My spreadsheet has one cell that says rehab, which is the problem

Question

Working out what my first deal actually costs and I've got a single cell that says rehab, with 140 in it. Someone in another room told me that cell should be three numbers, not one, and I didn't fully follow why.

As far as I can tell there are two ways people do this. One is a single hard budget with a contingency percentage bolted on top, so 140 plus 15 percent, and you treat the whole thing as one figure you defend. The other is building the rehab as separate scope blocks, systems and structure and finishes, each with its own number, so that when demolition surprises you, you know which block moved and whether you can cut somewhere else to pay for it.

The case for the single number is that it's simple and you can't fool yourself with clever reallocations. The case for blocks is that on a gut, the whole point is that you don't know what's behind the walls, and a single number gives you no idea where the damage landed.

I've also seen people argue the contingency percentage itself is the argument, that 10 percent on a gut is fantasy and it should be 20, and that if adding 20 percent kills the deal then the deal was already dead.

Beginner here, so tell me if I'm even asking the right question. How does your rehab budget actually sit on the page?

carlos_nunez · Accepted Answer

Blocks, and the reason is boring. When my last gut went over, it went over in exactly one place. Sewer lateral was collapsed under the slab and that was 19k I hadn't planned for. Because plumbing was its own block I could see immediately that finishes still had room and structure was under, so I moved money and kept the total near flat. If I'd had one cell with 140 in it, all I'd have known is that 140 was now 159, and I'd have panicked at the wrong thing.

Also your lender will probably want it broken out anyway for draws. Mine wanted the scope tied to inspection milestones and you can't inspect a single cell.

On the contingency argument, 20 percent on a pre-purchase gut estimate is not conservative in my experience, it's just accurate. I've never once come in under my first number.

joe_delgado5 · Answer

quarry's right on blocks but I'd add one thing about contingency, which is that it only works if you refuse to spend it on choices. Contingency is for things the house did to you. It is not for the tile you saw and liked better.

I blew a 22k contingency on my second flip and about 9k of it was me upgrading stuff. Then the roof deck turned out to be half rotten and I had nothing left. tally, whatever number you pick, write down that it's for discoveries only and then actually hold that line, because you will be standing in the house at week six wanting nicer cabinets.

jessreyes12 · Answer

Dumb question I've wanted to ask for a while: is the contingency percentage on top of the rehab number, or is it inside it? Because if a contractor bids 140 and I add 20 percent to get 168, and then I also see people say rehab runs 20 to 33 percent of ARV, I don't know which of those figures I'm supposed to be checking against the 70 percent rule. flint, is your 22k inside your budget or beside it?

My spreadsheet has one cell that says rehab, which is the problem

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