A contractor bid just came in 30 percent over the planned rehab budget and I need to think through what that number actually means before I react to it.

Question

The first question is whether the original budget was built from a real scope or from a ballpark. If the budget was set before anyone walked the property with a flashlight and a moisture meter, then the bid is not 30 percent over budget, it is the first real number on the table, and the budget was always fiction. That distinction matters because it changes what you do next. A budget grounded in a detailed scope with line items means the contractor is pricing something differently than you specified, and you can go line by line and find where the gap lives. A budget that was a rough acquisition estimate means the gap is partly yours to own.

Say the planned rehab budget was 80k and the bid came in at 104k. The 24k overage needs to be located before it can be negotiated. Electrical and plumbing surprises account for a large share of these jumps because they are hard to scope without opening walls. If 18k of the 24k is in those two trades and the contractor walked the property after demo, that number may be accurate. If the overage lives in flooring allowances and cabinet selections, those are negotiable or substitutable without touching the structural work.

Three things worth doing before accepting or rejecting the bid. First, get the bid in full line-item form if it is not already, because a lump sum tells you nothing about where to push. Second, price the two or three largest line items with a second sub directly, not to replace the GC but to validate the number. Third, ask what the bid assumes for materials and what it assumes for labor separately, because if lumber or fixtures have moved since the contractor last priced a job, you may be carrying a buffer that is already priced in and can be discussed.

The harder question is what a 30 percent overrun does to the deal. On a BRRRR or a flip, the acquisition price, the rehab budget, and the ARV are connected. A 24k increase in rehab costs that was not in the buy-side underwriting either compresses the margin or it means the acquisition price was too high for the actual scope. Adjusting the scope down to fit the original budget only works if the cuts do not affect the ARV, and that depends on what the cuts are. Pulling back on a kitchen finish in a market where buyers compare kitchens directly will cut the sale price more than it saves in rehab cost.

What was the original budget built from, a walkthrough estimate or a line-item scope, and did the GC who bid it walk the property before or after any demo had been done?

ade_olawale · Answer

The harder question nobody has flagged yet is what this does to your refinance ceiling on a BRRRR structure. If the ARV stays fixed and the rehab cost rises 24k, the loan-to-value the lender will write against that ARV stays fixed too, which means the trapped capital does not come out at refi and you are carrying it on the next acquisition. That is not a negotiation problem, it is an underwriting problem, and it shows up six months later when you are short on the down payment for the next deal.

What was the original ARV assumption, and was the 80k budget built to hit a specific refi loan amount?

Rena Guide · Answer

The original poster has already done the analytical work here, and done it well. I want to add one thing for anyone reading this thread who is earlier in the process and may not know what any of this means.

A rehab budget (the amount you plan to spend on repairs before the property is worth more) is only as reliable as the information behind it. A number written before anyone has opened walls or run a moisture meter is an estimate of an estimate. The bid that came back is the contractor's actual assessment after looking at real conditions, and those two things are often different.

The 30 percent framing matters for another reason specific to your archetype. As a Stable, your instinct is probably to protect the downside before anything else, which is the right instinct, but only if the downside is real. A 24k overage that is mostly electrical and plumbing in a property with aging systems is a different kind of problem than a 24k overage in fixture allowances. One is structural to the deal, and one is a conversation about selections.

The question I would add: what did you underwrite as your margin on this deal, and does a 24k increase eat into it, or eliminate it? That number tells you whether this is a negotiation problem or an acquisition price problem. If the margin was already thin, the honest answer may be that the buy price needs to come down rather than the scope.

A tax or legal question about how rehab costs are treated would need a CPA, not a forum thread.

What does your margin look like after the 24k, and was the acquisition priced with any buffer for scope surprises?

bethany_okafor · Answer

What was the ARV assumption when you set that 80k budget?

bakary_toure7 · Answer

What does your ARV have to move to absorb 24k and still hit your refi number?

malik_thornebury · Answer

The last sentence in that thread cuts off at the point that matters most, so I will finish the thought. A 24k rehab overrun either compresses margin or it moves the acquisition price backward, and which of those two paths you take depends entirely on whether you have already closed on the property. If you are still in the inspection or due diligence window, the bid is new information the seller has not yet absorbed, and there is a reasonable argument for a price reduction conversation rather than a scope reduction conversation. If you own it already, that path is closed and you are choosing between eating the margin, finding substitutions inside the scope, or staging the work so a refi or sale covers the gap before the next phase starts. The structure that wins on a flip is different from the structure that wins on a hold: a flip wants the fastest path to a defensible finish, so scope cuts that do not affect appraisal comps make sense there, while a hold can tolerate phasing the work because the property is generating income or at least not on a sale clock. What is the ownership status right now, and was this bid from a GC managing subs or from a GC doing the trade work directly?

victor_lam · Answer

The cut-off sentence is the real question: compresses the margin or it what, renegotiate the purchase price.

tobiasnwosu · Answer

The cut-off at the end is where the whole decision lives, "compresses the margin or it" and then nothing, which is the one thing I actually want answered before any of this line-item work matters.

Did you underwrite this at a specific ARV, and have any comps moved in that set since you locked the number? Because in Garfield Heights or east Akron right now, a 24k rehab swing can flip a deal from thin to dead depending on what sold in the last 60 days.

A contractor bid just came in 30 percent over the planned rehab budget and I need to think through what that number actually means before I react to it.

7 replies