Today I want to talk about my philosophy on rehabbing and coming up with that first rough estimate when you walk through a house. I like to walk through the property for the first time and do the math in my head, rounding numbers to the nearest 500 or 1000. I’ve gotten pretty good at that first estimate with experience so that I can comfortably make an offer. The question I want to answer is: do you want to be conservative with your quote or do you want to be aggressive?
A lot of new real estate investors tend to be very aggressive with their rehab quote. By that, I mean that they’ll go through a property and assume that they will be able to bring every cost down. They might be able to get that number down a little, but when you get into a rehab job, other things always pop up. There are things that you wouldn’t notice on a first walk through. Being very aggressive with your quote doesn’t allow for a “fudge factor” or a certain percentage of your rehab being budgeted towards miscellaneous unexpected costs.
On the other hand, if you get too conservative and start throwing extra money on top of every aspect of the rehab, you won’t be able to buy any deals because nothing will seem like it will make money.
There is a fine line, and I think finding that line is more of an art than a science. I’m not talking about getting a form quote from a contractor; I’m talking about just walking through and deciding whether something is a good deal or not. A lot of the time, this depends on how well you know your numbers and how much experience you have. For example, you may know exactly how much it would cost to paint a house, but have no idea how much replacing aluminum siding costs. It all depends on what you’ve worked on before, and the kind of project it is. If I’m looking at an older house that was built in the 20s or 30s, I assume there will be underlying problems and make a more conservative estimate on my quote. But if I’m looking at a newer building, the likelihood of a costly issue popping up is much lower and I can be more aggressive. In hot markets where a lot of investors are fighting over the same deals, you have to take a chance and be a little more aggressive sometimes. If you’re overly conservative, you might lose out to investors that are willing to make a smaller profit or take a bigger gamble. You want to trust your own mind and instincts, but as a general rule the answer to this question depends on:
- how hot the market is
- how familiar you are with every aspect of the rehab
If there is an aspect of the rehab that you really don’t know how to estimate, you need to be able to rely on your network. You can always call another investor up and ask them for a ballpark. To take it back to the original question:
Be aggressive where you feel comfortable that you know the numbers.
Be conservative when you encounter something that you’re not familiar.
In a hot market, you need to be as aggressive and detailed as you can afford to be.
If you’re a new investor, lean on the conservative side. As your experience grows, you can become more and more aggressive. Let me know your thoughts on this question in the comments!