Over Budget and not completed...now what?

Question

Hi Everyone,

I will post longer once it is all finished (if that day ever comes) but just wanted to get some advice from you all.  I decided to buy a freeze up foreclosure last year as my primary residence with the idea of house hacking and then an eventual rental.  The house has great bones and lots of special character features like a stained glass entryway, large stone fireplace and large bbq pit.  The house is about 2100 sq ft on the main living area and 1100 for the basement (which I am converting into a rental).  I made lots of mistakes with the rehab and chalked it up to a learning experience i.e. paying for pipes to be fixed that I decided to scrap after plans changed, following a relators recommendation for contractors without seeking out multiple bids + many more.  Unfortunately, I did not read J Scott's books until deep in my rehab...  I should have already completed the rehab and have the lower unit rented but that is not the case and my holding costs continue to rise.  I suppose I didn't take into account the larger the house the more EVERYTHING costs.

So my question is now what do you do when you know you are going to go over budget? Do I just stick to the basics now or do I continue with the level of the rest of the house? At the end of the rehab I have to have an appraisal from the bank so I want to make sure that I am doing everything to raise/keep the value of the house.  I am making progress but certainly feeling a bit overwhelmed.

Advice/encouragement appreciated-- This is my first large rehab project...

Derek T. · Answer

It seems like for me every rehab is over budget with only a few exceptions.   When you rehab you go in estimating a best case scenario and when you open walls up there are always surprises.   I keep a contingency budget but that always gets used up it seems. In my cases,  I flip.  So I can't deviate from the plans too much.   I normally just eat the overages and either list a little higher or eat the overages on my final proceeds.  At times I will change original plans or finishes to save a few thousand here or there.   For example my last driveway had gravel.  Initial plans where to pave it.  I got over budget so I just got $400 in gravel and rented a compactor and settled for gravel. So there are ways to save some.

In your situation, I would choose more inexpensive finishes or see where I can save if I were going live in the house.  Paint stores have wrongly mixed paint that they'll sell almost half off. Sears has outlet stores for scratch and dent or refurbished appliances.  Maybe change from granite counters to laminate if you have them. Get more inexpensive carpet, paint yourself to cut those costs,  refinish floors instead of replacing,  choose vinyl instead of stone,  get on Craigslist for vanities/fixtures/etc. I don't know your SOW and what you have agreed to with the bank or contractor but there are always ways.

Joel W. · Answer

@Stacy e.

Everything in Alaska is more expensive, except sockeye salmon, one thing I would suggest is getting in with a builder in Fairbanks. I never would have known that drywalling in Homer costs 75% more there than in the lower 48. It is that type of knowledge a builder can give you. I dont even think J. Scott's price estimates would be accurate in AK. What about taking a step back and re assessing your project list and budget with your new knowledge and info, then get back at it like an Alaskan and find a way to get it done, whether by duct tape, tarps, or recycled material.

From one Alaskan to another!

Joel Owens · Answer

Would it make a good vacation rental?? I know lot's of people want to see the northern lights and the world ice sculpting championships. I keep saying every year I will go but run out of time.

Don't feel too bad about your reno. There is a 600k house in our subdivision off the main road I have seen flippers work on for 2 YEARS! I am not joking. They seriously should have been completed in under 6 months tops. They will work some and then gone a week and then see them again. I am convinced it is just a get away from their wives or something to say they are working. lol

Stacy E. · Answer

Thanks for the feedback @Jerry Powers and @Derek Tyler. I had a contingency of 23k in place but I am almost through that with more things to complete.  I have done some of the work myself and am always on the lookout for deals.  The handyman idea is a good one but you are right that I would need to be careful with it.  I picked up laminate countertops in good condition for the basement unit for $100.  I also have found some other greatly great deals on materials.  The Re-Store is my friend.

I think I can chalk this up to the size of the rehab and large items (heat, insulation, roof) going over.  I figured that I would just have to eat the overruns for now and hopefully be able to make it up in eventual cash-flow but was hoping for another solution.  Another mistake I made was that I compared this to my other rental in Va.  The cost for things in Alaska is just more than VA.  Lesson learned... Now off to paint. :)

Stacy E. · Answer

Thanks for all the comments and suggestions.  It's good to know that I'm not the only one that goes over-budget.  Yes. when this is all said and done I could write in depth about the things I learned and what not to do but I've learned so much from the experience and will use it all for the next one.  I was able to do a couple things right as well which helps. ;)  My plan was to stay here for two years. I'm entering my second year now on the property. So I will have more options with it down the road.  A 1031 is not out of the question or even a straight sale but I also know that it will be a great rental if I can just reach the finish line...

@Joel Owens- I didn't think of this as a vacation rental but perhaps it could be for short term.  I certainly have the space.  I am close to the busline and "downtown" so that may be an option.  I appreciate the words of encouragement.  I will look into it more after the reno is complete.

I am working on with another contractor and am hopeful that he will actually get some things done as he says he is going to.  I think I may need to let go of my perfectionism on this one and just finish it up.

@Gilbert Dominguez--- I didn't think about a Bridge loan.  Hopefully I won't have to go down that road but it is something to think about.

Account Closed This project was financed by a "mini construction loan" where my rehab costs and price of the house were rolled into one loan with my local bank which I have extended for a fee of course.  I can't just stop because then the house will not appraise well.  I know that I need to finish it up.

The question is how--- I think I'm going to prioritize a little more what I want and stick with them till completion.  There are some things I would like to change e.g. the popcorn ceilings but there are other things that are higher on the list i.e. laying down the floor over gypcrete. Pretty much every room has something going on with it but is not finished.  I would love for a room just to be finished.

One thing at a time.  Thank goodness for BP

Account Closed · Answer

Sounds really like a real list of what not to do when rehabbing. How was the project financed?

What you do is based on what the real numbers are... which if terribly severe from a monetary loss perspective, may mean a complete halt.

Throwing more money into the project may be just as bad a decision based on what the ARV may be relative to what is being spent.

You often want to be disconnected from just about anything emotional when making decisions of this sort.

Gilbert Dominguez · Answer

Looks like you painted yourself into a corner, hehehe :) no pun intended.

You can try what are called bridge loans. See if you can  find someone to lend you just enough money to finish out your project as intended or as you can plan for now. If your credit is good and you have not created any dings in it lately and you have some income you can show you just might be able to work a bridge loan to tie you over until you can refinance the house.

John Thedford · Answer

Since this is going to be your primary residence consider living there for two years. At that time, if you wish to sell you can pocket any profit up to 250K if you are single or 500K for married couples tax free. Talk to your tax man about turning it into a rental. I do know that if you live there 2 of the last 5 years you can sell it tax exempt. Not sure of the ramifications of living there 2 of the last 5 and then selling and what the tax consequences are if you rented it 3 of those 5 years. Hopefully your market will appreciate over this period to help make up for being over budget. Every rental I have purchased has cost more than anticipated for rehab costs.

Roy Schauer · Answer

@Stacy E. are you a member of the local REX (Real Estate eXchange) group? We currently have discounts negotiated with several of the local contractors as well as service industries, such as we just negotiated a 30% discount for paint and flooring from Sherwin Williams.  If your interested, contact me and I'll get you pointed towards saving some more money. Love Re-Store!

Jerry Powers · Answer

Stacy - Derek is correct - you can save money by putting in basic finishes. What most people don't realize is that the level of finishes does very little to affect the value of a property. Appraisals are based primarily on square footage, number of bedrooms & bathrooms, location, condition of the property, and school district. Having premium finishes very rarely increases the value equal to or above the cost. As a home builder, I always consider the perceived value of any item built into a house. If that item is not considered standard for the area or does not increase the perceived value, it is not included in the house.

You are fortunate that you are planning on living in the house for some time. (I assume you're planning on a 1031 exchange.) This will allow some time for appreciation to catch up with any cost overruns - just don't overdo the overruns.

If you haven't already done it or considered this, you should consider performing some of the work yourself. As you probably already know, YouTube is a great resource for training videos on any home improvement projects.

Have you thought about searching for a handyman who would be willing to perform home improvement projects in exchange for a reduction on a portion of the rent in your rental unit. However, you really have to conduct a great amount of research on anyone you offer this arrangement!

Good luck on your first rehab -  you have learned some valuable lessons that will help you in your future endeavors!

Over Budget and not completed...now what?

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