How do you account for unforeseen issues/weather when evaluating deals?

Question

With the recent severe weather and other unexpected issues that can come up during a project, I’ve been thinking more about how experienced investors factor in the things you can’t always see upfront.

Even when the numbers look solid, surprises like weather damage, delays, or hidden repairs can change the outcome quickly. I’m curious how active buyers think about risk and protect themselves when underwriting deals.

Allan Smith · Answer

So the answer is not as revolutionary as you might have hoped for. Investors just add contingency to their underwriting for every deal, and then take whatever punches that come after purchasing.

I probably speak for all of us that you develop a template for each deal, you can get 80% of the risk into the spreadsheet. For example, we all add contingency to the construction budget. And we always add some extra time to the expected schedule too. I have a checklist of items to confirm that come up the most especially for development, but other than that I just research each project and see if anything comes up. Like if a tenant lives there, there's a chance I'll have to evict them.Like if there's an ice storm for a week, you just... lose some profitability. No one works on it, etc.

Caleb Brown · Answer

Having an oopsie reserve. Factor in normal maintenance and repair but you need to have money set aside for emergencies. Each area is different. In mine we get severe storms and cold. That leads to frozen pipe, snapped trees, roof damage, etc. If there is any preventative maintnance that would also be ideal to factor in. In my area it's ideal to trim trees and avoid them over hanging the roof.

Chris Seveney · Answer

Underwriting conservatively but not too conservatively it kills a deal. if you have been in real estate long enough you are going to have these types of issues that come up and are not in control - having the time and $ to withstand them is always the best answer, but when underwriting - never assume the rosiest of rosey scenarios.. Stuff always happens.