In Part One of Peter’s Plan for Estimating Repairs we discussed the importance of learning how to evaluate the condition of a property and then estimating the cost of repairs on the fly. We also described the features of cosmetic revamping. If you didn’t catch the article, please click here to read it.
The Difference between Value and Worth
As a real estate investor, regardless of your investment preference, you’ll need to learn how to assess the condition of a property to know whether it has value for you. A property’s value and worth are two different things. The worth of a home indicates a number; the cost of the home. Its value is more abstract. This implies the quality of the investment. Is it desirable? As we’ve said before, the value of an investment is different for different investors.
Sometimes the value is determined by the extent of the rehab. Whether the home is in need of a facelift (cosmetic repair), partial or full rehab is something every real estate investor should know how to evaluate. How does a partial rehab differ from a full rehab? Read on!
After determining the extent of cosmetic repairs, the next stage of renovation would be categorized a partial rehab. Homes at this level of disrepair will require more effort and more money. In other words, you won’t just be taking out the garbage or planting flowers.
Upon inspection of the interior of a house you might find that nothing has been changed since the 70s. Cool! Retro. No, outdated. If it’s in really good shape, some investors will decide to leave the home as-is: buy low, sell low. Others might see the value in a partial rehab, bringing more return on their investment.
Keep This in Mind: the true cost of a rehab is not determined by the number of nails you pound or amount of hauling you need to do.
If the home is shows visible signs of age—rust, peeling paint, broken fixtures—you might have to roll up your sleeves and/or hire a contractor.
A partial rehab might involve bathroom or kitchen remodels: cabinets, countertops, flooring, etc. Damage repair and certain code violations would qualify a partial rehab. A certain amount of updating and appliance replacement might be necessary. Decide whether you need to buy new or well-cared-for used appliances. The latter would be fine in most cases. For a partial rehab, you can estimate between $10,000- 25,000 out of pocket, unless you’re qualified to do the repairs yourself. Weigh this against your initial investment to determine its value.
Calling a full rehab “repairs” would be a misnomer. A full rehab has dollar signs and lots of sweat equity attached. We’re talking about gutting, remodeling, and demolition. Depending on the degree of distress (or destruction), a full rehab requires a lot of work. This type of investment might not be for everyone. It can involve ripping a house right down to its foundation and reconstructing. If there’s a lot of interior or exterior damage, you really need to know how to estimate the cost of repairs to evaluate an investment opportunity.
Sometimes you can get a property such as this for pennies on the dollar. As long as you have a trusted team to work with and you’re sure repairs can be made while allowing a good return on investment (ROI), the value might be there. Otherwise, selling as is or selling the contract might be a better way to go.
It can be tempting to sink more money into a house than is needed to resell it to your buyer. Many people look at a house in shambles and see what COULD BE. If you’re going to have the best ROI, be aware of the minimum amount of rehab and stick to it.
Keep This in Mind: the true cost of a rehab is not determined by the number of nails you pound or amount of hauling you need to do. The condition of the home is important, but as you’ll see in future articles, geography also plays a part.