Evaluating Real Estate Repair Costs

As an investor becomes more proficient at evaluating repair costs he learns what to expect for any sized property. Size does matter when dealing with repairs.  The bigger the home, the more expensive for the basic mechanical systems. Mechanical systems include the roof, structural aspects, air and heating, windows and doors, plumbing, sewer/septic, and electrical.

I developed a unique software program that uses the living square footage of the property to calculate repairs for everything from floor coverings to roofs. Pro-investors use this software because of its accuracy, ease of use, and they can carry it with them in a laptop connected to a printer in their car to generate the sales presentation for the seller. You can see what it does at http://www.ExcelRESoftware.com.

When a contractor estimates a repair bid for a property, he may measure the various rooms but his real concern is the overall dimensions of the property. He does these cost estimates using the living square footage as I do in the software. He knows what value an air conditioning / heating system is for a certain volume house which is square footage times the height of the living area which indicates to him the required tonnage of the system.

For the investors these calculations are unnecessary because entire system installations should be done by professionals for safety reasons. However, there are times when you have to make an offer in a moment’s notice and having a general idea of how much repairs would be could make a difference in getting the deal or not.

As a guideline, all cities have Building Departments that have to estimate the cost of room additions for assessment purposes. They have access to all the public records of house sales.  They can easily determine the cost per square foot of replacements (kitchens and bathrooms) or entire room additions using these costs that people have already paid. While it is not a gold standard, a value of $70 – $75/square foot is used by many state offices. In areas like California where there are unusual construction requirements, this number could be $200 – $300/square foot or higher.

Let’s assume that for the sake of this exercise, you are looking at a 1,500 square foot property and you need a quick estimate of what to expect for repairs. Without having the software to accurately project an estimate, here is a general guideline:

These estimates assume you will be doing as much of your labor as possible. If you are going to use a contractor to do all the work, add 50% to these numbers.

I can hear the roars from the crowd that these are low estimates based on what you spend to do a similar rehab. I don’t disagree that you can spend three or four times as much as I show here, but this is a rule-of-thumb for a fast calculation.

I recently saw a small burn-out property that was mostly smoke damaged. I estimated the repairs at about $38,000 from the software including a new kitchen, air conditioner, and bathroom upgrades. When I visited the rehabber after the property was finished, their cost had grown to over $78,000! I reviewed their figures and found that almost 40% was hard money carrying costs.  They over-ran their projected budget. Their actual repair costs were $46,000 which included having a contractor do some of the work that they could have done themselves. So all in all they did pretty well for the first rehab. The unexpected expenses were high carrying costs that would have been accurately estimated by the software.

The power of being able to estimate the repair costs accurately can really make a difference when negotiating with a seller. Somewhere in the conversation you should ask if they got estimates to repair what was needed. Usually they will have considered rehabbing themselves and keeping the extra $60,000+ the contract told them their home needed in repairs. I always agree and then move forward with an even higher estimate to reinforce their need to sell and leave the work to us. The bids the contractors gave them are usually 50% – 70% higher than they would actually do the work for.

As a bonus for us, we always tell the seller that all he needs do is take his personal items.  We will clean out the property. This is a huge selling point for many sellers and it has brought us many treasures and even automobiles. Make everything easy for the seller to move on and start over again.

To your limitless success,

Dave Dinkel
Real Estate Mentor Program Founder