When the repair number is doing too much work

Question

I’m starting to think some deals don’t really “work” — the repair number is just doing too much work.

You know the type of deal I mean. The ARV seems fine, the purchase price is close, and the spreadsheet looks okay as long as you believe the rehab is around $35k. But then you look closer, and it’s not just paint, floors, and fixtures. It’s an older roof, old HVAC, electrical questions, plumbing notes, moisture, maybe foundation movement, and the photos somehow look better than the house probably feels in person.

At that point, I don’t know if I’m analyzing a deal or just choosing the repair number that makes me want the deal. For people who have done enough of these, when do you stop trusting the low rehab number and just underwrite the ugly version?

Evan Polaski · Answer

@Ali Kalaei, who is coming up with the rehab number?  If it is anyone other than you and your contractor, than it is completely meaningless.  Even to Masoud's point, which is valid, but assuming you do have a full rewire line item listed in the budget provided by someone else... well, I have a friend that has a licensed electrician on salary for his crew.  His rewire cost is about 80% of mine, with my electrician, who is still 50% of the cost of the electricians driving around in company trucks.

So, back to your original point, yes.  Every number is doing a lot of work, if it is completely out of touch with reality.  Many wholesalers, in particular, will make every number optimistic from the outset, but I think they tend to be more realistic with their ARVs and rents, because those are far easier to verify than the rehab budget, for many investors.

Masoud Arouni · Answer

The issue is usually in what's missing from the $35k number, not what's in it. If someone hands you a rehab estimate and it doesn't itemize roof age, HVAC age, electrical panel type, and plumbing material, that number isn't a budget. It's a guess wearing a budget's clothes.

What's works is: price the big-ticket systems first, separately, before touching cosmetics. Roof, HVAC, electrical, plumbing, foundation. If the listing or your walkthrough notes don't give you actual ages or conditions on those five things, assume worst case for the area's typical housing stock and put a real number on each one. Cosmetics are the easy 80% to estimate and the part everyone gets right. The systems are the 20% that blows up budgets, and they're also the part people skip because it requires more digging than a Zillow photo scroll.

If your rehab number doesn't survive being broken into those line items above with a stated assumption behind each one, you're not underwriting the deal. You're underwriting optimism.