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

Question

There are two common ways to model the same gut, and it is not obvious which one is actually more conservative. The first 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 is found money. The argument is that a gut opens walls and walls tell you things you did not budget for, so the timeline is the variable you cannot control and you should stop pretending otherwise. The second models 100 days and takes the difference out of the offer price instead. Same total cushion, different place to put it. The argument here is that a fat carry line makes an operator lazy on the schedule, and that money sitting in a carry reserve is money not buying discount. Better to be 12k lower on the purchase and feel the pressure. Where it actually splits: the first approach means losing more deals at the offer stage on price and winning them on speed of close. The second means winning fewer deals on price and eating the overruns out of margin when they come. Both camps say they are the disciplined one. For anyone whose last heavy rehab ran long, which line item did it come out of, and did the model change 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

Years spent running jobs before buying property changes the thinking here, mainly that schedule and price are not really separate cushions. They are the same cushion viewed from two ends. Paying less for a shell usually means paying less because it is worse. Worse shells run longer. So an operator who models the lower carry number is often buying schedule risk with the money saved on the purchase, and may not notice it happening. It is common to see buyers hunt for the deepest discount in a market and then be surprised that the deepest discount had the worst foundation. The more reliable approach separates the two questions: underwrite carry off the scope, not off a default number. A cosmetic plus job with no permitted work gets 100 days. Anything pulling permits for structural work or a service upgrade gets 150, without negotiating that number down. Then price is priced off the comps and what the rehab supports. The thing that will get anyone, kestrel, is the sequence. Demolition tells the truth about a house only after it is owned. That is the whole problem with this strategy and no model fixes it. The only decision available in advance is how much bad news the deal can absorb without dying. Keystone, worth asking whether that 150 day figure includes a contingency on the rehab line too, or whether that is tracked separately.

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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