The first and most important skill of a flipper or wholesaler is estimating repair costs. Overestimate and you will never make competitive offers, underestimate and you can deal your business a fatal blow before you even get started. But how do you estimate costs when you’ve never rehabbed a house before? How can you know what a contractor will charge when you’ve never hired one before?
One of the primary difficulties when we started our business was creating accurate repair cost estimates. We found ourselves continually getting beaten out by other investors when negotiating with sellers. Our suspicion was that our conservative repair budgets were combining with our high money costs to ensure that our maximum allowable offers (MAO) were not competitive. If we were going to lock down more deals we needed to improve our ability to make highly accurate repair estimates.
Refining this process was also a priority because we knew that getting a property under contract was only the beginning of the process. Accurate and specific repair estimates would facilitate creating our scopes of work, screening contractors and mean being able to see more deals by knowing more precisely how much profit we could expect on the back end.
Though I have a background in residential construction I never constructed bids for projects or did accounting. Our entire basis for costs was a short two page sheet designed by a veteran investor who was kind enough to share it with us. No doubt in his hands this concise and focused layout was a powerful and time efficient way to estimate his costs, but, as novices, we had no way to temper or detail the general numbers outlined in the sheet.
A bathroom was $2500-3500. But what did that mean? A bathroom in a rental? A master suite? A tub and shower combo or a jacuzzi? Floor tile only or half wall tile? And for that matter, which tile?
To create a sheet that would work for our lower level of experience, we needed to create a detailed and itemized sheet that would let us deconstruct the costs to create as detailed a picture of the work to be done as possible.
Over the next few weeks I will be sharing the process we developed that helped us create a customized local cost sheet along with details on how you can do the same.
In our next post we’re going to create the most important ingredient for taking on this project: inspiration! We’ll give you the reasons why you absolutely have to create a custom cost sheet right now.
See you then!
By Nate Baumgart