know what your investment team should look like.  Here are the main players you need on your rehab team:

  • Attorney and/or Title company
  • Real estate agent
  • Lenders (i.e., bank lending officer, private lender, hard money lender, etc.)
  • Insurance agent
  • Contractors
  • Home inspector

 

The best way to find these team members is by asking other real estate investors for recommendations.  Most real estate investors will be happy to recommend who they are using.  The only exception to this is that you’ll have a hard time getting the name of their contractors.  Good contractors are extremely difficult to find so when an investor does have one, (s)he won’t want to give them up.  So then, how do YOU find good contractors?  You can meet them by:

  1. Attending AREIA events
  2. Walking around Home Depot or Lowe’s
  3. Ask salesmen at a local lumber yard
  4. Responding to an ad or posting an ad on Craigslist (make sure you screen these contractors well)
  5. Angie’s List
  6. Looking for contractor trucks on the highway (this is what I do on my way to and from my day job – I look for clean, presentable trucks and will call the phone number on their sign)

 

Now that you have your team in place you can work with them to more accurately estimate the rehab costs.  These costs can be organized into 4 main categories.

1. Purchase costs/credits.  This includes all the expenses from your due diligence costs to the costs you pay to close on the property.  It also includes real estate commissions that you’ll receive if you are a real estate agent and you’re buying off the MLS.  Some of the expenses in this category are hidden costs.  For example, in Massachusetts it costs about $4.00 per thousand to obtain title insurance.  And I only recently learned that this should be based on the rehabbed value of the house, not the purchase price so you’ll be covered for all losses even if you put rehab money into the property.  Other costs you should be aware of when you close include government recording fees, flood certificates, and other local or state fees.  On the lending aspect, you have your bank’s closing costs, appraisal fees, points, and origination costs.  All of these hidden costs can accumulate quickly.  This is why I would advocate that you start talking to attorneys and lenders now.  Here are some of the most common expenses in this area:

  1. Purchase cost of the property
  2. Home inspection / appraisal
  3. Surveys
  4. Attorney fees, title insurance and other fees
  5. Lender fees and associated costs
  6. RE Agent commission (credit) (only applicable if you’re a real estate agent)

 

2. Rehab costs.  All expenses related to the rehab or construction of the project.  From permits to finish work, you’ll estimate all of these costs under this category.  This area generates the most questions from people who want to know a quick way to estimate rehab costs.  Unfortunately, there is no magic formula to this.  If you’re not sure how to estimate costs, I would suggest you do one of the following:

  • Pay a contractor to walk through a property with you to help you estimate the costs
  • Partner with an experienced rehabber to learn from them
  • Hire a home inspector that has a background in construction and ask them questions as they are inspecting the house

 

3. Holding Costs.  These are the expenses you’ll incur while you own the property.  Some of these expenses are obvious and others are not so obvious.  This is the area that is most overlooked by beginner investors, so be sure to budget for the following:

  1. Mortgage/Interest payments on borrowings
  2. Property taxes
  3. Property insurance and flood insurance, if needed
  4. Utility costs (heat, electricity, water, and sewer expenses)
  5. Lawn maintenance

 

4. Selling costs/credits.  All costs associated with the preparation to sell and the sale of the property.  Again, some of the expenses are hidden in this category.  When selling a property in Massachusetts, you pay $4.56 per thousand of the selling price for transfer taxes.  And similar to the purchase of a property, you have government recording fees and other state and local fees.  Common costs in this area include:

  1. Selling price
  2. Real estate commission
  3. Home warranty
  4. Termite letter, radon and lead tests, or any other test that a typical buyer requires
  5. Staging
  6. Attorney fees and other fees
  7. Seller concessions
Rehab Analysis Example

My Rehab Analysis

 

If you haven’t already, start building your team today!  I don’t know about you, but my goal for any project is to be as precise as possible.  This reduces my risk and and makes me more confident going into a deal.

If you’re interested in getting your hands on my detailed rehab analysis, I’ll send it out to all my blog subscribers starting next week. I’ll also post an instructional video in the next week so you can see the functionality.  Some of the features include:

  • Minimal manual inputs to analyze a deal (formula driven)
  • Automatically calculates your profit, ROI and annualized ROI
  • Quickly compare various funding options
  • Track your budget vs. actual rehab expenses
  • Detailed rehab budget that doubles as a scope of work for contractors
  • Powerful formula based analyses
  • Easy to use
  • Store your contractor pricing and project notes

 

A big thank you to J Scott at 123flip.com for letting me work off his Rehab Analysis template to expand the functionality and use.

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  • Great article about figuring out your real costs.
    A newbie might be blown away by all that other “stuff” you have to think about besides the purchase price and rehab costs.

    • Thanks Shaun. I’m pretty excited about giving away my rehab analysis as well. I just finished it up over the last couple of weeks and it’s really powerful tool that will help not only new REI’s but seasoned investors.

      • I like it. It is pretty clean and easy to follow in your posts.
        I have my own things I have made and refined over the years but will take a look at yours to get some new ideas.
        Always need to keep learning and improving right!

        • The image that you see is only one analysis within the workbook. It has a lot of cool features and really breaks a rehab down to a line item schedule.

  • Hi Justin,
    b Great article. We are always looking to tighten our belt when it comes to our deal analysis. I would be interested in checking out your analysis sheet if you din’t mind. I appreciate it.
    Thank you
    Bill

    • Bill – As long as you are subscribed to my blog, you’ll receive the file in about a week. I’m also setting this up as a thank you gift for anyone who subscribes to my blog going forward.

  • Shariyf Grevious

    Hey Justin, I just subscribed! Great Info looking forward to the Deal Analysis Excel file as well as the detailed video on how to use it.