Last summer, over a span of two months, Manny and I made 6 trips to Milwaukee. It wasn’t that we were trying to escape the Phoenix heat (well, sort of). No, it was a fact-finding mission.
Our rehabs there were taking too long, and costing too much, to finish. Something had to be done.
What we learned surprised us both. After hours of meetings, driving to and from our properties, and analysis of our communications systems, we made an observation that now seems extremely obvious…
We are the only people that have the knowledge and experience required to accurately calculate our rehab costs.
You see there aren’t many general contractors, or sub-contractors, that know how much time it takes to rehab a house from basement to roof (or foundation to roof if you’re in Phoenix).
Most of them are hired to remodel one part of a house (i.e. the kitchen, master bathroom, etc). They have no idea how much time and money it takes to do it all.
That’s why it’s up to us to figure that out.
Learning how to do a full-blown rehab estimate takes time, more time than I have here to explain. That’s why we wrote a guide to help you out.
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That said, I can offer you 4 easy tips for calculating your rehab costs that will help you quickly decide whether that deal being presented to you by a distressed home seller, Realtor, or wholesaler is worth looking at more closely.
Add up the mechanical items that need to be replaced.
Add up the structural items that need to be repaired.
Add up the cosmetic items that need to be replaced.
Add Up the Mechanical Items that Need to Be Replaced
Mechanical items include stuff like the HVAC system, electrical panel, and hot water heater. How do you know if they need to be replaced? You can usually find the manufactured date on the unit. If you’re going to fix and flip your house for top dollar these items can’t be more than 10 years old.
For the electrical panel, we usually replace them if they’re too small to handle the increased load from a microwave, garbage disposal, or HVAC system.
You’ll have to make some calls to get a ballpark estimate of how much this stuff costs in your area. For us, we usually pay between $3,000-$5,000 for a new HVAC system, $1,200-$1,500 for an electrical panel upgrade and $1,000 for a hot water heater (and installation).
Add Up the Structural Items that Need to Be Replaced
Structural items include the roof, exterior stucco (or siding), windows, and the basement (or foundation).
The average asphalt shingle roof costs us about $7,500 to replace, siding approximately $10 per square foot, and windows around $300 each. When dealing with basement or foundation issues we call in an expert, but always guesstimate at $8,000-$10,000.
Add Up the Cosmetic Items that Need to Be Replaced
Your big-ticket cosmetic items are the kitchen cabinets, countertops and flooring. There should be no doubt you’ll be replacing this stuff. I always figure around $7,000 to replace the kitchen cabinets and counter tops, and $5.00 per square foot for flooring (hardwood or tile).
Case Study: Milwaukee-area Bank-Owned REO
Last week I walked through a Milwaukee-area REO with a list price of $89,000. I calculated the after repair value at $140,000.
Using the approach I just outlined for you, in less than 15 minutes I determined the house needed new exterior siding, a roof, windows, HVAC and a panel upgrade. Heck, it was still on a fuse box!
Worse, the basement was a mess. There were cracks on the walls and displacement in several areas. By running the numbers in my head there was easily $40,000 to $45,000 in rehab required.
That’s way too skinny of a deal.
In my last post, The 2 Things You Must Have to Successfully Fix and Flip Houses, I shared a video with you about the demo work we just completed at our central Phoenix project.
With the house completely gutted now Manny and I wanted to share this video with you. It explains our vision for the property and our cost per square foot for the addition to the home.
In my next post learn what we do to finish our rehab projects more quickly, and watch as we start framing the walls at our central Phoenix project.