When Does an “Unexpected Rehab Cost” Actually Mean the Scope Was Bad?

[Ali Kalaei]

After a rehab goes over budget, almost every extra cost gets labeled as an unexpected issue.

But sometimes it wasn’t hidden. It was visible in the inspection report, photos, or walkthrough—it just never made it into the original scope. When you review overruns, how do you separate:

•  genuinely concealed conditions
• Missed scope items
• bad pricing assumptions
• owner-requested upgrades
• contractor mistakes

Which one has caused the biggest overruns on your flips?

[Bruce Woodruff]

Quote from @Troy DeLong:

@Ali Kalaei

I'm a Realtor and Licensed Builder out of the Lansing, MI market. I manage tons of FLIPs that our team does and can confidently say it is VERY easy to miss / overlook items if you're not careful enough. 

Really the only things that should be considered "unexpected" are items behind walls or below flooring. Everything else you should 100% be able to inspect or budget for on your initial walkthrough (or even second walkthrough if the project is big enough). 

* Main sewer line is broke and you need to replace it? This could have been caught on a camera inspection. 

* Roof is leaking? You should have noticed the shingle condition from the outside or should have seen the moldy / rotten decking when you did your attic inspection. 

* Plumbing is cracked and leaking behind walls? This should have been noticed when you ran all of the faucets during your inspection. (If water is shutoff during due diligence and you live in a northern climate, simply assume plumbing is cracked).

* Need to replace a furnace? This could have been confirmed with a $150 HVAC inspection. 

* You have rotten framing / mold growing behind walls? Although this one is trickier, pay attention to the condition of your exterior siding and ensure windows have been properly installed / sealed. 

I could keep going on and on and on about every feature of a house, and I don't want to oversimplify this, but your rehab estimate  can only be as good as your time / effort spent on the initial (or even second) walkthrough. I am guilty of "being too busy" and getting lazy on an initial walkthrough and then missing items once we dive into the rehab. But, I've also created some very detailed scope of works during our due diligence period and have used that to renegotiate price with Seller as certain items weren't disclosed or obvious with a standard walkthrough. 

To sum up.... Hire an inspector / licensed trades person, spend enough time on your scope of works and you will eliminate 95% of your "unexpected costs". 

Troy is spot-on...! As I've said before, there are very few items in a home that cannot be seen (or guessed at) on a walk-through.....by a licensed, professional and veteran contractor. Not a Home Inspector, they do not have the background or experience (usually), not a 30 yr old GC with very little experience, not a Realtor (although many think they have the skillset), and certainly not an investor themselves who has done a couple of flips. No and not even your uncle Joe who built his own deck last year.....

I find it insanely amazing and somewhat amusing that people who are getting ready to spend 1/2 of a $million$ on a house will not pay a GC $500 to walk a house and type up a thorough report.