Rehab Budget

What it is

The rehab budget is the total estimated cost of renovation. It’s the number I have to know before I can make an offer. Once I have the after repair value, the only other thing I need in the formula is what the rehab is going to cost. I put the ARV and the rehab cost into the Flippin’ Calculator and it spits out my max allowable offer.

The formula at the underwriting stage is: acquisition price plus rehab costs plus profit equals ARV. Everything else — closing costs, interest, holding costs — gets figured into the calculator separately. The rehab is just the renovation.

Here’s the honest thing about those numbers: a price is not real until I have a bid in front of me that says it’s that price. The Fliporithm gets me in the ballpark. The jobs menu gets me closer. A contractor bid is what makes it real.

Why it matters

The rehab budget is the biggest variable in the offer formula. You’ve got ARV on one side — that’s the market, and it is what it is — and you’ve got your target return on the other. The rehab number is where you have the most uncertainty and where things go wrong.

When I blow a rehab budget, it’s usually because I bought a house from somebody who was already working on it. Electrical looked done. HVAC seemed okay. We planned on some plumbing. Upon further review once we got into it — the electrical wasn’t right all the way around, so we tore it out and started from scratch. The plumbing had sloping issues, so we had to repipe everything. The roof had been leaking long enough that we had to rip down the ceiling, drop insulation — when you drop the ceiling it’s more than just the ceiling, it’s everything above it. Budget said one thing. The job cost way more. That’s why I add a financial contingency on every project — minimum 10%. If I think the project’s going to cost $50,000, I put $5,000 aside. Because things come up.

On the offer side, I sometimes put a little juice on the rehab costs when I’m sitting down at the negotiation table with a seller. I show them the Flippin’ Calculator. That initial number is probably the lowest offer. You start with an anchor and work up from there. A little juice in the rehab means I have a little room to move without blowing my margin.

How it shows up

Walk a property, run it through the Fliporithm — that’s the quick version. Pick the project type (cosmetic, renovation, gut), answer the quick six on the big systems, flag replacements, add extras. The tool hands back a ballpark.

At the negotiation table I’ll show the seller my construction budget. On one deal: $300,000 ARV, rehab cost $52,500, acquisition price the calculator spat out. Those are real numbers I’m showing them.

If the deal moves forward, that ballpark gets turned into a real scope of work using the jobs menu. That’s where it goes from “I think it’s going to cost around $50,000” to a line-by-line document I can give to contractors and work against.

The thing I track is whether the budget held. No matter how good you get, budgets are going to get beat sometimes. The project management side — tracking against budget, managing change orders, understanding the fear tax — is how you protect margin once the deal is bought.

Related

fliporithm, max allowable offer, ARV, 70 percent rule, jobs menu, contingency, fear tax, change orders, scope of work, holding costs