Real Estate Broker · Frankfort, KY · Member since 2019 · 174 posts · 44 votes
When estimating a flip, it's easy to focus on the purchase price and the obvious repairs. But holding costs, permit delays, contractor changes, and unexpected structural issues can quickly change the numbers.
I'm interested in hearing how other investors build a realistic budget before committing to a property.
What's one expense you underestimated on an early flip, and how do you account for it now?
From the lending side, the one I see wreck early budgets is the cost of the money itself, specifically what happens when the timeline slips.
Most people budget interest for the months they expect the rehab to take. They don't budget for the stretch after the work is done but before it closes with a buyer. Listing, showings, buyer financing, inspection repair requests. That can easily run 45 to 75 days, and you're paying interest, insurance, utilities and taxes the whole time.
Then there's the extension. If your loan term is 12 months and you need a 13th, a lot of loans charge an extension fee on top of the interest. Read that clause before you sign, not in month 11.
Smaller ones that add up: draw inspection fees (often one per draw), the cash gap between paying your contractor and getting reimbursed from the draw, and closing costs on both the buy and the sell side.
How I'd account for it: build holding costs off a realistic sale date, not the rehab finish date, then add two months on top. If the deal still works with that cushion, it's a deal.
Full disclosure, I'm a private lender, so I end up seeing the back half of a lot of flip budgets.
Linda, you're asking the right question. The scary part of a flip budget usually isn't the line you priced wrong. It's the one that never made it onto the sheet. Cat covered the money side well, so I'll stick to the scope side. These are the ones that tend to get missed:
- What's behind the walls you open. Once demo starts, old wiring, old plumbing, or a rotted subfloor under a bath or kitchen becomes your problem. If you plan to open it up, budget for what you might find.
- Permits that trigger code upgrades. A kitchen permit can turn into new circuits, GFCI and AFCI protection, and smoke and CO detectors throughout. None of that is in a cosmetic budget.
- The sewer line. A camera scope before closing is cheap. Finding out after the new floors are in is not.
- Water. Grading, gutters, downspouts, and the basement. They're cheap to fix and expensive to ignore, and the buyer's side will find them.
- Change orders. Every "while we're at it" adds up. Write a detailed scope before you get bids, and stick to it.
How to account for it: walk the house with the main trades before you close, write the scope line by line, and size your contingency to the age of the house. A 100 year old house with unknowns behind the walls needs more cushion than a newer one that only needs paint and floors.