How to Identify Improvements for House Flipping
To start house flipping, accurately identify improvements and estimating renovation costs is essential. Without a realistic idea of the type of improvements required to flip a house, your estimate could be off by tens of thousands of dollars.
Learning how to quickly and comprehensively identify improvements will lead to greater profit and less risk for your house flipping business. To calculate the maximum offer price or minimum return on investment, you will need to accurately estimate repair costs. To calculate repair costs, you need to first identify improvements.
Careful evaluation of improvements and improvement costs is essential to your success as a house flipper.
Recommended: Learn how to start a house flipping business with our guide.
Your Best Option: Get a Good Contractor
The fastest, most efficient way to increase your chances of success is with a good contractor. They know what to look for and how much it will cost to repair. To start house flipping efficiently, a good contractor will take the guesswork out of the process. They are worth their cost because they will provide tremendous savings in the house flipping process.
How to Get a Good Contractor
The best way to get a good contractor is by asking another real estate investor for a reference. Ask one or more people who have already succeeded in the business to recommend a contractor. Reach out and start working with them from the beginning of your house flipping process.
In fact, it is good to schedule the first walk-through of the house when the contractor can be with you. Incentivize the contractor by telling them if they help you evaluate a house to flip, they will get the renovation work. Build in additional financial incentives for them. You want a good contractor, and you want them to be motivated to work for you.
While a good contractor will do most of the work of estimating costs, it is worthwhile to understand all your options and how to obtain an estimate. This will also help you to ask the right questions of the contractor throughout the renovation process.
The Importance of Accuracy
Whether you hire a contractor or do the estimate yourself, accurately estimating improvement costs cannot be overstated. It can be all too easy to fall into the trap of convincing yourself it won’t cost THAT much. Justifications like, “I’ll get the appliances on sale” or “I’ve already got leftover paint” are very tempting. Resist the temptation.
It is better to calculate the renovations at full value and take any items you get on sale or reuse as a bonus to your bottom line. You don’t want to depend on getting the best deals only to find your budget shattered before you’ve completed the project.
Just as contractors say “measure twice, cut once,” this is your time to measure and estimate every cost before jumping in to do the house flip. Now is the time to measure (and calculate) twice.
The most common mistakes in house flipping involve inaccurate estimates of improvement costs. It is easy to leave out or forget important factors, creating an inaccurate estimate. It is also easy to be overly optimistic and underestimate improvement costs.
A series of minor errors can dramatically affect your final profit. That is why it is better to double-check all your numbers and estimates. With a comprehensive picture of every improvement cost, you can safely move ahead with house flipping, knowing your return on investment is secure.
One final word of warning on accuracy: in the excitement over a project, it is easy to overestimate the final sale price of the house. Don’t let your judgment be clouded or lose objectivity with the potential you see in a house. It is better to be modest and conservative in your estimate of the final sale price.
Take the lowest value within the selling range you are targeting. If your house sells for more, it is a bonus.
An objective, rational approach will pay off with the greatest rewards in house flipping.
Miscalculated improvement costs can lead to increased cost and increased time for the project. Obtaining quick, accurate estimates of improvement costs is one of the most valuable tools in your house flipping toolbox.
If you plan to calculate the improvement costs yourself, here are the steps to take:
Step 1: Identify Improvements
To identify improvements, you will do a walk-through of the potential investment house and note all the improvements to make.
Improvements in house flipping fall into three main categories:
- Essential to the safety and security of the home. These are your must-do items.
- Improvements to the comfort of the home. These could be cosmetic or optional upgrades. These are your could-do times.
- High-end and custom finishes. These are nice but not essential.
You can categorize the improvement as must-do or would like to do. Put a star next to luxury improvements that are not essential but that will increase the value of the house more than the cost of the improvement.
At this stage, it is useful to get a general contractor or inspector to check the house. They can confirm the integrity of the roof, foundation, electrical, and plumbing.
This checklist covers some of the main must-do categories:
- Windows and doors should work properly and close
- All locks function well
- Stable foundation
- Rafters and roof are undamaged
- Walls aren’t crooked or bulging
- Chimneys, porches, patio, and stairs are all in good condition
- Adequate drainage
- Clean and dry basement
- Clean and repair gutters
- Remove any signs of pests such as termites, fleas, spiders, wasps, rodents, etc.
- Repair exterior carpentry
- HVAC system is in good condition
- Plumbing is working and in good repair, without leaks, slow drains, etc.
- Electrical system is in good repair
- Smoke detectors work
- All interior carpentry is repaired
- Repair walls and repaint
- Repair floors and countertops
- Update appliances
- Improve landscaping
Step 2: Obtain an Estimate of Improvement Costs
Once you know what needs to be done, there are three ways to obtain an estimate of improvement costs:
- Do the estimate yourself
- Hire a professional
- Use a rule of thumb
Each of these options has trade-offs in terms of speed and accuracy. Hiring a professional will give the greatest accuracy. The rule of thumb will be the fastest option, but accuracy will also be compromised.
Here is why it is worth exploring all three.
Option 1: Create an Estimate Yourself
Creating an estimate yourself will be the most time-consuming in the short term but has greater long-term rewards. There is a steep learning curve, so you have to really commit to it. If you are not willing to invest considerable time upfront to learn all the material and labor costs of your area, this is not the best option.
With time, you will be proficient at accurately estimating improvement costs. This will build your confidence and also lead to greater savings and accurate results.
When creating your estimate, you will need to calculate two costs for every improvement: material costs and installation costs (cost of contractors).
- Material costs can change quickly and also vary between regions. Just because you know material costs in one state doesn’t mean you have an accurate picture for another. These costs are also influenced by supply, seasonal and economic changes, weather, and natural disasters.
That means to estimate material costs accurately, you should be committed to not only learning prices but continuously updating your knowledge. - Labor costs can also vary widely. Demand is one obvious reason for increased labor costs. Seasons naturally influence labor costs, with summer being the high period in most areas.
There can also be fluctuations due to the local market, the desires of the contractors, and other variables that you will not be able to account for. For this reason, it is best to obtain a quote for each job. If you need to estimate, calculate a range for labor costs, or estimate high and build in a safety factor.
To accurately estimate both labor and material costs, you need to be familiar with all aspects of construction costs.
Estimating Material Costs
A good place to start for material costs is at construction stores, including Home Depot, Lowe’s, Menards, or similar local stores.
Make lists of the costs of common items you will require for every type of repair, from painting the walls to replacing the bathroom or kitchen. It is worthwhile to speak with a local contractor about the details of what you need for each type of project so that you don’t miss anything.
Once you have the initial list, you will need to gather as much pricing and supply information as possible about each item. You can gather much of this online, but it is good to also compare prices in person as sometimes local stores have regional pricing.
Once you have gathered the information, organize it into spreadsheets you can access as needed. These spreadsheets will help you to estimate material costs.
Estimating Labor Costs
For labor costs, a good starting point is to contact several local contractors to get an overview of the average and median prices. You can contact 5 to 10 contractors and get their pricing on several types of projects. This will help you to get a feel for pricing in the area, and how each contractor falls within the range of prices.
You can ask for the following estimates:
- Hourly rate
- Price to replace a door or window
- Price to replace a bathtub or shower
- Price to install a new sink and dishwasher
- Price to install flooring – by square foot or hourly
Some will only give you the hourly rate, but many will give a general estimate for different projects. Enter all of this information into a separate spreadsheet for labor costs.
Armed with a detailed spreadsheet of costs for different projects with local contractors, you are prepared to accurately estimate labor costs. With this information, you can hire the contractor with the best price and skills for a specific task or for the whole project.
Option 2: Hire a Professional
The second route for obtaining an accurate estimate of improvement costs is hiring a general contractor to do the estimate. Especially in your first few house flips, hiring a professional to help at this stage will save you unexpected expenses later in the project.
A general contractor can accompany you on the walk-through of the house and help you to identify items that must be done. They will also be able to point out improvements that are not essential but will add value in the minds of potential buyers.
The advantage of a general contractor is that their estimate will be accurate. Extensive experience will ensure they get the nuts and bolts right and do not forget anything. Their working knowledge of the current material and labor markets ensures comprehensive estimates for both materials and labor.
You also benefit from a general contractor’s volume discount. They can usually obtain materials for less than the prices at the local home improvement store. When the general contractor passes these savings on to you, it helps defray the cost of hiring them.
Building a good relationship with local contractors from your first house flip means you have the help and support when you need it.
How to Choose a General Contractor
You want to choose a general contractor who has experience working with real estate investors and in rehab projects. You should be clear with the general contractor that the goal is to maximize profit. It can be smart to offer to pass on some of this profit to the general contractor. Creating a win-win with the general contractor will help secure future success.
You want to hire an experienced general contractor with an understanding of every type of possible repairs. They should be skilled at identifying essential renovations and ensuring the safety and security of the home – from foundation to roof. You can ask about their experience and also get recommendations.
Even if you plan to do much of the renovation work yourself, it is worth hiring a general contractor for the estimate. They will help you to make sure you don’t overlook any essential areas for improvement and that your estimates are realistic.
A general contractor’s estimate ensures timely, detailed, and accurate advice.
Option 3: Use the Rule of Thumb
The rule of thumb can be used in a pinch when you need a fast estimate to make a decision. The advantage is in the speed. While the rule of thumb is a good starting point, do not take it as the final calculation. It is always worth going back afterward to get a detailed estimate.
General categories you can use for a rule of thumb estimate of improvement costs include basic improvements, rehab, renovation, and reform.
Basic Improvements
It costs around $5 per square foot for a simple renovation like new paint and carpet. This is the basic level to make a home habitable.
At this level, you will do the basics of any house flip:
- Clean out anything left in the house from previous inhabitants
- Make the yard tidy
- Do some simple renovations
- Deep cleaning before showing
Rehab
Plan to spend $15 to $20 per square foot for more complex changes. You will be fixing windows and doors and repairing the electrical, plumbing, and HVAC systems as needed. You will take the house up to a desirable standard for the neighborhood. This can include paint, carpet, fixtures, and upgrades to the kitchen and bathrooms. Finally, plan to improve the landscaping and give the house a final deep cleaning.
Renovate
Plan to spend $25 or more per square foot to do everything included in the rehab section, plus making replacements to bathrooms, kitchens, or walls. Renovating involves making the house feel completely new.
Reform
Plan to spend $40 or more per square foot if you plan to make major structural changes to the home or replace major home systems. This includes increasing the size of the kitchen, moving the location of a bathroom, and replacing plumbing, electrical, or HVAC systems. Of course, after these major changes, you will also make cosmetic improvements like new paint, new carpet, and a final deep cleaning.
Armed with these categories and an idea of your desired changes, you can quickly make a simple estimate of your renovation needs.
Plan for the Unexpected
Whatever way you choose to estimate your improvement costs, be sure to add 5-10% for unexpected expenses or delays. This will ensure that your carefully calculated estimates for the house flipping process. You want to ensure a profit regardless of delays or changes in labor or material costs. By adding a cushion in the estimation, you secure your return on investment.
Putting It All Together
Whether this is your first house flip or your 20th house flip, accurately identifying improvement costs is essential to your house flipping success. You can obtain an overview of the necessary improvements by taking a walk-through of the house. An inspector or general contractor can help you ensure the house is structurally sound.
Once you have an idea of necessary improvements, the rule of thumb will give you an initial estimate of improvement costs. You can calculate a detailed estimate yourself or hire a general contractor to help you at this stage. An accurate, detailed, and timely estimate of improvement costs will prevent unexpected expenses, secure your profit, and ensure a successful house flip.
