The price of doing rehabs
We just spent $100,000 on a rehab that we thought would cost $60,000. That means we went over budget $40,000. How do you like them apples?
To be honest, we were shocked that we went over this much, especially since at the time we calculated our offer to purchase I was thinking I overestimated the rehab.
This house was a three-bedroom, one huge bath brick ranch in Calhoun. The house sported more than 1,800 square feet of heated space that included a Florida room and a bonus room. It had a carport, detached garage, and an outbuilding. It also had an inground pool.
The house had a metal roof on it and newer windows, but past that had nothing in the way of updates. It had great bones though. There was a little bit of a hump in the floors in the back bedrooms, but nothing terrible. The main thing was they had taken two whole bathrooms, or at least a bath and half, and combined it into one huge bathroom with a massive real stone walk-in shower and a separate water closet for the toilet.
But you could tell that this whole area was a DIY project that had never been completed. The plumbing was not correct, there was a cast iron vent pipe from the previous layout still sticking out of the ceiling and under the house drains were not connected properly.
This house didn’t have anything major wrong with it when we started. Sure we were going to take that one bathroom apart and divide it back into two, but almost everything else was minor; at least minor to us.
Here is what our game plan was: Divide the bathroom, fill in the pool, level the floors out, replace HVAC with a new package unit, replace the roofs on the garage and outbuilding and then our normal cosmetic stuff on the inside such as counter tops, lights, paint and floors, and then gutters and paint on the outside.
Now at the time we were making the offer on this, we had just completed some substantial rehabs. One of which was of a house that we had to take down to the stubs, ceiling joist and subfloor. We call this a gut job. We had to put a roof on that one, redo the plumbing and build a deck out front. Inside it had to have new sheetrock throughout, new bathrooms, and a new kitchen. We also had the electrician come out and make sure everything was as it should be and then of course all of our normal finishes.
That house cost $45 a square-foot to rehab.
We also had one that was not as substantial come in at $25 a square foot. That one needed a roof, some subfloor and deck work, and then the rest was the cosmetics stuff.
Based on the scope of work, we figured the rehab on the brick ranch would fall between those two. Boy were we wrong. It came in at nearly $54 per square foot.
We’ve had a couple of meetings lately trying to figure out how we messed up. And here’s the thing: nothing is glaringly obvious.
There are many things that seem to be making the difference, things like our HVAC was $3,500 more than normal. The reason for this was the EPA changed their standards on what SEER rating was acceptable and somehow the major brands decided it was no longer profitable to make the package unit size we needed to replace the unit that was already there. This meant we had to go with a split unit which changed framing, electrical and duct work. We incurred those costs and the cost of the unit.
Our gutters were nearly double what we were used to. Our counter tops cost $1,300 more than normal. The pool cost $1,700 to fill in, but that was way cheaper than the $9,000 it took to fix the last one we did. The electrician was more and the list just goes on.
One of the meetings I had on this house was with my CFO Chris. He too couldn’t see anything that looked egregious. His thought was we just got hit with the top of inflation. That’s a pretty loose answer, but I have nothing better.
I asked my friend, and fellow investor, Tonya Milligan about their rehabs. She said they keep going over, too. Her husband Kerry said it’s like trying to hit a moving target in the dark. And that it’s harder than ever to set and achieve a budget.
They have been rehabbing for decades — plural — which means they have a ton of experience. Whereas it’s comforting knowing we aren’t alone it’s still not an answer. We’ve got to figure out what happened so we can know what our real price of doing rehabs is, because we can lose a lot of money quickly if we don’t.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.