Do you trust the first rehab number, or do you always assume it’s wrong?

Question

I’ve been thinking about how much weight investors put on the first rehab estimate when looking at a flip. Not the final bid after a contractor walks it. I mean the early number you use when deciding whether to make an offer, renegotiate, or move on.

On some deals, that first estimate feels solid because the scope is obvious. On others, it feels shaky because the inspection report hints at bigger issues without making the scope clear.

For the experienced flippers here, how do you handle that first number? Do you treat it as a rough filter, build your own scope, add a heavy buffer, or wait until a contractor sees it before you take the deal seriously?

Kevin Sobilo · Answer

@Ali Kalaei, a few thoughts:

1. If you were building the empire state building, how accurate would your initial estimate be? How accurate would it need to be? What about is you were developing your own large language model AI from scratch, how accurate would the estimate be?

2. Instead of looking at this as a flipping, rehab issue look at it as a PROJECT MANAGEMENT issue!

Project management is a whole field of expertise that people try to gloss over by trying to nail down firm numbers from the start when that is often not practical/possible or by adding in large contingency amounts into their budgeting. Those things are sort of like hiring "Chuck in a truck" rather than a licensed plumber. Sometimes it works ok, but it is sort of short sighted because eventually it will bite you in the a@@.

3. Learning a little about Project Management will go a long way!

Understanding the principle that a project has 3 components (Scope, Time, Cost (Money)) and that often you can make changes in 1 or 2 of these components to bring the 3rd component into line with your goals.

For example, if you have something that is ABSOLUTELY TIME CRITICAL, you can often spend more money to have people work weekends etc and/or simplify the scope of work to bring the timeline in to finish where it needs to.

4. Understanding the principles in #3 allows you to provide flexibility into planning without adding a large buffer in the budget.

For example if your timeline is reasonable and your scope of work is NOT the bare minimum then you have the flexibility to adjust those things later on as the project unfolds to keep any budget impacts roughly in-line.

5. Why does a budget estimate need to be one number? I generate 3 estimates. A low, expected, and high estimate. I assign a % of certainty I am about the estimate for each aspect of the project to generate these.

For example: If I get a firm estimate for a roof but have some cosmetic rehab to do inside that I don't have an estimate for I might end up with something like this:

Task                     Estimate     % Certainty       Low          High

Roof                     $10,000       95%                  $9,500     $10,500

Cosmetic Work      $20,000       75%                  $15,000   $25,000

--------------------------------------------------------------------------------

TOTAL                    $30,000                              $24,500    $35,500

6. If I am happy with the Estimate from #5 AND ALSO find that the High estimate is acceptable, I feel confident in the deal!

The high estimate should only come to fruition if EVERY aspect of the rehab goes sideways which should never happen AND I can use project management principles to keep that from happening and try to bring things in close to the Estimate.

So, the expected rehab should be near or a little above the Estimate on average because you have control to manage throughout the project.

7. If you are not happy with the estimate in #5, that may not be the end of the deal! You can look at the % confidence and if there are a lot significant costs with a LOW %, you can work to get better numbers for those and see if that brings the numbers into a range that makes the deal look better.

So, basically it can be a signal to put more work into an estimate especially if its fairly close.