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Rehabs, Renovations & Remodels - Fundamentals In Estimating Repair Costs

By Kevin Skelly on March 23, 2010

Rehabs, Renovations & Remodels - Fundamentals in Estimating Repair Costs

By Kevin Skelly

Estimating repairs: The silent assassin on your project. Whether you are a full time investor/rehabber, wholesaler or contractor It REALLY can be the single most important factor in determining your bottom line. It is just as important as calculating the after repair value, or ARV, of the property prior to making your decision to purchase. It will affect your bottom line in a way that if you OVERESTIMATE, it might cause you to pass on a worthy deal. If you are a wholesaler or contractor, you might just estimate yourself right out of a deal. On the other hand, if you UNDERESTIMATE, people will feel you might be hiding some things just to move a property, you are cutting corners, or you might be trying to make chicken salad out of chicken@$#%! Either way, NOBODY WINS!

Unless you already are a contractor, you should never commit to hiring one UNLESS you have a written estimate from one PRIOR to starting on your project. This holds true whether you are seasoned or a newbie. EVERYONE calculates their repair estimates differently. There are several reasons for this but two of the most important ones are: 1) exit strategy on the property and 2) doing the work yourself vs. subcontracting the work out. I feel it is best to give ranges-REALISTIC RANGES. I use plus or minus 10%-20%and then validate the reasons for this range. Example: if you calculate a repair cost of $10, 000 the range might be + or - 15%. Therefore, your estimate range would be from $8, 500-$11, 500. Reasons for these differences could be for a rental property vs. retail sale. As an investor, contractor GOOD ACCURATE estimates will establish credibility with your peers in the industry and most importantly will create an opportunity to see black instead of red.

If you do not know what your are looking at ABOVE ANYTHING-DO NOT GUESS!!! It will kill your credibility with other investors as well as your profit potential. I can not repeat this enough, but I will anyway: DO NOT GUESS your repair costs. You will not last very long in the business, I can assure you of that. Bring along an experienced friend/subcontractor/rehabber with you. Do not be afraid to ask someone. It is WELL WORTH IT! You might have to take someone out to lunch, buy them a few beers or even get them a gift card from the Home Depot or Lowe's. These things are really more for their time. It does go a long way. Many people will be happy & honored that you trusted them enough to bring them along to share their "expertise." Even if you had to pay someone to give you an estimate if it were in your budget, the money you spend on doing so could potentially save you from disaster.

You could ask a contractor to give you a bid on it or you might decide to hire a home inspector to do the estimated work needed to be done, or will need to do both. It might cost you anywhere from $100-$450 to do this. Some charge by the hour, but most will charge you by the job. They will generally spend anywhere from a couple of hours to as much as a full day to inspect the property. Many home inspectors do their work for people wanting or needing to get financing for their purchase & the lenders are more stringent on their loan requirements these days. It could be a very different situation for someone wanting to buy with cash. Accuracy IS important, but having too many repair costs might kill your deal and might not necessarily create additional value to your investment so: KNOW YOUR AREA AND FOCUS ON THE EXIT STRATEGY.

Here is the big one that usually NO ONE wants to be associated with: STRUCTURAL REPAIRS. While structural repairs can be daunting, they can also be tamed just like any big beast. You just have to confront it head on. Some people run for the hills. I personally have no concerns about these types of properties because many times these have the biggest profits potential. This one truly depends on your tolerance for risk, BUT if you do your homework these could yield the greatest reward.

In my opinion, here are the most important ones to look out for: 1) ROOF/RAFTERS/TRUSSES- checked for "cupped shingles", excess discoloration, humps in the roof lines. Newer shingles will have more "grittiness" to them, whereas older shingles will look much smoother. 2) FOUNDATION- This one is the LYNCH PIN of the entire project. If your foundation is bad, whether a concrete slab or frame foundation, the chances are so is most of the rest of the house. They could easily account for the majority of the costs. I have seen projects COMPLETELY run out of money just from the aftermath of foundational repairs. 3) TERMITES- Yes, I said termites! So easily & frequently missed, but SO destructive. A couple of very critical things to look for: tiny wings, tiny eggs (kind of look like really small chocolate sprinkles) and "pop-outs." These are pin-hole sized openings in the walls or ceilings that, unless you got a really up-close look, you might think they were just air bubbles left behind on the walls from the paint or even the drywall finishers.

Another essential piece to estimating your repair costs are the non-structural issues. Some of these issues MIGHT be very well caused by the structural issues, although you might not make a connection from one to the other. The prime example here would be water/moisture intrusion. It is also responsible for many of the dollars spent on your project. One of the biggest challenges you might have with water/moisture intrusion is that where it is coming out of often times is not the location where it is coming in from. Water travels the path of least resistance, so you might see water coming from one side of the house, but it could easily have originated from the other. The worst part: YOU MIGHT NEVER FIND IT, especially if you dont know where to begin to look. Some things to look for are bubbles, peeling paint, rust stains on the walls or ceilings.

These specific indicators are usually dead giveaways for water/moisture intrusion. Also, things like bowed wood trim or separating from the walls (door casings), floors (baseboards), ceiling (crown molding) are all signs that there might be an issue. Wood floors that are either cupped or have many small gaps between the planks are also signs. REMEMBER one very important indicator of moisture & wood: Wood is like a sponge in that is absorbs moisture. Also, like a sponge, wood will shrink as it drys out, leaving behind gaps and separations. Over time, this intrusion could lead to mold/mildew challenges, which are not cheap either.

Other interior issues to look out for are the "Big 3"- Electrical, plumbing & mechanical (HVAC). Check all switches in the house & the main electrical panel thoroughly. Make sure your existing electrical service will support any electrical upgrades you plan on doing to the house. For the plumbing, turn on all water faucets in the house, including showers, sinks, dish washer, and washing machine. Look at not only the water pressure but the water volume. It is also a good idea to flush the toilets at the same time. Not that all of this would ever happen at one time, but it creates a good indicator at the quality of the plumbing throughout the house. Also, check your exterior sewer water and/or septic connections. As far as the HVAC goes, is the air handler in the attic, or in a closet or garage? If it is in the attic, it will create a greater potential for damage if the system ever backs up and leaks. Check all dampers and determine if there is proper air flow, especially in the farthest room located away from the main air handler unit. Low air volume might mean the unit is not large enough to cool or heat the entire house or the trunk lines have a leak in them. Either way, it could be an additional cost not planned for.

Last but certainly not least is the exterior curb appeal of the property. This should actually be the first thing to be done & generates one of the highest returns on your investment. A clean looking yard will yield more interest from prospective buyers than a ratty looking one. PERIOD. Regardless of what the interior looks like in the beginning of your rehab project, if your exit strategy is to sell the house right after finishing the work the whole idea is to get people to stop by & check it out. As many as possible! You could have a beautiful looking interior but no one would would really ever know if they see a nasty looking exterior. The perception alone would many times keep interested parties from stopping by. Most yard cleanups could be done pretty inexpensively and take a couple of days at the most. Remember, we are not looking for an immaculate yard right now, but one that says: "Hey! there IS a house there behind all of those weeds!"

In conclusion, you must either get really, really good at estimating these repair costs yourself OR have someone on your team that is. Having very good and trustworthy contractors are like having a great mechanic. It will go much farther than you could imagine. You must do everything possible going into a project knowing what your maximum allowable budget is, and STICK TO IT. Just as a side note, whether you have experience or not, there should ALWAYS, ALWAYS, ALWAYS be a "Fudge Fund" set aside for underestimated or unforeseen costs. Believe me, you will thank yourself for this!

Differences of as little as a couple thousand dollars in overestimating or underestimating your project could be the difference in your investments moving like hot potatoes or sitting growing hair on the shelves. Be wise, be diligent, be thorough and above all, be involved in this part of your project.

Here are the top 10 repairs/updates on your home that will generally yield the highest returns:

1) Minor bathroom remodels
2) Landscaping
3) Minor kitchen remodels
4) Clean looking exterior of the property ( pressure washing, painting, etc..)
5) Adding/conversion of existing space to an extra bedroom
6) Major bathroom renovation
7) Major kitchen update
8) Addition of a covered porch/patio
9) Installing of newer energy efficient windows
10) Enlarging the family/living room.

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Original article published on SooperArticles.com

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