Construction Estimation Tips For Houston Real Estate Investors
When it comes to estimating rehab costs for a new Houston real estate deal, it’s really important to make sure you get it as close as possible and allow a buffer for unexpected costs. There are different strategies to do that, but we’re going to outline one that we feel is among the safest for most single-family rehab scenarios.
Traditionally, when an investor walks through a house to determine it’s damage and renovation costs, they’ll assess each thing they find and tally it up. This is the default method that we use because it seems to make the most sense. Our goal is to keep that number as low as possible so that we can try to increase the profit margin. But this backfires when we find that things cost more than we expect or unexpected things occur or need to be fixed that we didn’t account for. If the margins are tight, this will lead to a negative profit scenario, but if a private lender is involved, they wouldn’t have accepted that deal anyway because they expect a deal to come in at 70% or under.
A safer strategy would be to use the “back-to-front” strategy. Rather than adding up all the costs for repairs as you come across them, you start with a maximum amount. Let’s say you run the compos and you’ve determined that the maximum amount of renovations needed could be $50,000. You then walk through the home and find that the roof is in good condition, so you subtract what you valued the roof to be (in this case $5,000) from the total, leaving you now with an expectancy of $45,000 in repairs. As you find things that need to be repaired or completely redone, you leave that amount in the balance, but the reverse is also true. Once you find things that are in good condition, you subtract that from the needed budget.
When you walked in, you may have expected to pay a maximum of $50,000, but now you’ve ended up with $20,000 in needed repairs. Giving yourself a 20% buffer can account for unexpected issues, setting your budget at $24,000. If the ARV is $150,000, and you know the repairs are going to cost $24,000, then you know that the amount you pay for the property would need to be $81,000 (70% of 150,000 is 105,000 — subtract 24,000 from 105,000 and you get your accepted purchase price).
Using this model can help you better estimate home repairs so that you can get a good idea of if this is going to be a good house for your investment. It’ll also be a lot easier to run through and estimate a home, and you will know what your absolute maximum will be if you need to do a full remodel. Your private lender will appreciate this method as it’s predictable and they can get used to seeing every deal your propose in this way. You meet new investors or learn more about Houston real estate here at https://houstonrealestate.joomla.com.