Trying to Save This Flip Failure

TLDR

Budgeted $38,000 for phase one and two. Spent $82,000. That is a $44,000 overage before I even got to the finish work. Three options existed: bring the cash, borrow more, or sell unfinished. The only real option is finish the project with your own money. A 20% contingency is the safety net that keeps you out of this spot.

Table of Contents

• Where the Budget Blew Up
• Three Options That Are Really Only One
• The Scope of Work Has to Be Tighter Than Ever
• Not the Time to Cheapen Up
• The 20% Contingency Rule

Where the Budget Blew Up

Projects break into six checkpoints. The first two are where the money goes sideways.

A $44,000 overage on what was supposed to be the first two checkpoints. That is on a project where the full budget was $71,000. The overage alone is more than half of the original total spend.

The overage did not come from one thing. The walls got opened up and all kinds of new information showed up. The city asked for extra items we did not account for. We always leave a little fluff in the budget for the unexpected. This was not fluff territory. This was a lot extra. Every possible thing that could be asked for got asked for. Every possible thing that could go wrong went wrong.

Now the overall project budget is staring at $115,000 instead of $71,000 just to finish the same plan. And that does not include any of the next round of unexpected issues that phases three through six might surface.

Budgets do not blow up once. They blow up cumulatively. Phase one overages make phase three riskier.

Three Options That Are Really Only One

When you are this far over budget, you have three options on paper.

Option B is blocked by the math. A hard money lender will lend 60% to 70% of the ARV. I already borrowed that money. For them to lend more would require doing it as a favor, which is a favor you save for actual emergencies. Not this.

Option C is not an option. You cannot sell a flip before it is livable. If you try, you leave so much money on the table that the loss is worse than finishing. The only time you sell mid project is if the market has collapsed so hard that finishing costs more than the new arv minus what you owe. Rare.

That leaves option A. Finish the project with your own cash.

This is exactly the spot that pushed me to start a construction company about ten years ago. I did not have the cash either. I had to find it. I looked at what I had, which was a crew doing construction for me on my flips, and I realized I could redirect that crew to do construction for paying customers. The construction company was born out of need, not plan.

People think flippers are rich. Most are not. They are just willing to find cash in three places to finish the project.

The Scope of Work Has to Be Tighter Than Ever

Once you are in the hole, the scope of work going to the remaining contractors has to be cleaner than usual. Any vagueness costs you money you do not have.

On this job we used what we call an all arounder. One contractor handling drywall, floors, paint, trim, cabinet install, some exterior work. Not mechanical, electrical, or plumbing. Those are separate trim out crews. Bundling the cosmetic work into one contract keeps bandwidth low for me and the scope tight for them.

I also did not send this out for three bids. I sent it to one contractor I trust who fits the project type. Three bids wastes two people’s time. I know who belongs on this job. I know they will give me a fair number. That relationship is worth more than the theoretical 5% savings a competitive bid might deliver.

The scope itself goes written, then video. I walk the house on camera pointing at every wall, every floor, every fixture and describe the expectation. I send the video with the written scope. Their bid has to reference both. I confirm they understood before they ever start.

Pro Tip

On an overage project, video scope of work is not optional. Written is not enough. You will be fighting inspection resolution surprises later and you need the contractor on the same page from day one.

Not the Time to Cheapen Up

The instinct when you are over budget is to cut quality on finishes to save money. On this project I had the opposite instinct.

The neighborhood supports higher end. If I drop to builder grade LVP, laminate counters, and low grade cabinets, the house will not hit the price point the neighborhood’s comps actually prove. Cheapening the finish cuts the sale price by more than the finish saves.

What I looked at instead was what I could strip without hurting the sale. Delete the railing on the back deck because it is not required by code. Paint existing cabinets instead of replacing them. Keep the existing tile that could be matched. Use black hardware throughout because I already have some black hardware that would otherwise get tossed.

Small cuts that do not hurt the buyer’s experience. Not fundamental quality cuts.

The front of the house is where the buyer forms a first impression. That gets the investment. A wood accent feature on the foyer. Paint. New rails. Clean landscaping. Fix the front door area. Whatever the back of the house needs gets done but not upgraded.

Buyers forgive the back of the house. They do not forgive the front.

The 20% Contingency Rule

The main thing I wish I could go back ten years and tell myself is this. A financial contingency of 20% of the construction budget is the floor for older houses.

On a $40,000 rehab that is an $8,000 reserve set aside before work starts. On this project’s original $71,000 budget, that would have been $14,000 reserved. The overage was $44,000. Even a full 20% contingency would not have covered it, but it would have absorbed enough that I would not be stretching my personal cash to finish.

The 20% is not optional. Some projects come in under. Good. That is a bonus. Some projects come in way over. This is where the reserve earns its keep.

You balance two things as a new investor. Be smart about your budgets and set a contingency aside. Also just act. Go out and buy properties. The mistakes are how you learn to not make them down the road. Different people have different risk tolerances, different cash flow from their job or side businesses. Know your own tolerance.

Key Concept

A 20% financial contingency is the line between learning an expensive lesson and going bankrupt from one. On older houses, set it aside before you sign the loan, not after the walls are open.

FAQ

How do I know in advance my budget will blow up?

You do not. That is why the contingency exists. What you can do is look at the age of the house, the visible systems, and the scope. Houses built before 1970 with original plumbing and electrical almost always exceed the rough estimate. Budget accordingly.

What if I do not have 20% extra cash to set aside?

Then the project is probably too big for your current position. Either buy a smaller, lighter rehab where you can carry the contingency, or wait until you have more cash on hand. Going in without a reserve is how you end up in my spot on this project.

Should I use partners to cover the overage?

Only if the math makes sense for both of you. Bringing in a partner at phase three to save a failing project means giving up profit you would have otherwise kept. If the partner cost equals or exceeds the overage, you are just moving pain around. Bringing your own cash is cleaner.

Why not just sell the house unfinished to a wholesaler?

Because you will lose way more than the overage. Wholesalers buy at a deep discount. An unfinished house with $44,000 of overage in the basis is worth less, not more. Finishing it is almost always the better math.

What’s the biggest lesson from this project?

Have a contingency in place before the loan closes. Not planned, not intended, actually funded and available. The projects where you need it you really need it. The projects where you do not, you still have the cash for the next one.