How to [Accurately] Project Property Repairs

One of the most frequent questions that we get here from our students and borrowers at Strategic Real Estate Coach is “How can I accurately budget repairs?”

This is a BIG deal because comping the property correctly and making sure we know and understand the After-Repair Value (ARV) of the home is very important to have a successful, profitable house flip. One way to ensure that we are offering the correct asking price on a property and that will be a solid investment is by running the numbers through our Automated Offer Formula.

This formula is simply:

ARV x 68% – Repairs = Max Offer Price

The first objective when analyzing whether any property will be a profitable flip is to determine the After-Repair Value (ARV). In my market of Cleveland, Ohio, the rule of thumb is that most properties that are attractively renovated are going to sell for about $110-$130 per square foot.

Let’s walk through a current case study of mine to help make sense of all the numbers.

1148 Whittlesay Lane, Rocky River, OH

What is unique about this property on Whittlesay is that the city of Rocky River is one of the top school districts in Northeast Ohio, it’s close to Lake Erie with a great downtown shopping area and it’s very safe and walkable. So overall, it’s a highly desired neighborhood to live in.

Properties in areas like this usually have slightly higher prices per square foot, so for this particular home, we are estimating $150-$175 per square foot when it is sold. After reviewing comps in the area for similar houses, we settled on an ARV for this property of $399,000.

$195,000: Purchase Price
$170,000: Private Lender                           
$110,000: Josh’s Money
$100,000: Potential Private Lender #2
$80,000: Rehab
$399,000: ARV
$84,000: Est. Net Profit After All Costs

We will be all in on this property for $275,000 + $9,900 in interest + $30,000 in realtor commissions & closing costs.

One important thing to keep in mind as a new or seasoned real estate investor when looking for new deals is that the listing price is almost meaningless. As a real estate investor, based on running your numbers with the Automated Offer Formula, you are going to offer your Max Offer Price and that’s it. If the seller accepts your offer, great, if not, move on to the next.

Now, before we get into the details about this property, please keep in mind that $80,000 for a rehab budget is large, so if you’re working on your first or second deal, I would not suggest going this high, unless you have very reliable contractors that you regularly work with. For a first or second renovation, try to stick with a budget under $40k.

Some of our initial thoughts when visiting Whittlesay was that it has:

  • Newer windows
  • Brand new roof
  • Vinyl siding
  • 2 car garage

All those exterior newer items are helpful in saving money in the budget. We will be re-doing the driveway, but most of the work that needs to be completed on this property is all interior, cosmetic renovations.

5 Phase Renovation Breakdown

To tackle a project like this, we put our budget together and break it down into 5 Phases.

Phase 1

  • Have all your permits and SOW together
  • Make sure your plans for structural changes are approved with the city you are working in to begin renovations
  • If you are replacing any windows, make sure those are ordered first because it typically takes about 2-3 weeks to receive them
  • Start interior demo work – tearing down walls, removing carpet, cabinets, etc.

*It’s important to note that normally, exterior projects such as replacing the driveway or painting the siding would also be included in Phase 1, but since we are in Cleveland, OH in the middle of winter, our Phase 1 for this project starts with interior work only.

Phase 2

  • Demo is finished, and framework is complete and ready to put the property back together
  • Rough plumbing and rough electrical
  • HVAC installation
  • Once the plumbing and electrical inspections are clear, you can start putting up drywall and putting things back together
  • Trim and any crown molding installed
  • Interior doors and door handles installed

Phase 3

  • All interior paint
  • Tile installed – bathrooms and kitchen backsplash
  • Vanities and mirrors in bathrooms installed
  • Cabinets and countertops in kitchen installed
  • Electrical finish
  • Plumbing finish
  • Paint and waterproof basement

Phase 4

  • Landscape
  • Exterior paint
  • Replace garage door, driveway, exterior doors
  • Privacy fence installation
  • Custom awning

Phase 5

  • Refinish all hardwood floors
  • Install carpet
  • Install appliances

 

To learn more about how we find, renovate and sell our houses in 60 minutes or less, register for this free web class. After flipping about 700 houses, we’ve perfected our investing system down to a simple 5 step system.

Be Daring,

Josh and the SREC Team

5 thoughts on “How to [Accurately] Project Property Repairs

  1. it is with clarity expecially for the inexperienced. take your examplle that the offer price should be
    $399,000 X 68% – $80,000 = $191.32 ? it is to say that the purchase price you paid is slightly higher than waht you would offer but it is very slight.
    I have a case of which the purchase price is relaatively low but the the house is more or less a bone structure suppose i want it to be restored for commmercial use which will cost twice or more of the purchase price – suppose i intend to have the property for commerial use … does this make sense – that the renovation price is singifically more than purchase price ? so that i can not follow this principle in making an offer – what woudl be the base for making an offer in this case ?
    by comparing it’s nearby sold houses ?
    my appreciation

  2. If you want to sell fast (time is money) or if the market becomes mushy, you have to figure as much as 20% less than so-called “Market Value”. I don’t know if in this case the ARV already is 20% less than the “Market Value” or if in this case they are one and the same? If it’s not, then you need to subtract another 20% from the ARV to arrive at your purchase price in the formula. It’s far easier to sell at a discount than it is to wait for the ideal price. This also depends on the market. In some markets there so much flipping competition that even Bank REO’s hold out for higher prices. In other markets you can push sellers down down down. The key point here is to never overpay or underestimate your costs. If you stick to that, its much harder to lose. But if you overpay, underestimate costs, try to get top dollar, etc… your profits evaporate.

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