Anyone can become an expert estimating rehab repairs and it is as easy as adhering to the Rule of Three. What is the Rule of Three you say? Anytime you have a repair that is necessary and you are not certain ofthe cost, you need to get three bids from licensed professionals.
For instance, let’s say you want to have the outside of a home painted and you’re pretty sure lots of work will be needed before it can be painted. Since you are not aware of the cost, contact three licensed painters/contractors and have them bid on the project and give it to you in writing. These three bids should come in relatively close in dollar amount and now you know what a realistic price is to complete the work.
But what if the prices are all over the place? When this happens, you’ll want to get three more bids and soon you’ll have a tight price range for completing the work.
Note: Once you have determined a price range, I recommend that you determine the cost per square foot so you can use it as a future reference.
Why Contractor Bids Might Vary By A Wide Margin
It is not uncommon for contractors to bid the exact same work with prices that are all over the board. Understanding why this happens is very helpful because you never want to put trust in a relationship and think the contractor will always provide the best price or service. Here are some reasons why prices vary:
The contractor is too busy.Keep in mind that even though a contractor may give you a bid, they may not always know how to fit it into your schedule. But when they are too busy, they “jack up” the bid amount and figure if you are willing to pay that exorbitant bid then they will find a way to complete work. The reason they do this is because they know the worst thing they can do is not give you a bid since you would never come back to them for future work.
They are a General Contractor. General Contractors often hire another contractor (called a sub-contractor) to complete the work and they make their profit by marking up the bid of the sub contractor.20% is a common markup and can create quite a large difference in bid amounts.
The contractor needs work. When a contractor is hungry for work and needs to pay the bills, the bid amounts go down considerably. Sometimes by as much as 50%.When a person does the work themselves, the reason for the discounted work is clear. Meanwhile, contractors with crews will often discount their bids when work is slow because they need to keep crews working and gainfully employed or risk losing them.
Many investors get comfortable using a contractor and often end up paying too much because they do not get bids each time they have a project. Many times, I’ve used a contractor or handyman that was great to work with on the first project, but not subsequent projects. My reasons for not using them again has varied over the years but the most common reason is because I found them when they were just starting or hungry for business. Fast-forward a few months or years and business has picked up for them so as a function of supply and demand, their prices have gone up. A lot of things can happen and it is always important to get several bids.
An Extreme Difference In Bid Amounts
Let's describe the condition of the house. From the outside it was not remarkable, but the moment you entered the house you thought you were walking into a dumpster.
The floors were covered completely in trash to the point where you could not tell if there was bare concrete, carpet, tile or linoleum. You literally had to walk across trash and hear it squish under the pressure of your weight.
The kitchen and countertops were completely covered in trash and you could not even walk into the area. In the dining room, there was a dog door and I was thankful because it provided some ventilation for the pungent odor. The living room had 8 feet long cobwebs extending across the ceiling and the front door was sealed shut by spider webs--from both the inside and outside. Then, smack dab in the center of the room was a baby pen being used as a ferret cage – nasty little vermin! The rest of the house was in the same condition.
So, here’s the house in nasty condition and I had to get labor-only bids for interior paint, exterior paint, kitchen installation, ceramic tile installation, and a new roof. This project had a lot of material expenses and we decided to purchase the materials separately and contract the labor. Any guesses on the different bids?
Well, our bids ranged from $3,800 to $25,000.All bids were from licensed contractors, but that was an extreme difference. Because the property was so filthy, many of the contractors could not see past the inexpensive general cleanup and made the job into much more than it really was. Luckily, we understood the importance of getting multiple bids and had the work completed for under $7,000.
Note: Believe it or not, the owner, who was employed in the health care industry, occupied the house.Frightening thought. Then, on the first day of general cleanup, I was in the house when a neighbor told me the house had a tick infestation problem.Not long after, I went outside and found about 20 ticks on my leg under my trousers. That was one disgusting house, but when it was all completed we made over $64,000!
Take Heed New Investors
If the repair costs exceed 25% of the after repaired value of the house, I’d recommend that you do not purchase the house to fix up unless you have rehabbing experience.
If the repairs will exceed 25%, this is an extensive property renovation and there are too many things that can go wrong that could turn this type of a property into a bad deal. For seasoned investors with rehabbing experience, this could be a great deal, but if you are new it would be better to sell the property quickly, commonly called a ‘flip’ or ‘wholesaling’ to another investor that wants to complete the repairs.
About The Author:
Gerald Romine is a nationally recognized real estate expert that has been featured across North America sharing the stage with political leaders, film stars, and business leaders. Since 1989, Gerald has been involved with real estate as a real estate agent, broker, rehabber, investor, and builder and has been involved with everything from houses to apartments. For more information about Gerald's products or services visit www.kickassrealestate.com
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