EP 213: Should You Be Conservative or Aggressive When Estimating Rehab?

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┬ávery 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:

  1. how hot the market is
  2. 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!

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3 Comments

  1. Christian Austin on 08/26/2014 at 7:13 AM

    Mike. Love the show. I listen to your episodes each morning while getting ready for work.

    I’m a wholesaler, and am working at getting better estimating rehab costs. If you’re looking for ideas for future shows, Episode 213 made me think that an episode or series on estimating rehab on the initial walkthrough would be great. Possibly, discussing the components of the rehab you look at, e.g. roof, siding, electrical, etc. and order that you look at them. I know costs can vary depending on where you are flipping, but an idea of what you would pay per unit (e.g. sqft.) to have the component repaired would probably be helpful to many listeners, myself included.

    Thanks. Keep up the great work.

    –Christian

    • Mike Simmons on 08/26/2014 at 7:39 AM

      Hey Christian! That’s for listening!

      Doing a series on estimating rehab is a great idea! I will definitely do at least a show or 2 about that in an upcoming episode. It is such an important part of investing. As a wholesaler, if you can provide accurate renovation estimates to your buyers, you will be providing an extremely valuable service to them! It will set you apart from many wholesalers who simply do not do a good job of estimating those costs.

      • Christian Austin on 08/27/2014 at 9:03 PM

        Awesome Mike! I really appreciate you reading my comment. I can’t wait to hear the series!

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