One thing I’ve noticed with flips is that the original rehab budget and the final number don’t always look the same.
Unexpected electrical, plumbing, foundation issues, change orders, contractor delays, or extra holding costs can eat into a deal pretty quickly.
That’s why I think investors should build some cushion into the numbers before closing and make sure they’re only leveraging an amount they can comfortably handle.
Having access to additional business funding or a line of credit can help with cash-flow timing, but good financing shouldn’t be used to make a bad deal work.
For the experienced flippers here: what expense has caught you off guard the most on a rehab?
From the deals I underwrite, it's almost always the stuff behind the walls: electrical and plumbing. Cosmetics get bid carefully because everyone can see them, but a 60-amp panel or old galvanized pipes turn a $3K line item into $8K+ once the walls are open. Second place is scope creep on cosmetics, where "while we're at it" upgrades add up fast. What helps: price each major system (roof, HVAC, electrical, plumbing, foundation, exterior, cosmetics) separately with a worst-case number, then add a 10-15% contingency on top. If the deal only works without the contingency, it doesn't work.
Victor, that’s a great breakdown. I especially agree with your point about having a contingency built into the numbers before committing to a deal. Those unexpected electrical and plumbing issues can eat into profits quickly.
That’s also why I believe having access to additional business funding before starting a project is so important. Whether it’s a business line of credit or other funding options, having capital available can help investors handle unexpected expenses without putting the entire project at risk.
From your underwriting experience, do you find that most investors actually have enough reserves set aside, or are they usually cutting it close?
The one that gets me isn't the big-ticket item - it's the conversion I didn't scope fully.
I do a lot of 2/1-to-3/1 and 3/1-to-4/2 conversions, usually adding 400-650 sq ft or turning a carport or garage into a master bed and bath. The budget blows up when the conversion touches something unsexy: the electrical panel can't carry the addition, the plumbing run needs rerouting, or the foundation under the carport slab isn't what you hoped. None of that shows up until you're committed.
My fix: the contractor walks the property with me before I offer, and I price the conversion as its own line item - permits, panel, plumbing, all of it. I never put earnest money down, so if the numbers don't survive the walk, I walk.
Across 236 properties, the rehabs that hurt were never the cosmetic ones. They were the ones where I priced the dream and not the dirt.