Estimating rehab costs accurately is an extremely important part of the house flipping process. Without it, a house flip project can cost more time and money than intended.
There are some traps a house flipper must avoid when estimating house rehab costs.
Trap #1: General Project Cost Miscalculation
Estimating rehab costs incorrectly is an easy thing for a new house flipper to do. Not having experience or an experienced helper can lead to some miscalculations. The solution is to gather the correct information from a few knowledgeable sources in the local market.
For overall rehab costs, there is a simple formula. Multiply the square footage of the property by the rehab cost per square foot. Look at local or online sources to find the average rehab cost per for houses in your area.
This could take a little bit of effort and time but is worth it. Then add a contingency amount as a safety in case any numbers are off the mark.
Not knowing that ARV (after repair value) of the home can lead to a misjudgment as to whether to buy the property in the first place. If this is less than the overall cost of the project, then no profit will be made when the flip is finished.
The problem new flippers face is calculating the ARV and knowing the rehab costs.
Trap #2: Underestimating the Time it Will Take
Underestimating the time it will take to complete the rehab and sell the property is another error when estimating rehab costs. Expecting the project to take one or two months when it will actually take several or more will lead to more carrying costs, as well as missed opportunities for other properties.
Budgeting accurately for the carrying costs of your property is crucial as unexpected issues can arise that lengthen the timeframe for the flip. These include property taxes, insurance, payments on your loan, and utilities, among others. Remember the joke that there are only two things in life that are certain: death and taxes? If you are in the rehab business, there is a third: carrying costs. These costs can sneak in on you and slowly, but surely nibble your profits away.
Finally, it may be tempting to guess at a certain item’s cost just to save time. However, guessing at the rehab cost when you do not know the actual costs is a mistake. So, it is always safe to assume that you are underestimating the rehab costs of a house flip upon initial review.
Trap #3: Projecting costs based on the DIY Approach
Estimating rehab costs based on DIY estimates is a mistake. Even if the flipper is an experienced builder or contractor, there are things that may need another’s skills to repair. It is wise to estimate based on using a paid professional contractor who could do the work even if it is or seems more expensive. Sometimes, there are items that look easy to fix but lead to problems that are unexpected and only a professional contractor can do the work. If this happens (which it likely will) then there goes the original cost projection, along with some profits.
Not including special items that specifically help sell the house in the cost projection is also a mistake. These can cost a bit extra, but are worth it. While these features are not necessary for the buyer to live with, they help in generating a demand for your property. These can include some nice house front landscaping, a nice garage door, nice window framing, or driveway trim.
Choosing the right shiny features is often the hardest part of this. It is important not to over-improve your property. While it would be nice to add each of these features, doing this is not helpful to overall profitability. The solution is to check out what other houses in the area have done and try to at the minimum match them with these special shiny features.
Trap #4: Missing Hidden Damages
Running through too quickly upon walkthrough and missing hidden damages can ruin a rehab cost projection. Investors must take it upon themselves to conduct a thorough inspection of the property they are interested in buying. Hidden damages are of specific concern for an investor and must be searched for as much as possible. Some of these can require a well-honed eye to spot.
There are three items in particular that you must look out for:
- Lead-Based Paint
- Underground Oil Tanks
These problems are significant and can completely halt any rehab
Trap #5: Not having $ for Unexpected costs
Unexpected costs need to be considered while estimating rehab costs. There must be a portion of the budget that will cover them in the cost projections.
There will always be unknown variables that can drive up costs. The key is being prepared, learning from previous experiences, and getting help when needed.
Having reserves of funds is the way to avoid drowning in these unexpected costs.
For example, carrying costs are unavoidable, so be prepared to cover them. Do not to spend all of your capital on paying for renovations. When estimating your rehab costs, you must have enough money set aside to pay for these as they occur. The flip could take you two extra months or more to finish, so be prepared.
Much of getting caught off guard with unexpected costs is assuming the rehab will go based on the best case scenario. Profit that is only “on paper” has little to do with what you will occur in reality. This is due to wishful thinking and must be avoided by a new house flipper.
Make Accurately Estimating Rehab Costs a Priority
Falling In love with the wrong property when you have made mistakes in estimating rehab costs can lead to financial disaster. A significant amount of risk can be created with simple cost projection errors.
When you’re estimating rehab costs on a house flip be careful, be prepared, and get help from an experienced flipper or contractor if there are unknown costs. Once you know how much things cost and how long they will take, you will be able to estimate deals more accurately. This, like everything else, will come with experience.
Learn more about What to Look For in a Home Renovation Cost Estimator Spreadsheet in this article >
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