Epic Real Estate Investing - Estimating Repairs | 3rd Degree Thursday

Episode Date: February 5, 2015

On this episode of 3rd Degree Thursday, Matt elaborates on his quick and dirty formula for estimating repairs.  This formula is useful for crafting your offer quickly so that you can secure the property with a contract.  Once the property is under contract, Matt explains how to confirm your estimates and how to negotiate your purchase price if you originally underestimated it. ------- If you have a question, comment or concern that you’d like Matt to address live on the show, send it to him at [e-mail] and type "3rd Degree" in the subject line… or leave him a voicemail on the Epic Hotline at 1-888-891-7203. See you tomorrow on another episode of Financial Freedom Friday!   What interests you most? E ducation P roperties I ncome C oaching Learn more about your ad choices. Visit megaphone.fm/adchoices

Yes, hello and welcome. Welcome to another episode of Third Degree Thursday, the show where I subject myself to you giving me the third degree. And today's question comes from Greg, Greg Gordillo, and Greg writes. Hello, Matt, I just wanted to let you know that I enjoy listening to your podcast on iTunes and had a question that in which I would like further clarification. And one of your previous episodes, how to quickly estimate repairs you define as a good rule of thumb, the repair costs being $5 for light rehab.

That's $5 per square foot light rehab. $10 per square foot for moderate rehab and $15 per square foot for heavy rehab. Would you be able to elaborate on what light, moderate, and heavy rehab means? Well, of course. And then Greg goes on to write, the reason I ask is that I am looking to purchase my second property. And the place needs a lot of work, but has great potential in a very good area, suburb of Houston. We feel we are able to buy the property at least $20 to $45 per square foot below market value. But the house is very outdated.

All four bathrooms need to be upgraded. and there are also repairs needed on the roof, foundation, windows, et cetera, before anyone could live in the house. Do the rehab rates per square foot only take into consideration cosmetic repairs, in other words, upgrades, or is there an allocation being made to cover repairs such as AC, electrical plumbing, foundation, etc.? Any additional guidance on this subject would be greatly appreciated.

Best regards, Greg. Well, great question, Greg, and I'm going to answer that for you in 30 seconds, right after this. Have you ever wondered how some investors seem to get the inside scoop and snatch up all the deals? Wonder no more. The secret to finding deeply discounted properties has been exposed, and it lies within your ability to find motivated sellers. Go to find motivated sellers ASAP.com

and download their proven five-step checklist to find motivated sellers in any market. Find motivated sellers ASAP.com. Deeper discounts, less secrets. Find motivated sellers ASAP.com. Greg asks, would you be a.sap? able to elaborate on what light, moderate, and heavy rehab means. Yes, certainly. But before I do, Greg, I want to put my previous third-degree Thursday episode titled How to Quickly Estimate Repair Cost, the one that you were referring to. I want to put that into context. The quick estimate

that I referred to and the formula, the $5 per square foot for light rehab, the $10 per square foot for medium rehab, and the $15 per square foot for heavy rehab, that's for the purpose of putting an offer together quickly in the interest of getting the subject property under contract for a price that's in the ballpark for it being a doable deal for you. That's it. Okay? It's just for you to get to get a price on that piece of paper that's in the ballpark to get that property under contract. That's it. And then you'll want to confirm this rehab estimate after you're in contract. So what I shared with you on that episode, it's not the end all be all estimate for your fix and flip or your rehab and hold. It's just to make an a

approximate allowance for rehab costs within your offer to purchase. Okay, so I just want to make that clear. So now that we have that context, when do I use the $5, $10, or $15 per square foot number in my calculation? Well, first, I never use less than $5 per square foot. Even when the motivated seller I'm speaking to says there's no repairs needed and you get that every once in a while. Oh, the house is perfect.

It's fine. It doesn't need anything. I don't care. I still use $5 per square foot in my calculation. I mean, I have yet to buy a discounted property that needed $0. in repairs. At the very least, it always needs something, paint and flooring, okay, but it always needs something, or a really strong cleaning and trash pickup or something like that. It's never zero. So I always use $5 per square foot for that scenario. Now, I'll use $10 per square foot most of the time.

That's the number I use most of the time for my quick, dirty calculation. And so when I ask the seller if any repairs are needed and they say they don't know or they mention a few minor things, that's, I use $10. Now, if the seller runs down a list of things, I'll use $15 per square foot. And if that list is substantial, I might even bump that up to $20 per square foot. I mean, recently we had a motivated seller said that one of the rooms had burned down. So that's going to be up there. So we put $20 per square foot on that.

Now, in my mind, my rehab thoughts are either, one, I want to leave room for my buyer so that they can rehab. This would be in the event of a wholesale transaction. So I want to make that allowance for them. So when they purchase the property, they have room to do those repairs and still create a profit for themselves. So that's the first mindset. The second mindset is I want to clean the place up, make sure everything works and everything is safe. That's what we call rent ready, so to speak. Make sure everything is clean, make sure everything works, and everything is safe and everything's up to code.

And that's what we do in the event that I'm going to go ahead and hold the property. All right. So now what Greg is asking about a property, he's asking about this property in a nice area. needs significant upgrades. And I'm taking it that he's going to hold this property. So this is a whole other thought process altogether. I mean, a basic cleaning and repair job is probably not going to allow him to compete with other properties on the market, whether it's his intent to hold the property or if it's to fix and flip the property. He's going to have to compete. So he's got to bring it up to the standards of the neighborhood. But he does know going in that it's going to need

a lot of work. So if I were in his shoes, Greg, if I were in your shoes, I would estimate on the high side. I do $15 to $20 per square foot. Get the thing into contract and then have a property inspection performed so you know exactly what's up with the property and then have a contractor, take that inspection report along with everything that you would want and done it to the property and including all the upgrades and everything and get a bid for that or maybe a couple of bids. Talk to a couple different contractors. And if it turned out that I needed an adjustment to the purchase price for this deal to work for me, I would take the report. and bids back to the seller and explain Mr. Seller, based on the current market conditions,

the comparable homes in the area, the property inspection report, and these contractor bids that I have right here will need to adjust the purchase price to compensate for these most recent findings. That's how I'd do it. And they're going to say yes, or they are going to say no, and either way is 100% okay with me, because it's just a math equation. either that deal is going to work or it's not. Now, if you want to get down to the nitty-gritty, there are countless books on the subject.

There are spreadsheets on the Internet. There are software programs. There are online calculators. But in my opinion, unless you are going to be doing the work yourself, I think getting down to the nitty-gritty there, doing all the getting down and calculating all those numbers and the exact repair costs and everything, I think that's a waste of time,

unless you're going to be doing the work yourself. And here's why. Because with determining, say, the value for a house, you know, if you lined up 10 appraisers for their opinion of the same house, these are 10 licensed certified appraisers, this is what they do for a living. And if you lined up 10 of them along the wall and you asked each one of them what they thought their opinion was for the house behind you, each one of them would have a different answer. You'd get 10 different answers. The only opinion that matters is the one of the person that will be writing the check to buy the house. Okay. So always keep that in mind.

and with that same line of thinking, same goes for rehab. If you laid out 10 different books on the subject of determining rehab costs using each of their respective approaches, you're going to come up with 10 different answers. If you had 10 different contractors out there, you're going to have 10 different answers. The only approach that counts is the one that you're going to use or the one your contractor is going to use. As I mentioned, not the best use of your time unless you like this type of work. That's the caveat. If you want to do it, if you enjoy it and it makes you happy, go for it.

I always say if it makes you money, if it makes you happy, do it. If it doesn't do you of those two, don't do it. So your time is just much better spent in generating leads, talking to motivated sellers, and negotiating contracts. So Greg, to recap, get the property under contract for this particular property, get this particular property under contract at $15 to $20 per square foot. Use that number in your calculation. Use your gut.

If you think it's more on the $20 side, go ahead and use that. number if it's not as bad as you say or you think you can just think it's less use your gut is what I'm trying to say you don't have to be exact once you're in contract get a licensee's licensed contractor or two or three get them to come out and give a bid to confirm your numbers and you know if there are adjustments or additional negotiations to be made then do it if the seller doesn't want to play ball move on to the next deal all righty so should you have a question comment or concern that you'd like me to address here live on the show send it to me at podcast at epic real estate.com and type third degree in the subject line or leave me

a voicemail on the epic hotline at 1-888891 7203 and I'll play your voice right here live on the show and I'll make you famous. See you tomorrow. It's Financial Freedom Friday. This podcast is a part of the C-Suite Radio Network. For more top business podcasts, visit c-sweetradio.com.