Making Informed Estimates Means Not Having to Rehab Your Profits

Friday, March 5th, 2010 | Uncategorized

Succeeding in life is often about making solid, informed decisions. The same is true with real estate investing. If you can understand the difference that a smart decision can make, you’ll be able to watch your business – and your profits – grow. Estimating the cost of repairs is one area of real estate investing that can separate the profits from the losses. Underestimating the cost of repairs is a very common mistake that novice real estate investors make. Don’t fall into this trap! Ok, that sounds simple enough, right? But how do you actually prevent repair costs from eating into your profits? Do your homework.

Most real estate investors make their money by purchasing, rehabbing and reselling properties for retail. Others find their niche in renting a property after fixing it up. The key to any of these scenarios is to minimize the risk in making a mistake with repair estimates. What would happen to your profits if repair estimates are off by $15,000? What if something you thought would be a simple repair turns into a major reconstruction? What if a hot water tank gives out and floods the basement in the middle of the night? What happens? Your profits go out the window.

The repair cost risk increases for a complete rehab that will be sold for retail. Repair costs have to be conservative and additional money set aside for the unexpected. The same holds true for rentals, with the added burden of on-going maintenance because the tenant will look to you to keep things in working order. In any case, it’s imperative that you carefully evaluate any needed repairs or improvements and make calculated estimates on materials and labor. This means working with contractors you trust. If you don’t know one, turn to your centers of influence or your REI club to find one.

Here’s another way to help control costs – if you learn how to conduct back-to-back transactions for short sales, you’ll limit your exposure to uncontrolled repair costs. Instead you’ll focus on doing just enough to make the house presentable to sell again, generally with a fresh coat of paint and maybe some new carpeting. For short sale transactions, repair costs will be vital to your negotiation process. The short sale package with your initial offer to the bank will need to include a detailed list of estimated repair costs. Any counteroffers will also include the list, as a reminder of your continued lower offer.

If you keep the calculation, below, as a guideline, you’re more likely to buy smart and maintain your profits:

After repair value of the house – Amount of repairs x 70% = Your maximum offer

For example:

A house will be worth $200,000, after repairs. Before it gets to that point, the kitchen and bathrooms need to be updated, it needs a new roof, furnace and carpet, along with paint and landscaping, all totaling $20,000, including labor. That brings the as-is value to $180,000. Your maximum offer on the house should be $126,000. Or:

$200,000 – $20,000 x 70% = $126,000

Your actual offer should be 60-67% of the as-is value.

Using this formula to calculate your repairs will keep your profits intact, even in the case of the unexpected. Don’t be left wondering what to do next…take the first step to building your short sale expertise by registering to become a Real Estate Rebel today.

1 Comment to Making Informed Estimates Means Not Having to Rehab Your Profits

Larry Morris

I live in South Orange County, Ca. Do you know anyone who is working this area and able to close a deal using your formula? I’ve tried for several months, making 73 offers and the best I can get a lender to counter is about 89% ARV. REO’s get bid above ARV. At the Trustee Sale property is either going back to the lender or sell about 76% ARV. My market is $500k to $1,000k. Based on your experience, what do you think the lowest percentage I could take to net $20k. (ARV-x% = 20k). Thanks for all your help and suggestions.

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