The Essential Guide to Your Initial Repair Estimate of A Residential Property
Updated: Feb 26, 2019
When it comes to real estate investing (wholesaling, flipping, buy & hold, BRRRR) , one of the most important aspects of being successful is your initial repair estimate on the property.
It is very common in the industry for new investors or even old investors to have trouble producing accurate repair estimates on properties they are analyzing. Don't get me wrong, this is no easy task. It does take a lot of practice and construction understanding but there are tools you can create (and use) to mitigate your risk and assist you in producing accurate results.
There are two very important numbers that are essential to forecasting a profitable deal. These numbers are:
1) The ARV or After Repair Value
2) Repair Estimate or how much it will cost you to get the property in the condition you need to get it in to sell for that max ARV.
These two numbers are very important because they are the 2 main factors that will produce your Maximum Allowable Offer which will determine what your initial offers will be on the properties you analyze.
If you fail to produce accurate numbers, you will fail at being a successful real estate investor. However, if you create systems and tools that supplement you and your teams knowledge, you will increase your odds greatly of making profitable offers and becoming closer to reaching your goals.
This initial estimate will be created from the first meeting you set up with the owner of the property.
Side Note) You should already have all of the numbers together (besides your repair estimate) to give the homeowner a offer. This includes
Closing Costs (Purchase & Sale)
Commissions (If you use agent on Sale)
Holding Costs (Taxes, Insurance, Utilities, HOA (If Applicable)
Loan Costs (If Applicable)
The only missing piece to produce your MOA is the repair estimate.
This initial meeting you set up with the homeowner has 3 main purposes:
1) To build rapport, trust and introduce yourself
2) Learn more details about the homeowners situation
3) Learn more details about the repairs needed on the property.
So let's get into the purpose of this post, which is how we can begin producing more accurate repair estimates for my offers.
Tools Used for Initial Walk-Through
1) Pre-Acquisition Scope of Work
The first tool that we are going to bring with us to our initial meeting is the pre-acquisition task list (scope of work). This tool is going to be used to standardize and organize our initial onsite notes for the subject property. This document is broken up into 2 different subject topics with a detailed breakdown of each. Lets go through how this document is set up.
We will also attach the PDF copy of this document (below) for you guys to use or improve.
Roof Repair/ Replace
Exterior Paint/ Siding
Gutters/ Soffit/ Fascia
Doors & Windows
This document will be used to take brief notes of anything that stands out when you are initialing walking the property.
Investor Tip) It is best to focus on the seller in this initial meeting. Focus on building rapport, trust and credibility. Do not spend your whole initial meeting writing notes. The next tool you need is going to help give you more details into the repairs and refresh your memory when creating your estimate/scope.
FREE PRE-ACQUISTION SCOPE OF WORK
2) Ipad/Smart Phone
This might seem like a very basic step in the process but it needs to be addressed due to it's importance in developing an accurate estimate. Every meeting that you set up and attend, you have to make sure that you bring an Ipad or smart phone to take photos. Here is how we recommend you get your pictures. As we stated previously, we want your main focus in this meeting to be to build rapport and trust with the seller. So we do not recommend that you are taking photos with your initial property walk with the seller. We recommend that after you walk the property, ask the right questions and take the right notes, then you ask the seller if he minds if you take a couple minutes to get some photos of the property.
These photos are extremely important because you will use the photos to refresh your memory of what you looked at and allow you to get more descriptive with your estimate, which will ensure you miss less of the scope.
3) General Contractor/ Real Estate Agent
Are you not to familiar with residential construction? Maybe your unsure of what to look for when you walk a property. If you are just starting out and want to feel more comfortable, you can always have your general contractor and/or real estate agent walk the property with you. These 2 members of your team are great resources when it comes to putting together your initial estimate and also calculating your ARV. Within any business it is very important to utilize the main players of your team in any way possible (just make sure you compensate them in some manner.. ex) future work).
Investor Tip) Have your general contractor fill out the pre-acqusition scope of work and take photos of the property while you build rapport and walk the property with the home seller.
4) Excel Estimate Document
In order to produce the most accurate estimate (depending on your experience & understanding of construction), you are going to have to take the information from the walk through and sit down and produce an initial estimate. This is not going to be a finalized budget for your project but will be the initial estimate that you produce your offer from. This is where you are going to sit down with your pre-acquisition task list, photos and general contractor (if accessible) and work through all of the tasks associated with the project and assign labor and material numbers to all of them. Here is a quick look at how our excel document is set up.
If you would like the full copy of this excel document to begin tracking your estimates, we need you to do a couple things:
1) Like us on Facebook - https://www.facebook.com/webuyhousessyracuse/
2) Send us an email, requesting the document - email@example.com
This document is already pre populated with all of the tasks that you may see on any given project. You will fill in the dollar amounts associated with that specific project then filter the results to only show the tasks associated with the subject property.
Investor Tip) This tool is not only good for producing estimates, but also a great tool to show lenders and partners.
One of the most important line items to have on your estimate sheet is the contingency. Your contingency is established to give you some extra cushion to ensure that you didn't miss anything in your initial estimate. Typically how we use our contingency is a % of our overall estimate. This percentage will be determined from a couple different variables:
How comfortable we are with the accuracy of our estimate
How much competition there is on this specific property (may have to lower our margins)
Level of risk on repairs
Level of unknowns (age of property, opening walls, mechanical work)
These variables will determine how much money we allot for this specific line item when creating our initial estimate.
Your initial walk due diligence, analysis and repair estimate will determine how profitable you will be on that specific project and in your business. You want to produce the most accurate numbers, so that when you do get an offer accepted, you know for a fact that you are going to win. We are providing a service to assist homeowners who are in difficult situations but while we are providing this service, we are also looking to make a couple dollars. The better that you plan, the better you utilize your team and the better systems you have in place, the better your business will be.
In the comment section below, let us know what tools you use for your initial walk through and producing accurate repair estimates for your offers.
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