Contingency as a percent of ARV keeps producing numbers I don't believe on interior-unseen bids

Question

Working out what my first purchase costs in a way that survives contact with a house I can't get into. I've been running 15 percent of ARV as a repair contingency on anything I haven't stood inside. On a 240k ARV that's 36k of padding and I lose every bid. Drop it to 8 percent and I win bids I'd be terrified of.

The percent-of-ARV approach bothers me because the risk isn't proportional to value. A 240k house and a 380k house in the same market with the same square footage have roughly the same amount of copper to strip, the same one furnace, the same one roof. Percent of ARV makes the expensive house look safer when the dollar exposure is nearly identical.

So the alternatives I've been testing. One is a fixed dollar reserve driven by square footage plus a flat mechanical allowance, which tracks the physical thing rather than the price. One is underwriting the full-gut case every time and just accepting I'll pass on nearly everything. One is refusing to bid without interior access at all, which at the auction stage means I mostly don't bid.

The reason I'm asking rather than picking: the people I've heard win consistently at auction don't seem to use a bigger contingency than everyone else. They seem to use a better estimate. I can't tell if that's real skill from repetition or survivorship talking. What's the mechanism you actually use, and what does it cost you in deals you don't get?

aaron_fitz10 · Answer

Your copper point is the whole argument and I don't think percent of ARV survives it. The one place percent works is resale risk, because a 380k house in a softening market does carry more price exposure than a 240k one. So I'd split it. Physical reserve in dollars, market reserve as a percent. Two separate numbers doing two separate jobs.

Still trying to decide if I even want the auction stage, so treat that as theory.

mitchell_ray4 · Answer

Mechanicals are more predictable than people expect from the curb. If the meter's been pulled and the house has sat through a winter unheated in a cold climate, assume the plumbing is compromised and assume the water heater and furnace are done. That's a number you can carry as a fixed line rather than a guess. Where I've seen budgets actually blow up is sewer laterals and foundations, and neither one shows up in a square footage formula.

samantha_ruiz · Answer

I'm about nine deals in and I moved off percent of ARV after the third one. What I run now is a per-square-foot cosmetic number by market, plus fixed line items for roof, HVAC, plumbing rough, electrical panel, plus a hard 10k for the thing I can't see. The 10k is not a percentage of anything. It's just what unpleasant surprises have averaged for me on this house type.

The honest cost of that discipline: I bid on maybe 40 properties last year and got 4. tally, if you're losing every bid at 15 percent, losing bids isn't the diagnosis. Losing every bid means your comps are stale or your resale assumption is optimistic and the padding is covering for it. Fix the ARV first and the contingency question gets smaller.

omar_haddad · Answer

keystone's fixed unknown line is the right shape but 10k is market and vintage specific, so don't copy the number. On pre-1960 stock I carry more than double that because scope creep there is structural. You open a wall to run a circuit and find knob and tube plus a beam that was cut for ductwork in 1974, and now you have an engineer and a permit and six weeks.

Also, and this matters more than the formula: whatever your unknown reserve is, decide before the bid whether you're allowed to spend it. Mine used to be a number I mentally spent on nicer finishes the moment the mechanicals came in under budget. That's how a contingency becomes a lie.

Contingency as a percent of ARV keeps producing numbers I don't believe on interior-unseen bids

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