Do You Show the Lender Your Real Rehab Budget—or the Safest Version of It?

Question

I’ve been trying to understand how experienced investors handle this.

Say you expect the rehab to land around $55K, but there are enough unknowns that $65K wouldn’t surprise you. If you submit $65K, you’re better protected—but the deal may look worse on paper and require more cash upfront. If you submit $55K and the scope grows, you could end up covering the difference yourself or moving money between draw categories.

So what number do you actually give the lender: what you expect to spend, what protects you if things go wrong, or what gives the deal the best chance of being approved? Has being too conservative ever made a good deal harder for you to finance?

Erik Estrada · Answer

If it doesn't work with the highest rehab number it is basically a recipe for disaster.

I have seen it over and over. Tight deal, tight margins, and running out of rehab funds to finish.

You are better off saving your money and looking aggressively for a deal that does make sense.

Shiloh Lundahl · Answer

@Ali Kalaei and to answer your question, I give my lenders a range and they lend based on the deal taking into consideration the rehab costs. If a lender doesn't want to lend on the deal and you are new to real estate then that may be a good clue that the deal has more risk than a newer investor should take in at the beginning. So don't fudge the numbers to get the loan. It will make you look incompetent to the lender for future deals.

Shiloh Lundahl · Answer

Buying properties with big enough spreads so that it can cover the potential additional rehab is a good rule of thumb. Right now now is a buyers market and you shouldn't have to buy deals with thin margins.

Nick Belsky · Answer

@Ali Kalaei

I always recommend using what you think is most accurate, then adding a reasonable contingency as a line item.  Most lenders I work with will call out if they think any line item is lite and ask for it to be increased.  They want to ensure your numbers make sense in the same ways as you would... I've never heard of any lender refusing or deter a borrower to over estimate on costs.  Its far better and less risky to over budget (within reason) and actually spend less than vice-versa.  I don't understand what purpose having a lender facing budget versus one that is not would accomplish... if your budget is too high and makes the loan not work, then lower your budget to make it fit then ensure you have enough cash in reserves to cover the difference... no one says you have to finance 100% of the budget...

Cheers!

Stacy Raskin · Answer

Using the most realistic numbers are important for a fix and flip loan because depending on the lender, the numbers used up front for the purchase and the rehab budget is the way the loan will be structured.

Mike Grudzien · Answer

I would transparently explain the reasoning behind the range in numbers and ask what makes sense for the lender.  Transparency wins over camouflage...

Do You Show the Lender Your Real Rehab Budget—or the Safest Version of It?

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