Managing risk in rehab projects

Luis A. · 2010-05-31T03:27:46-07:00

This is me thinking out loud :roll: but up to this point I have considered the implications of risk in a rehab project as either and increase in cost and/or a delay in schedule. In order to account for risk I add a lump sum amount to my project budget of 10-20%. That is, after I have done a detailed analysis of all the work to be done and estimated costs as closely as I can I then add 10-20% to the final amount. The more uncertainties there are in the project the closer I get to 20% and viceversa. However I am now considering doing it a bit different and assesing different levels of risk to different portions and then adding a different percentage to each. So that if I get a house with several water stains in the ceiling and I don't know where they are coming from I would add a 20% buffer to my plumbing and drywall work in case I got to go fishing for leaks once I start running water. On the other hand, is there really a lot of risk in say, paint or appliances or landscaping? Probably not, so then I would just add 10% or less to these as a buffer. What do you think?

Christopher Davis

Real Estate Investor · St. Louis, MO · Member since 2010 · 153 posts · 104 votes

16y

Hi Luis

I automatically add 15% to my re-hab estimate on every single deal. No exceptions.
Just so you know I didn't pull this # out of my ear. This was taught to me by someone who has been successfully re-habbing for about 8 yrs,and it has served him well.

Chris

2 Reply

Gregory Childs

Flipper/Rehabber · Orlando, FL · Member since 2008 · 263 posts · 147 votes

16y

Agree with the above.

As we buy out of State a lot, we have actually been looking into a "construction consultant" to manage the rehab process. We have been quoted about $250 per draw request.

Our average rehab runs $20-25K; we probably average 3-4 draw requests during the project; so the cost will be around $1k per project. The consultant will review all the contractor bids, making sure that the pricing is inline and that the rehab will comply with local regs, and then they will do a physical inspection before each draw request is granted.
We haven't engaged yet - but are probably going to test this on our next project.
The selling point is that they consultants can help us keep the projects within budget, scope and time. Which can be a challenge when you have a bunch of rehabs happening simultaniously.
I'll let you know how it works.

Greg

1 Reply

Luis A.

OP

Real Estate Investor · Atlanta, GA · Member since 2009 · 339 posts · 126 votes

16y

Chris, I hear what you are saying and that is also the way I had been doing it. The thing about that is that you are assesing the same level of risk to every portion of the rehab when they really might not require it.

On the other hand if you asses 15% to some portions and 5% to others you might get a more accurate assesment which in turn will allow you to better calculate profit potential and ultimately you can make an offer on a house that might not have to be as low as you think therefore giving you a higher chance of your offer being accepted...phew!

0 Reply

Eddie Ziv

Investor · Mableton, GA · Member since 2009 · 1k+ posts · 465 votes

16y

What you're talking about called budget contingencies. This really depends on the purpose of the rehab. If you plan on flipping, it is one set of budgeting but if you plan on rental, it is different. Also, for rental, you would budget differently for a middle class for instance as oppose to low income rental.

When you rehab for flipping, you actually sells the property at market value (Or close as you can get...). You must provide work quality and level of renovation that is expected when you sell a property at full price. When you renovate for rental, you can cut corners to a certain extend.
I don't think that putting down contingencies per specific area of the job, makes any different. The reason is, that you can never tell the source of the problem until you know the source of the problem. I saw wet ceiling in basements that seems to be a plumbing problem but turned out to be a roof problem where water penetrated the space within the wall and travel all the way down to the basement... Go figure..

I think the more rehabs you do, you'll have a better idea how much contingency to put down. There are lots of unknown issues when you start a project. One of my first houses, seemed to be in a great shape when I bought it, and I ended up paying twice as much as I budgeted my rehab to be (Basement issues). However, this was my second house and I learned a lot since... :wink:

2 Reply

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

16y

Much already posted above on risks associated with repairs and renovations.

But not yet mentioned is the risk associated with declining property values. As in the longer a time delay, the bigger the drop becomes.

Also, holding costs will be a larger expense; think property taxes and financing.

2 Reply

Des Shei

Investor · Southern CT, CT · Member since 2010 · 211 posts · 41 votes

16y

Unlike some that like to assign "blanket" risk dollars to every potential deal, i evaluate and mitigate my risk on a case by case basis.

0 Reply

Jeff B.

Real Estate Investor · Lake Worth, FL · Member since 2009 · 263 posts · 92 votes

16y

As you can see everyone has there different thoughts on calculating risk for a project. I look at the age and condition of the property, older (higher percent), great condition (lower percent). I also do most of my own inspections and that means climbing in attics, putting the ladder on the roof and everything in between. If you've done a thorough inspection then you can generally calculate the risk very closely.

FYI, Water stains in the ceiling would be from the roof or HVAC air handler. They don't run plumbing in the ceiling besides the venting which is run through the roof.

0 Reply

Jon Holdman

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

I used to live in and around Houston. Plumbing in the ceiling was common. And a huge pain when we had the occasional freeze.

1 Reply

Luis A.

OP

Real Estate Investor · Atlanta, GA · Member since 2009 · 339 posts · 126 votes

16y

My point exactly. And the way I am trying to do that is to identify the areas with the most risk instead of doing a blanket risk buffer.

I agree and that is exactly what I meant when in first post I said that the biggest implications of risk are increase in cost and delay in schedule which in turn becomes an increase in cost for the reasons you mention.

0 Reply

Luis A.

OP

Real Estate Investor · Atlanta, GA · Member since 2009 · 339 posts · 126 votes

16y

My point exactly. And the way I am trying to do that is to identify the areas with the most risk instead of doing a blanket risk buffer.

I agree and that is exactly what I meant when in first post I said that the biggest implications of risk are increase in cost and delay in schedule which in turn becomes an increase in cost for the reasons you mention.

0 Reply

Managing risk in rehab projects

Managing risk in rehab projects

Most Popular Reply

10 Replies