Contractor · NYC/Los Angeles · Member since 2019 · 91 posts · 54 votes
5mo
I would think about safe margin as a spread after stress testing, not just a percentage on paper. The margin has to survive rehab overruns, longer hold time, price reduction, higher selling costs, and buyer credits. If the deal only works when ARV is perfect, rehab is perfect, and it sells immediately, it is not really safe.
For underwriting, I would use conservative sold comps, not hopeful active listings. Then build the rehab from actual scope, add contingency, and include every soft cost: financing points/interest, utilities, insurance, taxes, permits, staging, maintenance, closing costs, commissions, and expected seller credits.
Then stress test it. What happens if rehab is 15% higher? What happens if the sale takes 90 extra days? What happens if you sell 5% below target? If the deal still has enough profit to be worth the work and risk, you may have something.
The right margin also depends on project complexity. A cosmetic condo and a heavy single-family rehab should not need the same spread. More unknowns require more cushion.
In this market, I would rather pass on a thin deal than buy something that depends on every assumption going right.