Here's The Easy Way To Estimate Repairs...

repair Hi Moguls, Lex Levinrad back again with another awesomely helpful real estate investing lesson for you.

I’ve got a 3-parter for you about estimating the costs to repair a property including the material and labor expenses. The repair estimate is a crucial component of the After Repair Value (ARV) Formula, which we discussed in my last 2 lessons.

We first learned why it’s so important to understand the After Repair Value (ARV), and then using the formula, we calculated how much to offer a seller for their property. Then in the follow-up lesson, we talked about questions to ask the seller, comps and the difference between cash sales and retail sales.

Go back and have a quick read of those lessons so you can jump right in to today’s lesson about estimating the cost of repairs, because a lot of the things we covered flow into the goods I’m about to share.

Today’s Part 1 will provide an overview of how to estimate repair costs by understanding the material costs as well as the labor costs. Plus, I’ll give you some solid reasons why you really don’t need a general contractor for this kind of stuff – if you follow my advice. (BTW - Part 2’s follow up will be more specific with example numbers and dollar amounts.)

Looking Back So We Can See Where We’re Going

We used this formula to calculate our offer price:

After Repair Value (ARV) x 65% - Repair Estimate (RE) = Maximum Offer Price

Previously, we used an example of a house that was worth $100,000 fixed up and ready to sell (ARV). We calculated that this house needed $10,000 in repairs (RE). Based on the formula, a smart investor would pay no more than $55,000 to buy the house (MOP).

Here is the math so you can see it broken down:

$100,000 (ARV) X 65% = $65,000 – $10,000 in repairs (RE) = $55,000 Maximum Offer Price (MOP)

homedepot So utilizing the above formula, if you know what the house would be worth once it is fixed up (ARV), then all you need to know is how much it will cost to fix up and repair the house (RE), and you can plug in that number to calculate your maximum offer price (MOP).

Unfortunately, this is what trips up many new investors…

But that’s not going to happen to you! Because you are a smart Mogul and well, you’re reading this helpful lesson.

Not Needed: GC

Repairs are one of those things that’s actually not as complicated as it seems. You don’t have to be a general contractor (GC) or even know one to calculate repairs.

In fact, if the first thing you do when trying to figure out the cost of repairs is pick up the phone and call a general contractor – then that, friends, is your huge mistake.

Why?

Because general contractors charge retail prices. They have to make a healthy profit. And they have a huge layer of expenses to cover in order to make that profit.

Consider this before calling a contractor… if you’re bidding for properties online, once you find out that you are the winning bidder, you will either have to put up your deposit or lose the deal. You won’t have a lot of time - at most 48 hours. You will need to get to the property, inspect it, figure out your ARV and repairs and make a decision on whether you are moving forward with the property or not.

Another reason why calling a general contractor won’t work is because in many cases, if you’re meeting a desperate seller, you will have to estimate on the spot what it would cost to fix the property if you plan to make an offer. You won’t have time to call your contractor and get an estimate.

So, you will be faced with the same issue – lack of time. If you’re meeting a desperate seller, your goal should be to meet the homeowner and get them to sign a contract to sell you their house. Once you have an executed contract and the house is “under contract,” then you can then wholesale this property or you can buy it yourself and fix it and flip it or rent it.

leak If you’re going to rehab houses for a living or wholesale and flip houses to investors who rehab houses for a living, you must have an understanding of basic material and labor costs so you can quickly estimate those costs on the spot when you meet the homeowner or, if the property is vacant, when you inspect the property.

Also, keep in mind that renovating a $500,000 house is substantially different to renovating a $50,000 house. The higher the price of the home, the higher quality your labor and materials will need to be. Buyers of high-priced homes are very meticulous. Tenants in lower-priced income properties are not as much.

Break ‘Em Up: Material and Labor

I want you to know that estimating repairs gets easier the more houses you look at and the more times you do it. So, use the info below, and then get out there and practice.

Let’s look at an example property… we’ll estimate prices on renovating a starter home, which could be a first-time home-buyer type of home or a rental property at the lower price points of your target market city.

So we will be talking about basic material and labor costs. In order to estimate costs, you need to break down the costs into two major components:

Material Costs (what it costs to buy the items)
Labor Costs (what it costs to install the items)

color The key thing to understand is that you need to separate the material cost from the labor cost. You’ll land on what the materials cost, and then you’ll figure out how much it will cost to install those materials in the property. Then, add those two numbers and, of course, you will know the total cost.

Keep in mind that the person doing the job needs to make money. They won’t work for free. So, you’ve gotta figure out how many days or weeks it will take to complete the job, and then figure out how much money they need to make per day or per week to be satisfied.

A good question to ask your laborer is: “How long will it take you to do this job?”

Once you have the answer to that question, your next question should be: “If I purchase all of the materials, what would you charge me for labor?”

Be prepared… contractors and handymen who work on houses hate estimating jobs this way because they make way less money. But it is the key to understanding the cost. If you can figure out what a certain person needs to make per day in order to be satisfied and you know the cost of the materials, then the only variable is how long the job will take.

Once you separate the cost of the material and the cost of labor, then it becomes much easier to estimate.

Material Costs

Material cost is the cost of the raw material that you would need to purchase for the job:

Tile
Paint
Carpet
Countertop
Drywall
Doors
Cabinets, etc.

The easiest way to learn about material costs is to simply visit a Home Depot or Lowe’s store near you. I do this with my coaching students to show them how easy it is to estimate and calculate repair costs. It does take some time, so I suggest you take a notebook and pen and give yourself a few hours to go through the store. You can also break this up into two or three trips if that’s easier for you. When you are walking through Home Depot or Lowe's it is best to go aisle by aisle.

hammer Take note of the costs of these materials:

Ceramic Floor Tile
Carpet
Laminate Flooring
Drywall
Insulation
Interior Paint
Exterior Paint
Baseboard
Kitchen Cabinets
Countertops
Kitchen Sinks
Kitchen Faucets
Doors
Toilets
Vanities
Bathroom Faucets
Bathtubs
Shower Doors
Bathroom Tile
Ceiling Fans
Locks
Door Knobs
Light Switch Covers
Electrical Outlet Covers
Lights

If you do this exercise slowly and methodically, then you will learn what the basic components of materials for each room cost. You will also see that there is a variety in pricing depending on the quality of the materials. Don’t necessarily go with the cheapest item. Even on a rental, you don’t want your place to look cheap (or perhaps, fall apart easily). But, of course, you can get decent materials without spending a fortune.

The Detailed Goods Are on the Way

So, now you have a general idea of what’s involved in estimating repairs because you know you need to break out the costs into materials and labor. And, of course, you now understand why you really don’t need a general contractor.

Look, I can write an entire book on rehabbing and estimating costs of material and labor (I actually have done just that).

But, the purpose of this 3-part lesson is to give you a rough primer on understanding material and labor costs. A basic foundation, if you will. I cannot cover everything about repairs in one or two lessons. But I will certainly deliver the goods by giving you lots of details to get you moving in the right direction for estimating repair costs.

So, in my next lesson, we’ll do just that – we’ll talk about some of the specifics, including prices, when it comes to the particulars of home repairs. We’ll cover flooring, bedroom and bathroom repairs and the biggie – kitchens. And, I’ll discuss repairs involved when a property has been vacant.

Stay tuned…