In the classroom today, Lex Levinrad elaborates on how to get estimated costs on your next rehab deal and how to handle contractors.
By having a good idea of the cost of the materials you’ll need, you’re better able to analyze quotes you receive and in turn, keep your profits high.
Mike: Welcome back to the flipnerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Lex: Hi, everyone. Lex Levinrad with the Distressed Real Estate Institute, and on today’s REI Classroom show, I’m going to be talking about estimating a rehab cost, both material and labor, as well as working with subcontractors and general contractors.
Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.
Lex: This is probably one of the areas where I see the biggest misconception on pricing, and also the biggest confusion for new investors. And the reason is because you can have a rehab job and you can have one person quote 40,000, another person could quote 25,000, another person could quote 15,000 on the exact same job. Now, granted the quality of material and labor might not be as good, but there’s a huge discrepancy in pricing. And if you’re going to be fixing up properties and reselling them for a living, or even if you’re fixing up properties to rent them, it’s a very good idea for you to understand the cost and the components that go into that rehab cost so that you don’t get ripped off.
So the best recommendation I can give you guys is, go to your local Home Depot or Lowes. Take a yellow notepad with you and go down aisle by aisle, and start looking at the cost of different items. You can even sit on your home computer and just go to the online websites and start paying attention to the cost of things like tile, and drywall, and paints, and compost, and all the different materials that are you going to use.
So take a specific room, let’s say kitchen. Figure out what your cabinets are going to cost, your base cabinets and your wall cabinets, your countertop, your sinks, your faucets, your appliances, and learn how and where to buy different items. For example, I don’t buy appliances at Home Depot. I buy appliances at stores like BrandsMart, which is local to us over here, but stores that are more discount kind of stores. But I buy most of the other materials at either Lowes or Home Depot. Sometimes Lowes could have a sale, carpet might be 25% cheaper than Home Depot, and vice versa.
But if you learn the components, so you understand, let’s say, what goes into the components of the kitchen, you can break down your material costs. Let’s say you can break them down into basic kitchen of $2000, and if you know that your basic appliance package, let’s say stainless steel four-pack package can be had for as little as 17 and $1800, then that gives you a raw cost of around $3800.
The important thing that you need to know is how long it would take a contractor, or a contractor utilizing one of their subcontractors to go in there and do the job. And the best way that you learn is by doing. So if you go out there and you watch, and you see how long it takes them to do a specific project, then you can get a handle on the labor. So what you really need to do is you need to break apart the cost for the material and the cost for the labor. And guess where they make most of their money? They make most of their money on the labor side. So they’ll typically look at what the cost on a job is, they’ll add it up, and whatever that number gets to, let’s say it’s 15,000, they’ll multiply by three and that’s what they’ll quote you.
So they’ve got a pretty hefty price margin in there for their profit. And a lot of times they’ll work real slow. So one way you can strip these things out is basically go to them and show them the job when you’re getting an estimate. And I highly encourage you to get at least three estimates and then take the lowest one, and then get another three estimates so that you’ve got a total of six estimates and you use the first three to get low number to go to the next three, so you know you’re working in the ballpark of a good pricing.
And then ask them, once you’re narrowing your choice down to the last two or three people that you think you’re going to use, ask them, “How long do you think this job will take?” And you can take an average, two weeks, three weeks, whatever it might be, and then go ahead and estimate your materials. You’ll get an idea of the labor costs. If you do that, it’ll be much harder for them to overcharge you on a job, and some higher-end contractors that are very, very busy won’t want your work.
But the thing that’s interesting about contracting and working on homes is that there’s a lot of people out there that are unemployed, handymen, people that are subcontractors that are looking for work that will do work at a price substantially less than what the contractor will charge you. So if you went on the job site, you saw people laying tile, you might be able to initiate a conversation with them, and next time you need tile done, instead of going to the contractor, you might be able to go directly to them.
However, having said that, just be careful because a lot of these people are not licensed. You want to be able to pull permits. So your ideal scenario is to find somebody who’s working under the guidelines of a general contractor. They can still pull licenses for you, keep you fully legal, by the way you can do the job at maybe 50% of what the regular GC would charge you. And the best way you do that is by simply separating your material and your labor costs. And you cannot separate them if you don’t know what the cost of materials are.
So get in the habit of knowing what does a piece of drywall cost? How much is a square foot of flooring, whether it be laminate, or whether it be tile, or whether it be carpet? How much does paint cost? Five-gallon bucket of paint, how many square feet does it cover? How much paint do you need to paint a house? All of this information is readily available sometimes as simply as looking on the side of the gallon of paint or Googling it online. It’s not difficult to find out.
But if you understand what the subcontractors get paid for their labor, and you understand what the components of the materials are, it’ll be much easier for you to get reasonable prices and to do your repairs at a price that’s going to work out for you. And remember, when you’re rehabbing houses for a living, a large portion of your profit is dictated obviously by finding a good deal to begin with, but also a large portion is by a doing the work at a price that makes sense.
So that’s today’s REI Classroom tip on rehabbing, and estimating costs, and working with contractors.
Mike: HomeVestors, the We Buy Ugly Houses folks, is a franchise system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence, whether you’re a pro looking to take your business to the next level, or whether you have no experience at all, but a burning passion to be successful at real estate investing, please visit flipnerd.com/ugly to learn more.
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