If it were only that simple…
Thank you HGTV and every other Do it yourself home improvement show in the universe that details how to figure out the cost to fix a house In Sacramento. Listen carefully, because contrary to the shows… purchasing a fixer-upper property may be an excellent way to generate quick profits on a Sacramento real estate investment, but only if you know what you are doing. Before you buy, make sure you understand the true cost of a fixer-upper property in Sacramento, Stockton or Modesto. In our latest post, we explore the real expenses creating a short list, but it’s just the beginning on what to you need to know and what to prepare for.
Fixer-upper properties are a huge draw for both the novice and seasoned real estate investors because there is the lure of being able to creatively add value to something in real need. Maybe in its purest form, the allure of a fixer upper is tied to the notion of the American dream and sweat equity. Maybe it’s where they all come together in one big creative and exciting lovefest. The truth is, a Fixer upper is an excellent way to achieve a high return on investment but only if you are prepared to create a plan and budget to make the right strategic moves.
Disclosure… My name is Peter Westbrook and I am a real estate Investor in Stockton, Sacramento and Modesto. I know a thing or two about buying and selling houses because it is what I do for a living and while I might not have a television show, I do have 10 years of experience helping 100’s of families navivate real estate ownership problems.
Aside from that I have bought properties from other would be investors that had houses and finances get away from them. Keep in mind that most do it yourself rehab projects of the fixer upper are not the grand slams that they are made out to be on TV. A friend once told me when I first started that I needed to be careful because he knew some very smart people that failed at fixing and flipping houses. He was right. I know some of them too. Thank God I am not one of them.
So what are the rules? How do you figure out the cost to fix a house In Sacramento?
If you already own a home that falls into the fixer upper category and you just want to do repairs and upgrades, that’s great because you get to sidestep the most expensive part of the transaction… the actual acquisition cost of the house. Many people are lucky enough to inherit a house in Sacramento so they are just looking at the cost to fix.
If you don’t already own the house the next thing I am going to say may be the most important thing that you need to know, especially if you are hoping to make money with the project. Remember that the cost of the purchase and the cost of the repairs actually do determine the return on investment and you do not make money when you sell something. You make money when you buy it!
This needs to sink in because the cost of the acquisition is the baseline that you may never be able to overcome when it comes time to sell. In some instances that may be just ok, because for today’s article, the strategy for determining how to figure out the cost to fix a house In Sacramento is also different dependant on three other factors;
- whether you intend to live in the house and the improvements are for you to enjoy
- whether you intend to fix and sell the house and are looking to get the highest sales price/ROI
- whether you intend to keep the house as a rental to generate an ongoing monthly income.
So while investors all over the country flock to these kinds of properties, it is important to have a grasp on the true costs you are likely to face. Also remember, that if this rehab project is for a rental, you are not going to buy the nicest materials and appliances just for your tenants to trash or steal.
Here we go… today, we discuss these costs and how to plan ahead so you don’t find yourself in over your head.
Planning Ahead,
Order a General Home Inspection
It doesn’t matter who you are, unless you are a general contractor, you need to have the house inspected by a Home inspection company. There are three things that need to be evaluated.
- Roof Inspection
- Wood Destroying Pest (termite)
- General Home Inspection
While nothing can tell you everything that is wrong with a house, an general home inspection will always come up with the most petty, nit picking and frighteningly miniscule items that as a homeowner you may want to be aware of. It doesn’t matter what the items really are because they are going to set the table for you to negotiate a discount with the sellers for the purchase of the house. Most of the repairs called out in the report will be simple, but if you are smart you will have the seller take care of the big items. Keep in mind that if the seller agrees they may not make repairs that add any real value or actually save you any money for the rehab. And if the leak is in a bathroom where the cabinets already need to be and fixtures were going to be replaced anyway, there is no net gain. Remember fixing a water leak is a service call, not an improvement that adds value.
Get Contractor Estimates Before A Purchase
Once you have your inspection report, tour the property with your contractor to get estimates on the required repairs and updates. Also keep in mind that the cost of that contractor once the repairs begin are approximately 30% to 50% higher than the cost of materials. This will help to ensure the property you wish to buy will be profitable for you in the long-run. A contractor will be able to see things you may not, ultimately saving you thousands of dollars down the road.
How Much Should You Pay?
Once you have met with the Inspector and the Contractor, it’s now time to negotiate. In the most simple terms, you should calculate the value of the home if it didn’t require any work at all, then deduct the cost of repairs. To calculate the potential value of the property in question, take a look at what other properties in the area have recently sold for. While these properties won’t likely all be be fixer-uppers, it will give you a good idea of your property’s value potential. Once you have looked at that, I would recommend calling a few real estate agents and have them create a Comparative Market Analysis for your property that shows you what houses sold for near your house. Then sit down and and ask them what they would recommend in terms of upgrades and repairs… (remember you are looking for general guidance based on what they see as selling points) then you’ll need to evaluate your repair costs.
Padding Your Budget
Once you determine what you can pay and what the required repairs are going to cost, you’ll want to pad your budget a bit to prepare for any surprises you may face. A good rule of thumb is to set aside at least 15-20% for unexpected costs. These costs can be for things such as extra repairs you weren’t aware of, more labor needed than previously thought, or extra permit or administrative costs that were not planned for. Almost every project goes over budget, but when you plan ahead, you won’t have to.
Other Cost Costs To Consider
Permit Costs
On average, homeowners in northern California spend over $2,000 to $5,000 on building permits. The costs vary depending on extent of the project, but you can expect to pay a few thousand dollars depending on your location and the scope of the work being done.
There are a lot of things that California cities have in common. They rely on taxes and fees to feed their bloated salaries and pensions and they find a way to tax every turn of a screw driver and swing of a hammer. Don’t be shocked if you you are asked to file impact reports, pay for encroachment permits and the cost of an architect or even a contractor.
Good luck because time is money and unless you know how to manage them all personally you’ll quickly become frustrated at the elongated time frames. The biggest mistake that people make is to accurately calculate the time it will take and account for their holding cost while the project is in process. They are the main reason for cost overruns and ultimately profitability.
Financing Costs
Fixer upper properties are usually purchased with Cash or Hard Money loans. Most conventional lenders have restrictions on the kinds of homes that can be purchased depending on the specific defects, and most conventional lenders are not underwriting home purchases for houses that need significant repairs. It is a new twist on what used to be the way to buy a fixer upper in Sacramento. Lenders now have safety and livability standards that they rigidly apply.
Some houses, depending on the severity of the defects and the experience of the buyer can be purchased using an FHA 203(k) rehabilitation loan or a Fannie Mae Homestyle Renovation mortgage. These loans come with a reserve that is put into escrow in order to fund renovations. While these loans are great for bigger projects, they might be ideal when only small repairs are needed. You will face loan origination costs, a downpayment of around 5% down, as well as any other administrative costs. You need to do the math and they cannot be used if the purchase is not a primary residence. No investment properties of the fix and flip variety or the fix and hold for rent.
Repair Costs
While it should be obvious that the repair costs will need to be factored in before you buy, you need to understand that the cost to fix, renovate and upgrade things come in price ranges. The kitchen renovations for instance can range from $12,000 to upwards of $50,000 but can vary widely depending on appliances, cabinetry, types of materials and more. Flooring can run about $3,000 to $7,000 depending on the type of flooring used and how much area you need to cover. A new middle size bathroom remodel will run you at least $7,500 and any structural problems can end up costing tens of thousands of dollars. Master bedroom and bathrooms can cost upwards of $15,000 to $35,000. the list goes on. Remember If repairs are in excess, they eat into the profit margin. So here is a list. Live by it and know that not all houses are created equal and some are just money pits.
- Exterior Fencing can cost $1,500 to $3,500 depending on linear footage and materials. Neighbors my help with the expense. Don’t count on it and if they do they get a say… In my experience its a pain to collect and I want to remain calm.
- Landscaping will average $6,500 for the front and back respectively. Size matters
- Window replacements average $5,000 to $10,000. The labor is the same… the cost is in the delays and materials
- Facia and Siding will cost $4,000 to $8,000 and more. Stucco can be up to $11,000 and a new color coat $4,000.
- Electrical is expensive but if the house is accessible and they can punch holes for repairs later you can lessen the cost. Plan on $4,000 labor and another $3,000 to $5,000 in fixtures
- Kitchens cost at least $15,000 to $20,000. Keep an eye on materials and labor. There are lots of hidden costs of plumbing and electrical behind those walls.
- Master Bathrooms are expensive and if you’re looking for top dollar plan on $15,000
- Middle baths $7,500 and half baths cost $4,000.
- Flooring, New Doors, Baseboard, Trim are all finish work and cost a lot of labor. Replacing old doors while leaving old jams and trim is a mistake. For all plan at least $12,000.
- New HVAC upwards of $8,000 for a 1500 square foot house.
- Hot Water Heaters Conventional $1200 installed, Tankless the same.
- Garage Doors with Openers $1,500.
- Paint the interior $3,000 and up depending on size. If you are doing this yourself learn how to calk and have a steady hand, the time and attention to detail will pay off.
The Rule to Remember and Apply to all of the above… If its a rental, dont spend too much on any of it.
My name is Peter Westbrook and I am a real estate investor in Stockton, Sacramento and Modesto Ca. It is not easy to win everytime that you pick up a hammer. The spread sheets and the analysis are just some of the tools that we use as real estate investors to make things work. In my business, there are two things that kill profits; ) Delays and 2) Surprises. It is difficult to plan for either but if you are doing this part time, then duck for cover because the surprises will just cause the delays and if you’re not ready to deal in a positive way, they will kill your project.
The last thing to know…. if you run into trouble with that project and just want to sell that house Call Me . We Buy Houses in Stockton, Sacramento and Modesto and we pay Cash.
