How Much Does a Renovation Cost, Anyway? (Part 1 of 2)

by Vena Jones-Cox

Question:

I keep hearing other members of my real estate association talking about fixing up a whole house from top to bottom for $10,000 to $20,000. When I get bids for properties I’m thinking of buying, I find that I can’t get the same work done for less than $30,000. What am I doing wrong? A.L., Cincinnati

Answer:

I’m guessing that you have several problems here. The first is a problem of perception. When you hear someone say that he fixed a house “from top to bottom” for $10,000, you might assume that he replaced everything—roof, furnace, walls, kitchen, bath, wiring, plumbing, etc. But this is probably not the case.

The goal of most investors who buy properties to renovate and resell is to buy cheap, spend $10-$15,000 on renovations and holding costs, sell for retail price, and pocket $25,000.

Because major mechanical work (like rewiring, replacing plumbing, or overhauling the heating system) and structural work (like fixing foundations, leveling floors, or dealing with extensive termite damage)is expensive and time consuming, many investors won’t even consider tackling a property that needs these things.

On the other hand, cosmetic work like kitchen and bath updates, paint, siding, carpet, landscaping, and decorating are relatively straightforward and inexpensive.

That’s why you need more information to determine how your colleagues are getting better prices than you are. The first question you should ask is, “Exactly what did you do to the property?” If “fixed top to bottom” means updating cosmetics, a $10,000-$20,000 price tag is completely reasonable.

If it means dealing with the mechanics and the structure, a $20,000 price tag is–well, let’s just say it’s highly suspect.
A second question you need to ask when someone quotes a seemingly low price for rehab is, “Who actually did the work?”

If the investor did the labor himself, he’s quoting you a price for materials only, and paid only 25% or so of the cost of having the same work done by someone else.

But on the other hand, he also spent an enormous amount of his own time (and endured enormous headaches!) getting the property ready for market–time that he’s probably not “paying” himself for when he figures out how much the rehab cost.

Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by clicking here. One per household, please.