What is the % used to calculate the unforeseen expenses ?

Diversification is a great hedge, but all of those would also be effected by any unforeseen event.

I'm just worried about allowing him to accumulate equity because it feels like some unforeseen circumstances could require material amounts of labor that would substantially (and unpredictably) change my return on investment if I'm losing equity the more work he puts in.

For some reason, I thought that paying the points up front to lower the interest rate would be beneficial long term.I’m in a similar situation where a lender I’m using is offering these rates for another property I’m refinancing:- 5.75% w/ 1 point- 5.5% w/ 1.625 points- 5.25% w/ 2.25 pointsProperty Details for BRRRR:- Purchase: $43k- Rehab: $60k- Expected ARV: $110k- Rent: $1000/monthI know I’ll be keeping money in the deal since an unforeseen rehab expense increased the budget.

I know when it comes to funding these deals most lenders wont touch them, and that's because their is always unforeseen costs that can put flippers in bad situations with the total costs.

If there's no language in the contract about unforeseen increases in material pricing, he may be stuck and you need the advice of an attorney.My suggestion is to see if you can get him to pay you for the release. 

If you decide to go the FHA route  low down payment but higher PMI  cost  but allows you to free up reserves  for any unforeseen cost.

My suspicion is that you've "paid" for any unforeseen labour or material spikes as the builder has worked in a cushion for this in their sale price. 

There will be unforeseen issues that arise when managing yourself.

There is a lot of unforeseen issues that will likely drive your cost about your budget and drastically reduce your profit margin/equity in the property.BTW, I like your positive energy to get this done.Goodluck and update us on your progress.