How do you estimate repairs before making an offer on an investment property? [Ask Coach]

 

 

About This Episode

Episode #227

Episode Transcript

[00:00]

So here’s the scenario. You want to make an offer on a piece of real estate, but you know this property needs a lot of repairs. It’s a fixer upper. But in order to make a confident offer, you actually need to know approximately how much of those repairs going to cost. So what should you do an Inspector for $500 before you even make an offer on the property or pay a contractor or have them come out there with you and waste their time when you don’t even know if the seller is going to accept your offer yet?

[00:24]

It’s a real dilemma, especially when you add on the fact that if you’re a new investor, you might not even know how to estimate repair costs. You don’t know what things cost. So what should you do? That is a question I want to answer in today’s episode of Ask Coach, and we’re getting started right now.

[00:48]

Welcome to the Ask Coach edition of the podcast, if we haven’t met yet. My name is Chad Carson. You can also call me Coach. And my mission here is to help you get out of the financial grind so you can do more of what matters in the Asked Coach podcast series is where I do my best to answer your burning questions about real estate, investing and personal finance. So this is a question or a dilemma that’s very common for those of us who are buying properties, whether it’s for an investment or something to move into.

[01:11]

But this particular question came from one of my students in a course real estate deal school called Stephen King. So thank you for your question, Steven. And by the way, if you’re interested in having these kinds of discussions with me behind the scenes year round, you can go check out my courses at coachcarson. Comcourses. I’ll also have a link below in the podcast or the video description.

[01:32]

So how do you solve this dilemma? You do what’s called a quick and dirty repair estimate. I’m going to explain five different steps so that you can do that for yourself. But I want to say upfront. This isn’t something that is overnight going to become very easy for you.

[01:47]

It’s something you practice, kind of like riding a bike, kind of like doing any exercise movement. You have to feel a little awkward for us doing this. So if you’re brand new and you feel awkward in this process, it’s normal. You’ve got to practice it. You’ve got to just look at a lot of properties.

[02:01]

That’s going to be my number one recommendation. Look at dozens and dozens of properties as a new investor and practice this over and over again. So the first step I recommend to do a quick and dirty repair estimate is just to gather information. So gathering information about the condition of the property, you’re going to probably do that from a couple of different sources. One a seller disclosure statement, another doing an actual tour of the property.

[02:25]

So if you are physically in the location where you are making an offer, then you could go out and take a look at the property, perhaps with a Realtor. If you have a realtor helping you out, or if you are long distance, you might have to have your realtor go and take a video. And in either case, I recommend whether you’re there or your Realtors there, take a video with your phone. Do every single part of the property, the basement, the crawl space. If you can get up in the attic, do that as well.

[02:48]

You’re not going to remember everything. And so when you go back home and do some of these next steps, I’m going to talk about you want to have that video so you can review it, rewind it and look at things. So take a video. But what are you looking for when you do this? Gathering information, either in person and also with this seller disclosure, which is like a checklist of things that most States require an owner of a property to provide to the buyer whenever you are looking at a property.

[03:11]

There are exceptions like banks, when they take back properties and have never lived there, typically don’t have to do that. But you want to look at either the disclosure and or the tour to look for big red flag items. What are the big expenses? Things like the roof. Is it a really old roof?

[03:24]

What’s the age of that roof? The heating and air unit? How old is it? Is it on the last leg or is it brand new? You want to look for water issues.

[03:31]

Water. Water is a big problem, particularly in my area. If you have moisture, water in the basement or the crawl space, if you see water running up against the house, those are the kinds of problems that you want to just make a note of. And even if you’re a rookie, even if you’re brand new, take the video. Make a checklist to see what things stand out to you.

[03:49]

That’s step number one. Step number two is then to use a checklist to evaluate which repairs probably need to be done. Now this checklist might be something you take with you during the tour, but you can also review it afterwards. And if you need a checklist, I have what’s called a Deal Worksheet that I’ve used for years that you can borrow. And if you go to the video description of the podcast description below, I have my real estate vesting toolkit that I give away for free on my website.

[04:14]

So go to that. And one of the things inside that toolkit is A Deal Worksheet that you can borrow. It’s a two page document. You can print it out, but on one part of it, it just has a bunch of different repairs that you want to look out for. So as you’re going through the video as you’re going through the gathering information on the disclosure statement.

[04:31]

Look for things that are both safety and kind of structural that might need to be done. Like I mentioned, is the roof have a leak in it? It’s a crawl space have problems. Like, you can see some rotten wood somewhere. That’s a structural or a safety issue.

[04:44]

But then you also have cosmetic things you want to know. In this neighborhood, does a kitchen like this looks really dated? Can I still rent the house or can I still sell it with the kitchen looking like this or with a carpet like this or with the paint colors? So cosmetics, safety and structural go through a checklist. And again, when you’re brand new, you only know what you don’t know.

[05:03]

You don’t know what you don’t know. So you might not know everything, but do your best borrow a checklist like this, maybe bring a friend who can help you out. That is step number two. Step number three is to assign a value to each of the repairs that you’ve determined need to be done and then total up all of those costs that you assign. Now as a beginner, how are you going to do this?

[05:24]

This is where you’re going to have to build a little bit of a network. You can’t just start from scratch and not know anyone. You might be able to have a contractor who you can text. And let’s say you have a roof and you’re like, hey, can I text my friend, the contractor or somebody else who’s done roofs recently and say, this roof looks about this big? Here’s how big the house is approximately.

[05:42]

What do you think this would cost? That’s an important phrase that I use a lot when I’m talking to my contractors. Like, hey, I’m not going to hold you to this. This isn’t a bid. You’re not giving me, like an absolute hard number that I’m going to hold to you.

[05:53]

But what do you approximate would this cost to repair this roof? The more you can break down the repairs, don’t just give them this long list and say, here’s 20 things I want to do. What’s the estimate for that? That’s a little bit harder. But if you can get piece by piece, hey, here’s this crawl space issue where we need to replace a bunch of wood here.

[06:11]

What do you think that’s going to cost? Or here’s this water issue. How do we solve this? They’re going to give you an approximate number for that repair, and that’s what you’re looking for at this point. Approximate.

[06:19]

We’re going to have some other contingencies in the next step. But for now, add something to a number for each one of those things. You can ask friends, you can ask contractors. You might even look on YouTube and look around, go on the Bigger Pockets forums or Facebook groups locally, you can ask people questions about what things cost to at least to get a rough number for each one of these repairs. Step number four is to add a contingency, especially this step, add maybe a 20% contingency.

[06:46]

So if you total up all those items and they were $15,000, a contingency would be $3,000 extra. So 15,000 plus the $3,000 contingency, that equals $18,000. I’d probably just round that up to $20,000 as well. You’re not trying to be exact at this step. You’re just trying to be able to make an educated offer.

[07:06]

It’s not way off. That’s the purpose of this quick and dirty repair estimate. So step number four, add a contingency, get your total number again of the repair costs. And the step number five importantly and this is really what makes this entire process work is especially as a new investor, you want to make an offer with a contingency, so you can check with your local attorney, your local real estate agent in your area about how this works. And there are different rules for different States.

[07:32]

But you want what’s called a due diligence clause in your purchase and sale agreement so you can make an offer subject to being able to do due diligence to verify all these items. And so during that later stage of due diligence, if they accept your offer, then you’ll be able to have an Inspector, then you’ll be able to have a contractor give you more firm estimates on all of these. And so that’s the key here. Now, you don’t want to go around making offers on tons of properties that you’re just way off, and you’re wasting everybody’s time. And in some States, you might even lose your earnest money deposit if you have a contingency.

[08:03]

In other States, like in South Carolina, when I make an offer, if you have a due diligence calls, you can put in the contract that you get your earnest money back. So that is a negotiation with the seller, of course. But for a new investor to make this process to make you more confident having a due diligence period in order to verify that is the key. And that’s step number five. So as someone who’s new to real estate, you might listen to all that and say, I’m overwhelmed.

[08:26]

That’s a lot to remember. I just want to go back to what I started this episode with and remind you this is a skill that you learn, like riding a bike, like speaking a language. It’s going to be a little clumsy at first. It’s going to take you longer. And I remember when I first started investing, it took me a couple of hours to do something like this.

[08:43]

Whereas later on, when I did it every single week when I was making offers almost every single day, I could get it down to like 20 or 30 minutes. And so it’s something you’ll get better at. It’s going to feel clumsy at first. The only way you get better at this is practice and so I recommend doing dozens and dozens of practice runs on this. Even if you don’t make an offer on a property, do the exercise.

[09:01]

Go over those five steps, do your best. And I also want to recommend a couple of additional resources that might help you beyond this video. And one of those is a book written by my friend Jay Scott. It’s called The Book on Estimating Rehab Cost. It’s actually a book I buy for all of my students when they take my course.

[09:17]

Real estate deals just required readings, like a textbook. So I’m going to have a link to that in the video description in the podcast description below. And then the second resource I want to recommend is a course I teach called Contract to Closing. It’s a course all about the process of putting a property under contract or making an offer. Actually, this whole process we’re talking about today, I go in even more depth on that and give you resources and checklists on how to do that and then continuing on, though, if you get an offer accepted, what do you do?

[09:45]

How do you do due diligence? What due diligence things should you look out for? I have an entire two page due diligence checklist, and I have videos teaching you. For example, if you don’t have a realtor and you’re making an offer on a property yourself, what paperwork should you use? How do you fill that out?

[09:59]

How do you understand the general terms of how to buy a property and how to put it under contract? And how does the closing process work? So all those details you probably haven’t heard about and they don’t have a school to teach you about, I teach you how to go through the closing process of buying a real estate property. So I have a link to that course, contractor Closing. Is Evergreen available anytime for you to go through it, and you can check that out.

[10:20]

And I would love to see you inside the course. I hope you enjoyed this edition of the Asked Coach Podcast. If you’d like to have one of your questions featured in a future episode, there’s a couple of ways you can do that. The first is send an email to [email protected]. You can also leave a comment on a YouTube video if you’re watching it here on YouTube, and let me know that this is a question you want me to feature in a future episode.

[10:40]

Be sure to keep your questions quick and to the point if you want to have them featured, and also keep them on topic on real estate investing, personal finance and personal development. If you like the show, I’d like to invite you to subscribe to my free email newsletter at coachcarson.com/reitoolkit. In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my real estate investing toolkit, which includes a property closing checklist that I actually use when I buy properties, a real estate deal worksheet, a tenant screening criteria checklist and other spreadsheets and goodies that will help you on your journey to financial independence using real estate. You can get it all for free atcoachcarson.com/Reitoolkit.

[11:21]

I also want to take this time to thank the people behind the scenes who make this podcast possible each and every week. This includes my podcast editor extraordinaire Michael Nguyen, my amazing virtual assistant Megan Thompson, my wife Kari who helps me behind the scenes and is my partner here at Coach Carson and of course thank you to all of you, the listeners of the show who make everything possible. This show exists for you. It exists because of you and I really appreciate you being here for another episode. Everything I’ve shared with you in this episode has been for general education purposes.

[11:48]

I have not considered your specific situation or risk before buying your own investments. Be sure to consult a financial real estate and or a legal professional until next time, I’m Chad Carson. You can also call me Coach and this is a show all about helping you get out of the financial grind so you can do more of what matters. See you next time.

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