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Estimating Repair Cost

Question:

I have decided to focus on rehabbing. My big stumbling point now is that I am unsure on how to estimate rehab costs, and the best ways to find contractors. What would you suggest I do in the meantime till your class starts, as I really want to get started as soon as possible?

Answer:

The “best” way to do anything is usually different for all of us. Since everything I do is local, meaning I do all of my investing within a small geographical area, my business model is front loaded. That is, I typically invest a larger amount of time at the beginning to find experienced, reliable professionals who have proven themselves in my market. By this I mean, they have already been tested by someone else. This applies when trying to add ANYONE to my team including real estate agents, brokers, attorneys, insurance brokers, termite inspectors, property inspectors, appraisers, lenders and all types of contractors and handy men.

Now let me attempt to answer your questions more specifically…

1 – “Finding” a worthwhile contractor: If you want to find a worthwhile contractor, speak to real estate agents that have been utilizing the services of such contractors for many years. They will typically know who the good ones are as well as the bad ones. Keep in mind, these brokers should be REO brokers who are accustomed to using Fannie Mae approved vendors. In some cases, these contractors may be more expensive than a typical handy man. However, they may be better equipped to provide you with quick and accurate repair estimates than a typical handy man. These vendors may also be found on the actual Fannie Mae website.

Also, Home Depot as well as Lowes both have a department called the “Pros Desk,” here is where all your area contractors with credit lines repeatedly pay for their material purchases in order to have their purchases reviewed to lock in their discounts (10-20% off retail prices). The folks that man the counter are very familiar with the contractors and handy men who are presently active in your market place. Make friends with these home improvement store employees and they can easily direct you to contractors who may be worth using.

A third resource for contractors would be other local investors you might befriend. To find them, simply attend a local investors club meeting and make your request known to everyone there. Either individually or ask to speak to the group before the meeting.

You can also write a short note to other investors in your area requesting a referral for a local handyman or contractor that they use for repairs on their rental properties. You can easily obtain the contact information for these investors by requesting your local title company to pull the list of absentee property owners in your market which is public information and available to everyone or you can look it up yourself on the internet, assuming you have access to county records data. You might even add a financial incentive like taking them to lunch. After all, it may be a great opportunity to meet someone who can sell you their property at a discount or finance your deals if they have too much cash sitting around doing nothing or partner up with you and finance your whole operation or any other idea your creative mind can think of on how to benefit from meeting and building business relationships with these local investors while talking to them about finding a contractor or handy man. Just so you know I have used this technique myself over the years and it paid off very well.

With respect to “finding,” choosing, or hiring a worthwhile contractor or handyman it is imperative that you seek a referral from someone who has already used them successfully several times. One less reliable method is to drive your local neighborhoods and look for houses that are presently being rehabbed and speak to the contractors doing the work. However, I cannot caution you enough about hiring someone straight out of the phone book, newspaper or advertising from flyers or local recyclers or a referral from someone who has only used the contractor once… this is setting yourself up for a HUGE disappointment!

2 – Estimating repair costs: Again, there’s NO substitution for experience! The best way of accurately estimating the repair costs of a fixer upper property is to already have done it hundreds of times. Remember it’s not only accurately estimating repair costs of what you can identify but it’s having the experience of where to look for evidence of problems that are not clearly and easily visible. These are the explosions that will eat up your profit by becoming the “extras” that your contractor will be more than HAPPY to rectify!

Since you obviously do not have this wealth of knowledge as I have already mentioned – find a reliable contractor with a verifiable track record and have him do this for you. Most contractors will provide this service at no cost to you in hopes of getting the job to repair the property. However, some may charge you a minimal fee and then credit it back to you as part of the contract for the job should you decide to hire them.

Another option is to hire an actual property inspector. Again, they must be someone who has proven themselves and comes referred to you by other professionals you respect in your specific market area. These folks will charge for their labor and their cost can range from $100 to several hundred dollars for a complete inspection. I suggest that whatever method you choose to use, I HIGHLY recommend that you are ALWAYS present during the inspections at least, at the beginning of your real estate career. Come equipped with a video camera and digital recorder and be prepared to interview the property inspector or contractor as they walk the property documenting the needed repairs as thoroughly as you would interrogate a terrorist incarcerated in Guantanamo minus the water boarding! Consider the cost of these inspections as part of your initial real estate education. You’re paying for it, so make it count!

Documenting on video and audio your before and after inspections of your properties will become extremely valuable over time in many different ways from capturing an accurate record of all your decisions helping you write up detailed work lists for your contractors and in settling any disputes when your contractor accidentally forgets some of the items he initially agreed to repair. You will also be able to use this information when soliciting financing from private investors. It is an excellent tool in demonstrating your performance.

Over time, you can develop a system which breaks down your cost of repairs by a specific metric, such as a dollar per square foot cost. This method can be applied to each specific improvement such as paint, stucco, plumbing, carpentry, electrical, air conditioning and heating, windows, doors, flooring, landscaping, etc. Iit can also be broken down into more detail like interior/exterior repairs and improvements or as a general overall price per square foot of the entire rehab. After a while, you will be able to walk through a property and quickly calculate what the overall total cost of repairs will be within a 10-20% margin of error.

Your objective should be to get to the point where you’re able to accurately estimate your rehab cost even though, for the most part, your contractor will be the one actually repairing the estimates.

Remember you will be the one who does the initial inspection before you make the offer so you must sharpen your skills so that ultimately, you rely on YOUR ability to identify a worthwhile project.
I hope I have answered your questions to your satisfaction.

Your friend always,
Uncle Tony

Question:

Uncle Tony,
Thanks for your answer, but this is also were I get confused. To rehab a building for a novice like me, who do you call? A general contractor or a home inspector? or both? I am confused.

Answer:

1-To answer your question directly- to rehab a property you should use a professional who does rehab work, such as a licensed and insured contractor (preferably one that has been referred to you by someone you trust that has used that same contractor several times successfully).

2- For an initial inspection to assess and estimate the actual repairs (IF YOU CAN’T OR DON’T KNOW HOW TO DO THIS YOURSELF) hire a reputable property inspector local to your community, who is experienced with inspecting properties in disrepair (most home inspectors typically inspect properties for only the items that are easily visible) or a licensed contractor that is willing to do this for you economically, typically because he is hoping to get hired to complete the rehab.

“Home inspector” inspects property for a fee.
Contractors do rehab and construction and sometimes also inspect properties for the purpose of estimating the repairs that they are hopefully going to get hired to complete; get it?

NOTE- In both cases REMEMBER to hire someone that comes referred to you by someone you trust that has used that professional in the past on several occasions successfully.

Your friend always,
Uncle Tony

Posted on

Annual Inspections

Question:

Hello Tony,
I’m talking to my JV partner and I think it’s a good idea to do annual property inspections. He thinks it will cost too much money and the tenant will give a list of things they want fixed during the inspection. Do you have someone do regular inspections on your property? If so, how often?

Sincerely,
MM

Answer:

This is a touchy area indeed. But, a system we have had in place for many years and we follow a very specific routine with a detailed list of items we inspect, interior and exterior, from the FIRST walkthrough inspection with the tenant BEFORE they move in on the first day of the tenancy. We tell all of our applicants that they will be signing a lease or monthly rental agreement that includes a quarterly (NOT yearly) ”Health & Safety” inspection. This means a representative from our company will be inspecting the interior and exterior of the house every 3 months. THIS TAKES TIME AND COST MONEY, SO WHAT? Now, why? Two reasons:

1- PREVENTION- If they are such good actors that they get under our screening radar, and they are actually problematic tenants such as – sell drugs, rob banks, are hookers, grow pot, have uninsurable dogs,( Pit Bulls, Rots, etc.) or they are just plain pigs, they will never agree to these inspections and move on; that will save US from a future costly eviction.
On the other hand, “Normal” tenants are typically very happy to hear that we will be staying on top of items under the category of “health & safety”

2- PREVENTION -Should you ever find yourself being threatened with a lawsuit or actually being sued for some item such as a fire due to smoke detectors that did not function properly because of battery removal by the tenant because it kept going off every time she burns dinner, or some tenants kid cutting their jugular while climbing through a broken pane of glass on a window they broke because they forgot the key to the house. It will be pretty tough to prove that you as the landlord are responsible due to deferred maintenance seeing as you have an established system that goes beyond anything any property management company has ever done to prevent problems.

Of Course we video record every inspection which includes recording the whole conversation with the tenant and the list of questions about any problems or required repairs (NOTICE I WROTE REPAIRS NOT IMPROVEMENTS) as well as have the tenant sign a sheet which indicates no problems were found during the inspection and they are happy with the condition of the property, or you both agree that the window was in perfect order when they moved in(as evidenced by the VIDEO and signed inspection sheet from the initial move in inspection) and they are responsible for the cost to repair the problem. Or the problem is a slow drains, or plugged up toilet due to the lovey child putting his plastic toys or bar of soap in the toilet (which would be on the tenant) or constant problems with sewer line backing up due to tree roots consistently blocking the main sewer line in which case it’s on YOU, the landlord, to repair before you spend 50% of your yearly rental income on Rotor- Rooter.

Inspections or the threat thereof is all about PREVENTION! As a matter of fact- GOOD property management is ALL about developing systems to PREVENT the expected and the UNEXPECTED possible potential nightmares. It’s about developing and implementing systems that help you identify minor issues BEFORE they can become HUGE disasters.

You don’t even have to keep them quarterly- once you confirm that the tenant is not problematic then BACK OFF! Just drop by every 6 months or yearly if you like- BUT you have gotten them to agree to quarterly which usually means THEY are probably pretty good people with not much to hide.

I like doing the inspections anyway because it also builds rapport with your tenants; they appreciate a landlord /management company that cares about taking care of maintenance items that make their lives difficult. So you increase retention.

The comment we hear most is either “we love you people because you’re always there for us” or “we hate you people because we can never get a hold of you when we have a problem,” which tenant do you think actually stays longer?

If you are more concerned about saving pennies on doing repairs that NEED to be done or items you anticipate tenants requesting, you have never been stung by the wasteful costs of litigation and you are headed in the wrong direction as a property owner. Dealing with tenants is an art form more than a science. When your decisions are based on fear of tenant requests, you’re out of control; YOU have to be in control of that conversation. BTW-Make sure you have GOOD insurance and READ the fine print on your policy- many will NOT cover if you can be proven to have contributed to the deficiency that caused the end problem /liability by the slightest neglect; some even require fire extinguishers in at least the garage.

Anyway, I think you get my point. Whether you decide to utilize yearly, monthly, quarterly or whatever inspections, it’s more about WHY you’re doing them. The end reason is what will help you design a detailed & complete system based on the outcome you desire or problem or situation you want to prevent. Inspections without a SOLID focused reason and subsequent systems are just a waste of time and money. Inspections based on well thought-out preventative reasoning, dictate their own process, make the costs negligible and are irrefutably INVALUABLE!

There are only two ways to manage real estate: With well thought out proven systems or by the seat of your pants; both are equally effective at delivering you to a predetermined end result.

If you want to learn more about how we have managed our stuff for the past 30 years, including surviving dealing with over 100 Section-8 tenants, two fires, a shooting resulting in a fatality on the front lawn of one of our rentals, a young child’s death while sleeping, dog bites, burglaries and a host of other problems- without filing insurance claims or litigation – watch for the property management class I will be teaching in 2014 and make sure your ass is in one of those seats.

Hope I’ve been of service! 😀

TA