Professional home flippers typically follow a systematic approach when modeling the costs of remodeling a dilapidated home. Accurately estimating renovation costs is crucial to ensure the flip remains profitable. Here are the key steps they might take:
Property Assessment: Flippers start by conducting a thorough inspection of the property. They assess its current condition, noting all areas that require repair or renovation. This assessment includes evaluating the foundation, roof, electrical system, plumbing, HVAC, windows, doors, flooring, and other structural elements.
Create a Scope of Work: Based on the property assessment, flippers create a detailed scope of work (SOW). The SOW outlines all the required repairs and renovations, specifying the materials and finishes to be used. This document helps in accurately estimating costs and acts as a guide during the renovation process.
Obtain Contractor Bids: Flippers often seek bids from licensed contractors or subcontractors for each aspect of the renovation listed in the scope of work. Multiple bids provide a better understanding of the market rates for the required work and materials.
Account for Contingencies: Experienced flippers understand that unexpected issues can arise during a renovation project. They typically include a contingency buffer (usually around 10% of the total project cost) to cover unforeseen expenses.
Cost Estimation Software and Tools: Some flippers use specialized cost estimation software or online tools that help calculate renovation costs based on the property's size, location, and scope of work. These tools can offer valuable insights and increase the accuracy of the estimates.
Material Sourcing: Flippers research and compare prices for construction materials and finishes. They often try to strike a balance between cost and quality to maximize their profits.
Labor Costs: Alongside material costs, flippers account for labor expenses when estimating the overall renovation budget. Labor costs vary depending on the complexity of the work and the region's labor rates.
Carrying Costs: Flippers consider the carrying costs, such as property taxes, insurance, utilities, and mortgage payments, while estimating the project's overall costs. These costs continue to accrue during the renovation period and impact the flip's profitability.
Permitting and Inspection Fees: Depending on the scope of the renovation, flippers factor in the costs associated with obtaining permits and undergoing inspections to ensure the work meets building codes and regulations.
Project Timeline: Flippers estimate the project's timeline, as the duration of the renovation impacts carrying costs and potential financing expenses.
Exit Strategy: Lastly, flippers consider their exit strategy. They assess the potential market value of the renovated property and determine whether it aligns with their profit goals. They also account for real estate commissions and other selling expenses.
Overall, meticulous planning, thorough property assessment, obtaining multiple bids, and using appropriate tools contribute to accurate cost modeling for home flippers. Successful flippers are cautious, factoring in all relevant expenses and maintaining a buffer for unexpected challenges.