Trying to estimate the cost of repairs to a property could turn out to be an expensive mistake. If you underestimate your renovation costs, that money will come out of your profit. With the right education and network however, figuring out your costs becomes easier.
3 STEPS YOU CAN TAKE TO SPEED UP YOUR KNOWLEDGE OF HOW MUCH THINGS COST.
1. Find a distressed property to get started
The first step, and usually the hardest, is to find a deal that is going to make you a profit. So many average investors get stuck on the fact that they don’t have capital to invest, when really, the deal is always your starting point.
You need to find a property with flipping potential, that is advertised on the market or through word of mouth.
Your intention isn’t necessarily to buy the property, but rather, to gain insights on how much refurbishments would likely cost. See this as a learning exercise.
When trying to find a distressed property, it is very important
that you make your intentions clear to the estate agent.
2. Manage the expectations of the estate agent
Once you have found this distressed property you need to manage the estate agent’s expectations.
Tell the estate agent that before you are able to commit to buying the property, you want at least 3 builders to quote on the renovations. Usually the estate agent won’t have a problem with this.
If you plan on making an offer on the property, make sure you give yourself enough time in the Offer to Purchase (OTP) to get the required quotes.
This will be done as a suspensive condition in the OTP, in case the builders’ quotes come in higher than expected and therefore the deal does not work anymore.
You will need to consult your attorney to ensure that you insert the correct suspensive clauses into the OTP.
3. Go through the property in detail
Many would-be investors underestimate refurbishment costs because they do not spend enough time viewing the property.
They quickly browse through the kitchen, bathroom and bedrooms and are then surprised when they find a major defect after they have bought the property.
Get yourself a basic inspection sheet. You can get one of these from joining local property investor networks and attending seminars and courses on investing in property.
- We recommend that you start from the outside, walk around the property and ensure that the 4 walls and roof are in good condition. Check if the boundary walls are secure.
- Once you are happy with the exterior of the property then go inside. You will want to take your own photos (with permission from the agent/seller) and make notes on your inspection report/sheet.
- When walking around be sure to open cupboards, look for damp patches, cracks and anything that could amount to spending money on the property.
- If you walk into a property that has just been painted, in some cases, it could be that the seller is trying to hide something. So, make sure you take a good look.
- Depending on the condition of the property, you may want
to employ the services of a professional home inspector.
They will often climb on the roof and into the ceiling, and will
know what to look for. This could also be a great learning
curve for you.
5 THINGS THAT COULD UNEXPECTEDLY INCREASE YOUR COSTS
- Electrics - Have a look at the sockets and switch boards to see if they are old or if they have been replaced. Try to find out from the agent/seller when the last time the electrics were worked on.
- The pool - Check for cracks in the pool as fixing these could prove extremely expensive.
- Tiling - Investors assume that tiling is cheaper than it actually is. Get the most accurate cost per sqm.
- Curb appeal - Make sure your house has a good outward appeal, as this is what attracts potential buyers to viewing the inside.
- Garden - Most people have little idea how much landscaping
costs. Removing trees, adding shrubs and planting grass are
always more expensive than people first perceive.
Now that you know about running the numbers...
The next step in your Buy-to-Sell Investor Guide is "Understand the renovation and holding costs":
- Run your numbers and buy right
- Understand the renovation and holding costs
- Know the market value of the renovated property