REISkill - When Buying - Estimating Repairs

Estimating Repairs

Once you've gained access to a property, your next step is to estimate how much it will cost to repair it.

Different Types Of Rehabs

Before you can estimate how much the repairs on a property will cost, you must first take into account what you plan to do with a property. This can greatly affect the quality of the repairs to be done, as well as the extent of the repairs. Therefore, let's look at how a property would be repaired within each of the four Deal Quadrants.

Estimating Repairs When Wholesaling

When wholesaling a property, you'll want to avoid doing any repairs because you will be flipping the property in it's "as-is" condition to another investor. The investor you wholesale the property to would then be responsible for doing the repairs.

 

Realize though, even if you don't plan to do any repairs to the property, you must still know roughly how much it will cost someone else to do the repairs. This is because it affects how much you should offer and how much you can wholesale the property for.

You also need to speculate as to what a future investor would do with the property. For instance, would the investor you wholesale the property to most likely retail it to a homebuyer, or is the investor more likely to make the property into a rental? This can have an affect on how the property is rehabbed and how much the rehab costs will be.

Quick Fixes When Wholesaling

Even though another investor will be responsible for doing the repairs after you wholesale them the house, sometimes it can be to your advantage to correct certain problems ahead of time so you can increase the wholesale value of the property and your profit.

One of the most influential things you can do would be cleaning up the yard so the property has better "curb appeal".

 

(Just incase you don't know what cub appeal means, this is how appealing the property looks when standing at the curb.)

Increasing the property's curb appeal by cutting the yard is especially important if the property is severely overgrown and this can be an inexpensive repair that is quick to have done.

Removing boards from windows and replacing any broken glass, can also have a dramatic effect on the property's curb appeal and the ultimate price you are able to wholesale the property for.

Along with cleaning up the yard, you may want to clean out any trash from the inside of the house.

Another repair you may want to consider is patching the roof if it is leaking. If a leak has damaged the ceiling, you should consider repainting the ceiling or slapping a quick piece of sheetrock up over any hole. Even if the roof needs total replacement or the ceiling has a hole, just do a quick patch. You'll be amazed at how much more interested other investors will be if water isn't pouring in every time it rains.

The point is to only do quick fixes that will increase the number of investors who'll be interested in the property as well as increase the price they're willing to pay you for the deal. As a general rule, if you do any repairs at all when wholesaling a property, it shouldn't be more than one day's worth of work for two guys.

Rehabbing When Retailing

When estimating the repairs on a property which will be retailed to a homebuyer, you must account for the added expenses of making the property look top-notch. For example, you'll want to put in nice light fixtures, shinny brass door handles, nice carpet and so on. As for landscaping, you might need to re-sod and put in some nice plants.

If the property is in a lower or moderate income area, you'll rehab it differently than if it is in an upscale or affluent neighborhood. As a result, the class-level of the neighborhood must be taken into consideration when estimating the repairs. The same holds true if the property will be used as a rental.

Rehabbing A Rental

When rehabbing a rental property, several factors come into play when estimating the repairs. First, you want fixtures that match the class level of the neighborhood. For example, you shouldn't put nice/expensive light fixtures and faucets in lower-income HUD rentals, nor should you put in plush carpet.

Another thing to consider is "durability". You want the property to hold up under wear. This will reduce your maintenance costs in the future. Some simply things you can do to make a rental more durable would include using commercial grade linoleum and carpet. U sing semi gloss or satin paint makes it easier to clean after a tenant moves out.

We'll talk more later in this section about the differences between rehabbing a rental property and rehabbing a retail property, as we go over estimating particular repairs.

Estimating Repairs Properly

To help you estimate repairs properly, we have included a "Repair Estimate Worksheet" 5.18 of this Section. This worksheet is only meant to be a guide for you until you get the hang of estimating repairs on your own.

Estimating Repairs Quickly

One of the key parts of being a successful real estate investor is the ability to estimate repairs quickly without the use of worksheets or even a note pad. Most experienced investors do not even bother writing down an estimate. They can walk in the front door, through each room and out the back door, and do a fairly accurate repair estimate in their head.

Getting In The Ballpark

The purpose of estimating repairs is not to get an exact number on how much the repairs will cost, but rather just a ballpark figure so you can calculate how much to offer the seller. You don't have to be right on the money; you only need to come up with a ballpark figure that is usually rounded to the nearest $1,000.

You don't want to over analyze the repairs or start picking out colors of carpet or paint either. Your objective is to get a ballpark figure first of what the repairs will cost. Once the offer is accepted (and you know you have a deal), you can go back and get more specific.

In the end, even if you are off by a couple of thousand dollars on your repairs, it really shouldn't matter when you take into account the cheep prices you'll be paying for properties.

Low-Balling Repair Estimates

On some deals, the numbers may be a little tight as to whether or not you can buy a property, fix it up, and still have room for a profit. If you come across a deal like this, don't purposely "low-ball" your repair estimate to make the deal work. You're only going to get into trouble later down the road. So, if the numbers just don't work, move on to another property.

Cutting Corners On Repairs

Don't try to keep your repairs estimates down by cutting corners either (especially when you are retailing a property). Many homebuyers are looking for a nice house. If you cut corners on your repairs, a qualified buyer may pass on your property. This means it could take longer to sell the house and your holding costs would be higher.

The same holds true if you cut corners when rehabbing a rental property. If the property isn't nice enough, potential tenants will pass on your unit and keep looking. This means it could take you longer to rent a property out, thereby reducing your cash flow.

Doing Repairs Yourself - Getting Handyman Pay

Another way some beginning investors try to save money on repairs is by doing the repairs themselves. As the saying goes ... "A penny saved is a penny earned."

However, if it costs eight or ten dollars an hour to hire a repairman and you do the work yourself instead, you are making eight or ten dollars an hour.

Most people have a limited amount of time they can spend as a part-time real estate investor. Therefore, you must allocate your time as wisely and as efficiently as possible.

·         Do you think you can make more money as a repairman making eight or ten dollars an hour, or more money as a real estate investor out finding and doing more deals?

·         The answer should be very clear.

·         In short, if you do repairs yourself, you will quickly grow tired of this business; and if you cannot afford to pay someone else to fix the property, then you paid too much for the house.

Include A "Hedge Factor"

Finally, you should always include what investors call a "hedge factor". This means you should include an extra 5-10% on top of your estimate to cover any unforeseen costs, but be sure not to over estimate the repairs. Having high repair estimates can cause you to make a purchase offer that is too low and not competitive enough with other investors.

Estimating Exterior Repairs

As 'soon as you drive up to the subject property, you should begin to identify what repairs can be done to enhance the "curb appeal", along with any "deferred maintenance" .

Exterior Paint

Starting with the structure itself, one of the first things you'll probably notice is the color of the house. On just about every property you buy, you'll have to repaint, so don't worry too much about the current colors. What will matter most is the actual paint's condition.

If the paint is peeling off, extra steps will need to be taken when pressure washing and scrapping the house. You'll also want to check to see if any of the paint layers are chalking. This can be detected by rubbing the paint's surface to see if any paint powder comes off onto your fingers. In the cases where there is either peeling paint or chalking paint, the surfaces will need to be primed with a special primer designed to grip to the surface and lock the old layers of paint down.

When deciding on the colors to paint the exterior of the property, take into consideration what colors the other houses in the neighborhood are painted and the colors other investors tend to use on their properties. As a general rule, you'll want to paint the main structure a bright (yet neutral) color with an "eggshell" finish. ("Eggshell" is a finish that looks sort of flat, yet is still smooth enough to be cleaned easily.) The trim work should then be painted in a semi -gloss color that is either bright white, or a contrasting dark color.

 

How much the exterior paint will cost on a property depends a lot on how large the structure is and how much preparation work is needed on the old paint. Check with other investors to see how much they usually pay, but for the most part, an exterior paint job will usually range between $700 and $1,200 for both the paint and the labor. By the way, if you do buy your own paint and only hire a painter to perform the labor, make sure the painter is comfortable with the brand you have chosen. Some cheaper paint brands are thinner than others, which can cause more work for the painter.

Repairing Rotten Wood

Another issue to look for is whether or not there is any rotten wood that must be replaced prior to the property being painted.

As an investor, don't be afraid of seeing rotten wood. Wood is cheap and the labor to replace it does not cost much either. Just go down to your local home improvement store and see how much lumber really costs. You'll most likely find that an eight foot two-by-four costs only a couple of dollars and a four-by-eight sheet of plywood costs around twenty dollars or so.

One of the best things about looking at a property with rotten wood is the fact that the rotten wood helps to drive the price down and scare other investors off who haven't been properly trained.

Termites Are An Investor's Best Friend

If you live in an area of the country that is subject to termites and other wood destroying organisms, you should always get a termite report before you purchase a property or you willieam a very expensive lesson. For as little as $50 to $75 you can have a termite inspector crawl through the attic, go all around the outside and inside of the house, and even crawl up underneath the house. As part of the inspection the termite guy will identify any fungi or rotten wood. $50 to $75 is a small price to pay to know whether or not there are any problems that need to be addressed.

Even if a house is block or brick, you should still get a termite report. Block houses still have frame interior walls, wooden baseboards, as well as a wooden roof structure. It is not uncommon for termites to crawl up the center of blocks to get to wood or corne up through cracks in the concrete foundation.

If you do find there is live termite infestation, you should jump for joy. Live infestation helps to drive the price of the property down while at the same time, helps to scare away other investors and buyers who don't understand what it takes to correct the problem. An actual termite treatment costs as little as a couple of hundred dollars and as we said a minute ago, the wood termites eat is fairly cheap to replace (if the termites even damaged the wood enough for it to need replacing). Most of all, treating the termites and replacing wood could cost you several hundred dollars, but you'll almost always end up making several thousand dollars more on the deal.

Roof

The roof is another large expense to consider when estimating repairs and there are several things to look for when determining what to do. The most important issue is whether or not the roof is leaking and why. Sometimes a roof will leak because it is old, in which case the roof will need replacing. Other times the roof will only have some minor damage that needs patching (such as from a fallen tree limb).

Another issue is how old the roof looks. For instance, are the shingles curling up or do they show signs of getting water-logged? If you plan to use the property as a rental, you may be able to get more life out of the roof. However, if you are planning to retail the property, the roof should look new or be new.

Some roofs will have plenty of life left in them but they will be covered with dark fungus stains, making the roof look unsightly and old. If the roof is dirty and has mildew stains or fungi stains, you can have it chemically washed. Just check your local hardware store for some "deck and patio cleaner" and hire a handyman to treat the.roof properly. For the most part, a roof treatment will cost you around $150.

Assuming the property needs a new roof, a 1200 square foot house would cost you about $1,800 to $2,000. If you pay much more than that, then you are dealing with the wrong roofers. Of course if you are dealing with a roof on a two story house, it will cost you a little bit more due to the extra height of getting up there and the extra danger inv~lved. Don't try to cut comers by letting the roofer shingle over top of the old roof without taking the old shingles off (this is commonly referred to as a "roof over"). When it is done you can tell, and it does not cost much more to rip everything off and do it right.

One last note on replacing a roof on a rental property; if you replace an entire roof on a property you keep as a rental, the expense for the roof is a "capitol improvement" and generally must be depreciated on your tax return over 27.5 years. To avoid this, you can replace just half of the roof one year, and the other half in another year. This way, the partial replacements are considered repairs and are 100% deductible in the year the repairs took place, thus allowing you to depreciate the entire roof in as little as 2 years rather than 27.5 years.

Windows

When determining whether or not to replace windows, the two most important factors to consider are how the windows look and how they function.

If you plan to retail a property, the windows should be up-to-date, clean, and fully functioning. You should always consider replacing old wooden sash windows that leak air, have pealing paint, are hard to open and close, or that do not stay up. If the windows are somewhat older looking but still function OK, you can sometimes get away with just replacing the windows on the front of the house so the house looks better from the street. This is only assuming that the other windows around the house are not in true-need of replacement.

If you plan to keep the property as a HUD rental, one of the requirements during an inspection is that the windows must open and be able to stay open half way. They also must have functioning locks and there cannot be any excessive air leaks or light coming in through the window jam.

As a general guideline, replacing windows usually costs around $150 each installed. Of course, the cost can be higher if you choose a higher quality replacement window.

Cosmetic Upgrades

While still estimating the exterior repairs, you should look for minor cosmetic upgrades that would enhance the curb appeal of the property; such things as new shutters, a new mailbox, a brass porch light, large brass street numbers, and so on. A new front door with a new brass door handle and brass kick plate can make a big difference in the look of the front of the house too.

Collectively, all these cosmetic upgrades can cost several hundred dollars, however the value and marketability of the property can be dramatically increased.

Landscaping

Next, take a look at the landscaping. Start by identifying if there are any bushes that are overgrown which need to be cut back, or if there are any bushes or trees that need to be cut down all together.

The grass is another item to consider. What type of neighborhood the property is in and what you plan to do with a property will dictate what you should do about the grass. If you plan rent the property out, you won't want to put down any expensive sod because the tenant may not maintain it properly in the future. Most of the time, it is best just to throw down some cheap grass seed. However, if the property is in an upper-middleclass neighborhood and the grass is in poor condition, you may need to consider at least re-sodding the front yard.

Next, consider adding some flowerbeds along the front of the house, around any large trees, or along the drive way or sidewalk. The quickest way to make flowerbeds is by stacking landscaping logs two logs high as a boarder and then filling the bed with mulch. To make the beds look better, you should spend an extra few bucks to put down red mulch~ Red mulch looks better and doesn't tend to look old as fast as regular cypress mulch does.

It is important to use plants and bushes that have "wood" limbs. Don't use small flowers such as daisies or bulbs because they almost always have to be replaced yearly and they may die before someone buys the house. Remember, there probably won't be someone there to water them as much as they need.

As for your landscaping estimate, most small bushes cost around six or eight dollars a piece, landscaping logs are about three dollars, and mulch is two or three dollars a bag. Simply pick out what you need and have a regular yardman or handyman do the work. All together, a good landscaping overhaul shouldn't cost more than $500 or so (assuming you won't need to re-sod).

The Driveway & Sidewalk

If the house has a driveway or sidewalk, look to see if there are any excessive oil stains or if they need an overall pressure washing. The cost for hiring someone to pressure wash a driveway and/or sidewalk, can vary widely depending on how much work there is. For the most part, you can have a house and driveway pressure cleaned for around $200.

If the house does not have a driveway, you can consider putting one in. Sometimes, putting in a concrete driveway may not be cost affective. As an alternative to concrete you can consider using something a little cheaper, such as mulch, shredded car tire chips, or shingle-tabs. Usually, shredded tire chips can be some what expensive; however, shingle-tabs can be pretty cheap. Shingle-tabs are the little strips that get cut out of a roof shingle at the factory and you can get some dumped in the drive way for as little as a couple of hundred dollars. This isn't much to pay for a halfway decent looking driveway, especially if you plan to keep the property as a rental.

Estimating Interior Repairs

Once you have estimated the exterior repair costs, your next step is to move on to estimating the interior repairs. Because there is a lot to cover about estimating interior repairs it can sometimes be hard to decide where to start, so we'll start with the ceiling and work our way down-and-around through the house.

Ceilings

As you go through each room, start by looking at the condition of the ceiling. Look

to see if the ceilings need to be repainted or retextured and identify if there are any stains. If there are, figure out if they are they from a plumbing leak or a roof leak, and has the problem been fixed yet.

Light Fixtures

If you plan to retail the property, all the light fixtures in the bedrooms should be nice

ceiling fans with shinny brass trim. If you plan to keep the property as a rental, a cheaper white fan will do and looks much better than a boring "dish plate" light. The light fixtures in the bath, kitchen, dining room, and hallways should all be nice shinny new bass fixtures as well.

If you check at your local home improvement store, you'll find that many of the light fixtures only cost around $5 to $10, and some of the cheap ceiling fans start off at only $15. You might be surprised at how good some of the cheaper light fixtures look and how they can brighten up an old house.

Walls

Moving on to the walls, look for any holes that need patching. If there is any paneling

on the walls, try to gently peal back one piece so you can see what condition the wall is in underneath. Sometimes you'll find that a previous owner used the paneling to cover a damaged wall, in which case you should consider removing the paneling and repairing the original wall the proper way.

If there is only framing behind the paneling, consider having the walls covered in sheetrock (this is assuming there are only one or two walls with paneling). Sheet rock only costs around $5 for a 4' x 8' sheet, and the time and labor to install it isn't much. Paneling tends to be undesirable to most homebuyers, and may even bring down the property's value and marketability; therefore, you should always try to eliminate it.

If any of the walls are very rough or have been patched in several places, consider having the walls refinished with a "knock-down" or "orange peal" texture. This is done by spraying a plaster texture onto the walls to hide the defects and to give them a more uniform look.

Interior Paint

When choosing the colors to paint the interior, you should go with a satin finish light tan color on the walls and then paint the trim and doors in semi-gloss white. This will give you an overall bright look inside with a nice contrast between the trim and the main walls.

Do not use antique white trimmed out with bright white though. Those two colors do not give enough of a contrast, and you especially will never want to paint the walls and the trim the same color either.

Using a "satin" finish or "eggshell" finish paint on the walls is important because the flatter finish will help hide any minor imperfections, while semi gloss paint on the walls tends to bring out the imperfections. Satin and eggshell finish paint also allow for easier cleaning that you don't get with regular flat paint.

When painting properties you plan to keep as a rental, it's a good idea to paint all your units the same color and keep track of the paint code. This way, after a tenant moves out, it will be easy to go back and touch up the walls rather than having to completely repaint with a similar color.

Doors

Along with painting the doors semi-gloss white, you should install new shiny brass door handles. You may even need to consider replacing the hinges if they have been painted over & you plan to retail the property.

On a moderate to low income rental property, flat doors will do fine; however, if you plan to retail the property, the house should have "six panel" doors throughout. (These are the doors that have the picture frame styling in the door.

You may want to consider going the extra mile and putting shinny brass lever doors handles on the properties you plan to retail as well.

The Kitchen

As for the kitchen, it should be in excellent condition because it is one of the main determining factors when people are deciding whether or not they like the house. Depending on the value of the property and the current condition of the cabinets, you 'mayor may not be able to get away with just cleaning or repainting them. However, if the cabinets even come close to needing replacement, you should seriously consider replacing all of them.

Replacing a kitchen is not nearly as expensive as most people think. Go to your local home improvement store and price-out an eight foot set of base cabinets, a counter top, double bowel sink, faucet, drain connections, supply line connections, a few upper cabinets, and a range hood to go over the stove.

By the way, many of the major hardware stores have computers set up with kitchen design software and they will design a kitchen layout for you for free including a price list for the various styles of cabinets they carry.

Be sure to check your bargain plywood stores to see what they carry in the way of cabinets. Most of them will carry unfinished cabinets that are already assembled. All you need to do is either paint them or stain them, and most of the time these cabinets are much stronger than the cheap particle board cabinets that come in a kit you have to assemble.

Appliances

The appliances in the kitchen should also be in excellent condition. If you are retailing

a property that already has a refrigerator which is in poor condition, you can remove it and attempt to sell the house without a refrigerator. Some buyers will already have their own refrigerator while others may not. For those that don't, you can offer to add a refrigerator as a bonus for going ahead and buying the house.

The property will need to have a stove as a condition of the buyer's new financing though. Most stoves can be cleaned, and replacing the burners and burner plates can help to make it look new again. If the stove can't be made to look new again, you should replace it.

For the most part, unless the property is in a very nice area, a decent set of used appliances will do fine. Just check around with some of the used appliance stores and you should be able to find a nice stove or refrigerator for less than $200 each.

Bathroom

When estimating the repairs on a bathroom, you'll first need to determine which items

can simply be cleaned or repainted, and which items must be completely replaced. Some of the items to consider are the light fixture, medicine cabinet, mirror, faucets, sink, toilet, vanity cabinets, tub, tile, and flooring. For an idea of how much each of these items cost, again, visit your local home improvement store.

If you are dealing with a small bathroom, you should be able to get a small prefabricated base cabinet (including a marble sink) for under $100. As for the toilet, if there is anything wrong at all, just replace it. A basic new toilet only costs around $60 and is pretty easy to have installed. If the toilet bowl is in good condition, you can sometimes get away with just replacing the seat to make it look new again.

When it comes to the tub, you should only replace a tub when you absolutely have to. If the tub can't be cleaned because it has bad rust stains or maybe some chips, having the tub refinished would probably be your best option. This usually costs round $150, and as always, check to see the quality of work a tub refinishing guy does before you hire him.

If the bathroom has tile that is in bad condition, this too can be refinished. However, you should consider replacing it if the value of the property warrants it and there is room in your budget. Sometimes, just putting up a cheap fiberglass shower wall will do the job and these shower wall kits costs as little as $30.

Finally, be sure to put up a nice fancy new shower curtain and put down some matching floor mats. This will help to give the bathroom a nice warm "lived-in" feeling.

If you priced out all the items for a typical small bathroom renovation, the cost of the supplies would cost around $500 or so; and even if you had to completely gut a small bathroom and replace it, it should only cost you $1500 at the most including labor.

Carpet And Linoleum

The carpet and linoleum through out the house is another repair you have to get good at estimating. When retailing a property, the carpet should look new or be new. Don't try to slide by and keep the existing carpet because you think it looks ok, and don't try to get by with replacing just one or two rooms. For the most part, a nice mid-grade or FHA grade carpet should cost you around $1.00 to $1.25 per square foot installed with pad. The cost is about the same (or a little more) if you're putting down vinyl flooring.

If you are dealing in Section 8 rental properties, it is best to put in commercial carpet and have it glued down with no pad. This type of carpet holds up much longer in lower-income rentals. By not having any pad, it helps to eliminate odors and a darker color carpet (such as hunter green or charcoal gray) will help to hide a