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Calculating repair costs accurately is one of the most important skills for real estate investors to master. Getting the repair estimate right can be the difference between landing a killer deal or losing out to another investor.
In this post, we'll go over some expert strategies for calculating repair costs from investor Jerry Norton. Jerry has flipped hundreds of properties and built a multi-million dollar portfolio. He's an expert at analyzing deals and estimating rehab costs.
Let's dive in!
Why Accurate Repair Estimates Matter
When wholesaling or flipping houses, your offer price is heavily dependent on your repair estimate. If you overestimate repairs, you'll offer too little and lose the deal. Underestimate the repairs, and you could end up overpaying.
As Jerry explains:
"One of the key factors of making those types of offers to get great real estate deals that you can make 20 plus thousand dollars from is actually calculating the repair costs."
Getting the repair estimate right is crucial to structuring profitable deals. With the right knowledge, you can consistently buy properties below market value by properly accounting for repair costs.
Avoiding Contractors for Repair Estimates
Many investors rely on contractors to provide repair estimates. But reaching out to contractors takes time. It also tips off other investors that you're analyzing a property.
Jerry has come up with a way to accurately estimate repairs without hiring a contractor. By learning Jerry's method, you can quickly estimate repairs and make offers without letting other investors in on the deal. Let's look at how it works.
Estimating Repair Costs Virtually
With Jerry's system, you can estimate repairs for out-of-state or remote deals without seeing the property in person. Here are the steps:
Step 1: Find Comparable Properties
Look up similar properties that have recently sold in the neighborhood. Try to find comparables with the same bed/bath count and square footage. The more comps you can pull, the better.
Step 2: Review Listing Photos
Scan through the listing photos for each comparable sold property. Make notes on the condition of kitchens, bathrooms, flooring, etc. This gives you insight into the typical condition of homes in that area.
Step 3: Create a Repair List
Make a list of likely repairs needed on the target property. For example:
- Paint interior
- New carpet
- Update kitchen
- Replace roof
Step 4: Estimate Costs
Use repair estimate calculators online to estimate the cost of each item on your list. HomeAdvisor and HomeWyse have good calculators.
Step 5: Add Up Your Estimated Costs
Add up the total repair estimate. Remember to include profit margin for your contractor as well.
Step 6: Verify With Local Contractors (Optional)
If you want to verify your estimate, call local contractors and run through your list. Ask if your estimated costs seem realistic. Revise as needed.
And that's it! With some practice, you can get very accurate with virtual repair estimates using this process.
In-Person Repair Estimation
For deals in your local area, Jerry recommends doing an in-person walkthrough to identify repairs. Here are his tips:
- Walk the exterior first, making notes on the roof, siding, paint, etc.
- Then do an interior walkthrough room-by-room, listing repairs as you go.
- Take photos of major issues like plaster cracks or water damage.
- Pay attention to smell - odors may indicate mold or pet damage.
Once you've compiled your list, follow the same process above to estimate costs and complete your repair calculation.
How Much to Budget for Repairs
As a general rule, Jerry recommends budgeting $25-$35 per square foot for repairs on flips. For lower-end homes, $20 per square foot may be enough. For high-end flips, budget closer to $40 per square foot or more.
Of course, your actual repair costs will vary deal by deal following Jerry's estimation process helps account for the unique needs of each property.
A System for Consistently Great Deals
Accurately estimating repairs takes some practice. But once you have the skill down, you gain a huge advantage over other investors.
Jerry explains why getting this number right is so critical:
"Being able to calculate the repair costs allows you to buy properties at deep discounts consistently."
Rather than relying on contractors, use Jerry's repair estimation system to quickly value deals and make competitive offers. This strategy can help you land many more profitable deals.