Common mistakes for a first time BRRR
Member since 2020 · 12 posts · 4 votes
Common mistakes for a first time BRRR
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Brian TeeterBusiness Member
Little Rock, AR · Member since 2021 · 75 posts · 64 votesI work with a lot of BRRR buyers in Little Rock, Arkansas. Here, the most common mistakes I see DIY BRRR investors make are underestimating ARV and repairs. ARV typically comes back to bite the buyer when they go to refinance the property after renovations and learn that the actual appraisal fell short of the ARV they originally predicted. To get around this, I suggest hiring an appraiser on the from end of you purchase. Ask them for a "drive by appraisal" and present them with a list or scope of work for your intended repairs. Request a future value. Typically, they will provide you a partial appraisal at a reduced cost from standard. The appraisal will typically identify all the same comps as a full appraisal. That way you are looking at a more accurate value, through the eyes of an appraiser.
With regard to underestimating repairs, I often see DIY BRRR investors more focussed on cosmetics. I recommend having a professional home inspector inspect the home on the front end. Start creating your SOW from the inspection. Because they are focussed on cosmetics, I see a lot of DIY BRRR buyers blowing their budget because they missed important details like electrical, HVAC, plumbing, structural, foundation.
Turnkey Property Management4.8170 Reviews
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- 1yBrian TeeterBusiness MemberLittle Rock, AR · Member since 2021 · 75 posts · 64 votes
I work with a lot of BRRR buyers in Little Rock, Arkansas. Here, the most common mistakes I see DIY BRRR investors make are underestimating ARV and repairs. ARV typically comes back to bite the buyer when they go to refinance the property after renovations and learn that the actual appraisal fell short of the ARV they originally predicted. To get around this, I suggest hiring an appraiser on the from end of you purchase. Ask them for a "drive by appraisal" and present them with a list or scope of work for your intended repairs. Request a future value. Typically, they will provide you a partial appraisal at a reduced cost from standard. The appraisal will typically identify all the same comps as a full appraisal. That way you are looking at a more accurate value, through the eyes of an appraiser.
With regard to underestimating repairs, I often see DIY BRRR investors more focussed on cosmetics. I recommend having a professional home inspector inspect the home on the front end. Start creating your SOW from the inspection. Because they are focussed on cosmetics, I see a lot of DIY BRRR buyers blowing their budget because they missed important details like electrical, HVAC, plumbing, structural, foundation.
Turnkey Property Management4.8170 Reviews- Rental Property Investor · Arlington, TX · Member since 2016 · 706 posts · 611 votes1y
Quote from @Brian Teeter:
I work with a lot of BRRR buyers in Little Rock, Arkansas. Here, the most common mistakes I see DIY BRRR investors make are underestimating ARV and repairs. ARV typically comes back to bite the buyer when they go to refinance the property after renovations and learn that the actual appraisal fell short of the ARV they originally predicted. To get around this, I suggest hiring an appraiser on the from end of you purchase. Ask them for a "drive by appraisal" and present them with a list or scope of work for your intended repairs. Request a future value. Typically, they will provide you a partial appraisal at a reduced cost from standard. The appraisal will typically identify all the same comps as a full appraisal. That way you are looking at a more accurate value, through the eyes of an appraiser.
With regard to underestimating repairs, I often see DIY BRRR investors more focussed on cosmetics. I recommend having a professional home inspector inspect the home on the front end. Start creating your SOW from the inspection. Because they are focussed on cosmetics, I see a lot of DIY BRRR buyers blowing their budget because they missed important details like electrical, HVAC, plumbing, structural, foundation.
I do BRRRRs in Little Rock, and this advice right here is spot on!! Electrical and plumbing have blown up a project of mine.
- Rental Property Investor · Philadelphia, PA · Member since 2021 · 780 posts · 504 votes1y
@Nicholas Minich - I think the project management of the renovation process is the biggest area that is underestimated. There's always a plan with a renovation, but then there always what you undercover/discover during the project that you have to adjust to with your contractor. Sometimes you'll need to pivot and reallocate funding whereas other times you'll need to dip into contingency funds and/or come up with more funding to cover newly discovered items that may be infrastructure related and/or critical. Overall, I would say the renovation process/costs are the biggest item to focus on and say on top of throughout the BRRRR process.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes1y
So many to list, but like Brian noted, it tends to be underestimating renovation costs and timelines and overestimating loan proceeds.
I tend to disagree with Brian on hiring an appraiser on the front end, only because I have had appraisals swing WIDELY on the same property. Long story short, one of my flips from years ago had three appraisals done in about 40 days (first two for FHA loan, and third for backup offer). The appraisals ranged from $165k to $225k. Same house. No changes between appraisals. I have had a duplex appraised twice for a HELOC and the value swung more than 25% between them, as well.
Regardless, cashout refi's have no arms length transaction that can be a benchmark for the appraiser. As such, in the about dozen cash out refi's I have done, they always came back lower than I expected. So don't just pull comps, but be very conservative with the comps you pull.
On rehabs, just know they basically always go over budget. You can protect yourself to some extent with inspections prior to purchase, but if you are in a competitive market, it is very likely you will be competing with cash buyers with no contingencies. If you are offering the same amount with a home inspection as someone without an inspection, your offer is very unlikely to be accepted.
And even with inspections, you will have cost overruns. Whatever a contractor quotes you, I would anticipate 10-20% more than that, to be safe. The worst spot to be in is midway through a renovation without enough money to finish.
- Investor · Madison WI · Member since 2021 · 176 posts · 103 votes1y
Yeah not a huge fan on the "art" of appraisals. I'd much rather stick to an income based valuation :-D
One big thing to look out for is your exit strategy bank policies. You need to know beforehand if there is a seasoning period, if they will give a certain max % of ARV or if they just give back the amount put in. I had a situation a couple years ago where the bank changed ownership and their policies changed mid BRRR. So I wasn't able to take out up to 80% of ARV, only the amount I had just paid for the rehab *massive eye roll*. I had to provide them receipts, it was super obnoxious. Now the property is sitting at roughly 62% LTV. Has great cashflow! lol.
- 1yJohn O'LearyPro MemberLender · Winter Park, FL · Member since 2021 · 738 posts · 412 votes
I'd focus on having a solid understanding of the lender's underwriting guidelines for the refinance. Know what kind of rate to expect based on your target LTV, and take the time to thoroughly research market rents. BRRRR investors are primarily aiming to pull out their initial cash investment, which often means pushing for a higher LTV. That higher leverage impacts the rate, and using DSCR loans in these scenarios can sometimes complicate deals that would otherwise be straightforward.
Basically underwrite the refinance as if you're doing it at the time of purchase. Be clear on whether you're structuring it as a rate-and-term or a cash-out refinance.
- Lender · South Lake Tahoe, CA · Member since 2019 · 109 posts · 36 votes1y
Quote from @Nicholas Minich:
Hello all!
Analyzing my first properties to utilize the BRRR method. Was seeing what errors that some experienced buyers made, and how they fixed - looking to minimize any issues as I start my journey here… also, any feedback or recommendations for a first timer would be great ! Figuring this out as I go! Thanks all!
- Lender · South Lake Tahoe, CA · Member since 2019 · 109 posts · 36 votes1y
Hey there! It's awesome you're diving into the BRRRR method, and super smart to learn from others' screw-ups early on. The biggest blunders usually involve underestimating rehab costs and time – seriously, always add 15-20% to your budget for surprises and expect it to drag on longer than you think. Don't go putting a Rolex in a happy meal by over-improving for the neighborhood; always check comps and match the local vibe. Paying too much upfront is a killer, too, so be brutal with your offer price because if the "buy" part is off, nothing else saves the deal. Also, watch out for crappy contractors; get references, see their work, and always get a solid contract with payments tied to milestones. And don't get high on your own supply by inflating your ARV – get a real value before you buy. Lastly, remember those holding costs like taxes, insurance, and utilities; they eat away at your profit every single day the project stretches out. For a first-timer, focus on learning, start small, build a solid crew (like me at Complete Lending, wink wink, for your financing), and know your numbers inside and out. It's a marathon, not a sprint, so patience is definitely your friend here!
- 1yZul BudhwaniPro MemberInvestor · Grapevine, TX · Member since 2016 · 78 posts · 39 votes
@Nicholas Minich since this is your 1st BRRR I would encourage to maybe look for something with a lighter rehab rather than a full. I agree @Brian Teeter that renovations can easily be under estimated often overlooking things like electrical and plumbing that @Myka Artis mentioned.
Look for a home that is a built 1990 + ideally where the electrical should be good, and hire a plumber to scope the lines ($300-500) to help avoid any surprises. Long as you are not moving walls and no foundation concerns other renovation items are more straightforward (roof, hvac, water heater, paint, flooring and etc) but still get a 2-3 bids to better understand the cost to do the repairs. I know it sound like overkill but will help you be more confident in your numbers. - Lender · Riverside, CA · Member since 2017 · 248 posts · 98 votes1y
One of the most common mistakes I see is underestimating repairs and not getting proper bids up front. A lot of investors run numbers based on a rough guess or what the seller or wholesaler told them, without walking the property with a contractor. You should have at least two contractors give you real bids based on an actual walkthrough — not a phone call or a scope sent over email. Another big one is overestimating comps. I see too many people insert a little too much optimism into what their ARV will actually be, and it gets them into trouble when it comes time to refi or sell. People also get overleveraged. The BRRRR method works great when you have the right capital stack and some financial cushion — but if you go in trying to do it with no money, you are setting yourself up for risk. I tell my clients they should ideally have 25% of the rehab budget in liquidity and at least six months of reserves. Things run over budget, take longer than expected, and appraisals are coming in light in this environment. If that happens and you don't have the money to bridge the gap, you're going to be stuck. The biggest lesson I'd pass along is this: BRRRR is powerful when done correctly, but right now you need more margin and more cash than most social media makes it sound like.
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