One of the BIGGEST mistakes I see made by most real estate investors when purchasing a property wholesale is underestimating repairs.
As a real estate investor, you should always run the numbers. No matter what his heart tells him about a particular property, numbers are numbers. If he is estimating repairs and is not a licensed contractor or builder, I suggest he be conservative in his repair estimates.
What does it mean to be conservative? Good question. I recommend whatever amount you determine the repairs will cost: twice as much. Add that cushion so you won’t be surprised when the actual costs are higher than you thought. I recommend that you do the same with the time frames your contractors tell you it will take to get the job done. If they say 2 weeks, you make it three. Adding a little slop will only help save money and headaches in the future!
As you walk through a property, use a repair checklist to help keep track of anything that needs work. Then, when you’re analyzing your numbers, you can refer back to your checklist and better estimate the repairs needed. Talk to other investors in your Real Estate Investors Association (REIA) to determine a good starting point for repairs in your area. I typically start with $3,000 per repair on 1,500 square foot homes.
Namely..
Carpet = $3000
Painting = $3000
Kitchen cabinets/countertop = $3000
Bath = $3000
You get the picture. If the house is bigger, increase the numbers. Remember, these are only estimates that you will use to arrive at your Maximum Allowable Bid (MAO).
When getting your contractors to bid on work, I recommend getting several bids and comparing them. You will want to get at least 3 bids from 3 different contractors. This will give you a good idea of the actual cost of repairs. Remember to keep in mind the estimated time to complete the repairs.
When deciding on a contractor, be sure to get everything in writing. Otherwise, you may find that they will try to take advantage of you.
To avoid the mistake of underestimating repair costs, be sure to estimate conservatively, use a checklist, and get multiple offers to compare. Decide which contractor to go with and manage it so you stay on time and on budget. Good luck and happy investing!