Trying to Save This Flip Failure

TLDR

I budgeted $38,000 for phases one and two but spent $82,000, a $44,000 overage before finish work. The choices were to bring cash, borrow more, or sell unfinished; in this case, I chose my own money. Ross recommends a 20% or larger contingency on old houses, though that alone would not cover this full overrun.

Table of Contents

• Where the Budget Blew Up
• Three Options That Are Really Only One
• Build the Remaining Scope Clearly
• Not the Time to Cheapen Up
• The 20% Contingency Rule
• FAQ

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.

The speaker says additional borrowing was not available for this project. That outcome is specific to his existing loan and lender; the transcript does not establish a universal hard-money percentage or say more financing is always unavailable.

The speaker viewed a mid-project sale as unattractive on this deal because of the likely discount. The transcript does not establish that unfinished houses are unsellable or that selling is almost never rational.

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

That does not mean the finish work rescues the profit. Ross expected to complete the house so he could sell at retail value, realize the loss, and learn how much of his own money remained in the deal. That final amount was not yet known.

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 may assume every flipper is rich. Ross’s experience was that investors often have to find a way to fund the work and finish the project.

Build the Remaining Scope Clearly

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 sent the remaining scope to one trusted contractor who fit the project type. The source values that relationship but does not quantify hypothetical savings from competitive bids.

The scope itself goes written, then video. I walk the house on camera pointing at each area and describing the expectation. I send the video with the written scope, make sure the bid is based on that scope, and confirm the contractor understands it. This is Ross’s standing scope practice; the overage simply made ambiguity more expensive.

Pro Tip

Written and video scope are how Ross normally sets expectations. They do not erase the loss, but they make the remaining work easier to bid and manage.

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 house still has to compete near the top of the range of comps in its neighborhood. Ross’s instinct was not to cheapen the finish package after the overage. He considered spending a little more where the finish could help the completed house compete.

What I looked at instead was what I could simplify without losing the plan. Ross proposed removing a back-deck railing because he believed the deck was below the height that required it, painting the existing cabinets, and preserving tile that could be matched. He chose black hardware to match the planned black appliances.

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.

The source prioritizes the front of this house while cutting optional finish spending elsewhere; it does not establish a universal buyer rule.

The 20% Contingency Rule

The main thing I wish I could go back ten years and tell myself is this. Keep a financial contingency of 20% of the construction budget or more, especially on older houses.

On a $40,000 rehab that is an $8,000 reserve. On this project’s original $71,000 budget, 20% would have been $14,200. The overage was $44,000. The reserve would have reduced the gap, not covered it.

Some projects will reveal very little, while others will reveal nearly everything that can go wrong. The reserve is for that uneven reality.

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

The speaker recommends a 20% contingency for older houses from this experience. The source does not prove that the percentage is a universal line between a lesson and bankruptcy.

FAQ

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

You do not know in advance. An investor may look at 10 or 20 properties before buying one, so bringing inspectors or the city to every candidate is not reasonable. You make the best judgment you can from what is visible and keep a contingency for what is not.

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

Ross recommends having a safety net before buying older houses where surprises can appear. The right decision depends on your risk tolerance and the cash flow available from your job or another business.

Should I use partners to cover the overage?

Borrowing more or bringing in partners was one of the three options Ross considered. On this project, the existing loan already used the amount the lender would normally support, so he chose not to ask for an exception and brought his own cash.

Why not just sell the house unfinished to a wholesaler?

Ross believed selling before the house was livable would leave too much value on the table in this case. He did not claim that finishing is always the better choice for every distressed project.

What’s the biggest lesson from this project?

Keep a financial contingency of 20% or more for older houses, while still taking action at a level your own risk tolerance and cash flow can support. You cannot inspect every house you consider or remove every surprise.