Ask yourself questions starting with: “How much will repairs cost?” That chapter deals with estimating expenses on the front end, to see if you want to pursue an opportunity or not. Some people call that process a back-of-the-envelope pro forma. It means a very rough estimate of your expenses, potential sales price, and anticipated profit. If you did a full-blown budget on every potential flip you ran across, you would suffer from a disease industry insiders call analysis paralysis or sometimes the getting ready syndrome.
If you read budgets prepared by experienced flippers, you might see very broad categories of expenses such as “rough electrical” or “finish carpentry.” That is probably fine if you do the same type of house all the time and are very comfortable with the kinds of expenses you will encounter. For beginners, I recommend a budget just as detailed as you can make it. There are three reasons for that.
1. It helps to have a checklist to make sure you have not overlooked anything. “Finish carpentry” is fine as a category, but breaking that down into items such as “install crown molding in the dining room” helps you remember that you must cost out the molding itself, and have someone stain or paint it, in addition to just installing it.
2. You have better communication with subcontractors and suppliers because you itemized the things you want.
3. You are able to ask pointed questions, such as: “What have I omitted from this list?” When I first started flipping properties, it came as a shock to me that when you buy a one-piece tub and shower, faucet set, and showerhead, you have to separately buy valves, drain flanges, and other such items.
Materials should all be listed individually, with the cost plus sales tax and delivery fees where relevant. Labor should include firm bids or estimates of man-hours to complete and labor rates per hour. Include time estimates for the completion of various categories of work. This will let you know how long your project will take, and it will let you schedule subcontractors who must do their work in a certain order. If you cannot estimate the time, ask someone at the store where you will be buying the supplies for help with that task. They can usually help you with estimates for time and for labor costs.