Carry at 150 days as the base case, or price the risk into the purchase instead

Question

Two operators I've been talking to model the same gut completely differently and I can't tell which one is actually more conservative.

The first one models 150 days of carry as the base case. Interest, taxes, insurance, utilities, all of it for five months, and if the project lands at 110 days that's found money. His argument is that a gut opens walls and walls tell you things you didn't budget for, so the timeline is the variable you can't control and you should stop pretending otherwise.

The second one models 100 days and takes the difference out of the offer price instead. Same total cushion, different place to put it. His argument is that a fat carry line makes you lazy on the schedule, and that money sitting in a carry reserve is money not buying discount. He'd rather be 12k lower on the purchase and feel the pressure.

Where it actually splits: the first approach means you lose more deals at the offer stage on price and win them on speed of close. The second means you win fewer deals on price and eat the overruns out of margin when they come. Both operators say they're the disciplined one.

I don't have a gut under contract yet so I'm asking from outside the fire. If your last heavy rehab ran long, which line item did it come out of, and did you change your model afterward?

samantha_ruiz · Accepted Answer

I've done it both ways and the long carry model is the one that kept me solvent, but not for the reason your first operator gives.

The reason isn't discipline. It's that carry overruns are the only cost on a gut that compounds against you while you can do nothing about it. If materials come in 8k over, that's 8k, it's done, it's a number. If you're stalled waiting on an inspector, you're paying daily and every day of waiting also pushes your listing further into a season you didn't pick. My third gut sat 34 days on one electrical sign-off and by the time I listed I was into a slower stretch of the year and had to cut price. The carry cost of those 34 days was maybe 9k. The price cut was 20.

The purchase-price version of the cushion only helps if you actually get the discount. In practice I found I was talking myself into deals at my old price and calling the tight timeline aggressive underwriting.

So I model 150 now. And yes, I lose bids. I lost one last quarter to someone who I'm fairly sure modeled 90 days on a house with knob and tube still live in half of it. I don't know how it went for him.

mitchell_ray4 · Answer

The 90 day gut is real, but it's real on a specific kind of house. Everything on one floor, no structural moves, existing service adequate, no permit needed for a layout change because you didn't change one. Those exist. They're just not what people mean when they say full gut.

The minute you move a wall that's carrying something, or the panel has to come out, you're on someone else's calendar and their calendar is not your calendar. I've had a rough-in inspection sit two weeks because the guy who does them in that jurisdiction was one person and that person was on vacation. Nobody's model has a line for that.

keystone's point about seasonality is the one I'd underline. The tradespeople you want are busiest in the same months you want to be finishing.

gregpowell66 · Answer

Twenty years running jobs before I started buying them, and the thing that changed my thinking is that schedule and price aren't really separate cushions. They're the same cushion viewed from two ends.

If I pay less for the shell, I usually pay less because it's worse. Worse shells run longer. So the second operator in your post is buying schedule risk with the money he saved on the purchase, and he may not have noticed. I've watched guys hunt for the deepest discount in a market and then be surprised that the deepest discount had the worst foundation.

What I actually do is separate the two questions. I underwrite carry off the scope, not off a default number. A cosmetic-plus job with no permitted work gets 100 days. Anything where I'm pulling permits for structural or a service upgrade gets 150 and I don't negotiate with myself about it. Then price is price, and I bid what the comps and the rehab support.

The thing that will get you, kestrel, is the sequence. Demolition tells you the truth about the house after you own it. That's the whole problem with this strategy and no model fixes it. You can only decide in advance how much bad news you can absorb without the deal dying.

keystone, curious whether your 150 includes a contingency on the rehab line too, or whether that's separate.

megan_doyle15 · Answer

Reading this and realizing I didn't know carry cost was a line item you model rather than just something that happens. What actually goes in it besides loan interest?

Carry at 150 days as the base case, or price the risk into the purchase instead

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