Going Over Budget...Avoiding Expensive Hidden Costs

In this newsletter, I go over the common hidden costs when doing flips and rehabs.  Sometimes it seems like the exception, not the rule, to end a project on (or under) budget!  If you can relate to this, then for sure continue reading.  If you are struggling with budgets, then this newsletter is for you.

Once again, I personally write these

Inside the Trenches:

Have you ever purchased a property, and later realized you missed a major red flag (or even a few minor ones)?  Maybe you bought an older home and found out later the sewer lateral is messed up.  Maybe you didn’t realize the roof needed to be replaced.  Maybe you didn’t see that the foundation had a sag in it, or there was dry rot throughout that deck, or termite damage, or old wiring, or whatever…

Unless you started this business after being a contractor for decades, you are probably like me and learned all about major rehab issues and change orders the hard way…by finding them after purchase and having to write the check to fix them!

After many years of this business, nearly 700 projects, and paying millions and millions in rehab/construction costs…I have compiled a list of some of the most common ‘red flags’ to look out for BEFORE you buy a property.  

It is VERY IMPORTANT to update your underwriting process to be able to get eyes on these key areas that can create hidden costs for you later down the line.  Keep in mind, a good deal doesn’t mean it doesn’t have red flags and issues, in fact some of the best deals have the most problems with it.  THE KEY is being AWARE of these issues BEFORE buying the property so that you can factor it into your purchase.  It is ok that the property’s foundation is messed up…if you knew about it BEFORE you bought it and factored it into your costs and underwriting.

Before I get to the list, you want to know the worst part about being able to find all the red flags on a property before you purchase it?  You will be more likely to pass on more deals…!  Yep, that is exactly what happened to me.  The better I got at finding issues on a property (and underwriting for them), the less likely I bought a property.  WTF!  

Guess what though, it also meant that projects have gone a lot smoother for me since then, we are more likely to be within budget, have less change orders, and not rely on the market to save me.  I never lost money on a deal I didn’t buy…

Pro tip: Look for the BIG TICKET items first (roof/foundation/windows/hvac/electrical/etc)

Top Red Flags to look for on EVERY property (btw I have a free webinar April 17th where I will be deep diving on red flags, underwriting deals, and showing how I do all this remotely today without walking the properties myself, register HERE)  This is not a FULL list, there is so much more to look for, however these are areas you should ALWAYS look into.

Exterior: I find it easier to start with the exterior first. If its SO bad on the outside, it probably won’t be much better on the inside.  Additionally, looking at exterior pics may tell you right away that your budget is too light and you can just pass on the deal and move on.

• Roof Issues

  • Always check the roof.  Even if it looks good.  A good looking roof can still have 2 to 3 layers hidden underneath.  Learning what this means the hard way is never fun.

• Windows and Egress

  • Windows can add up in costs if the ARV requires upgraded windows.  Are the seals busted?  Is there egress in each room?

• Siding

  • Not all siding can be matched/repaired.  Not all siding is good to keep either for your ARV.  Always double check the condition, material, and if you can salvage or will have to replace

• Foundation

  • Don’t know what to look for?  Bring a professional.  But always check!

• Drainage

  • Erosion, standing water, water against the house, etc

• Landscaping

  • Heavy landscaping?  Trees look dangerous?  Roots pushing into the foundation or near the house?  

• Trash/debris/outbuildings

  • I once had a property that was covered in black berries and underneath it all was exactly 407 old tires.  That adds up…

• Utility connections

  • Is the property connected?  Are the utilities up to date?  Can you get utilities turned on?

• Electrical Panel (if exterior)

  • Always check

• Sewer/Septic

  • Sewer scope if the property is older

  • Do you know if its septic or sewer?

  • IF SEPTIC ALWAYS GET IT INSPECTED BEFORE PURCHASE, NO EXCEPTIONS!!  Too much to write here.

• HVAC

  • If there is an outdoor unit, what’s its condition? Are there more than one of them?

• Non-conforming additions and/or buildings

  • Just cause the house has an addition or out building, doesn’t mean it is conforming/permitted/allowed.  Some cities may make you tear it down, always do your due diligence. 

• Lot line issues

  • Is the house really close to the lot line or on it?  The fence looks like it's on someone else's property?  Is there access to the property?  Shared driveway? So much here…

Interior: Interior can have a lot of ‘signs’ for hidden damage if you know where to look and what to look for.  Look for obvious damage, floor plan issues, water stains, soft floors, in the attic, basement, etc.  If something doesn’t ‘look right’ take pictures and send them to a professional.

• Non-Functional Floor plan

  • Just because a house is a 4 bed 2 bath, doesn’t mean the floor plan is appropriate for today and functional

• Sloped floors

  • Typically means foundation or post/beam issues

• HVAC

  • Is there heat/air in all rooms?  Is there a HVAC system?  Is it serviced? Old/new?

• Electrical

  • Panel? Type of wiring? 

• Plumbing

  • Galvanized? Rusted? Busted? What condition is it in?

• Water stains

  • Was what caused the stains still an issue? Water intrusion still possible?

• Sagging structural

  • Did the previous owner open up a wall?  Is the beam (if there is one), sagging?  

• Soft floors

  • Usually where there is water, like the bathrooms.  If the floor is soft, it’s probably rot

• Rodents/Pests/Termites/etc

  • Checking the attic and crawl space is always important.  If there are pests, you will see signs.

I can write pages and pages about rehab issues, red flags, hidden costs, and so much more.  In fact, I have a FREE give away of an 18 page Red Flags guide that you can download for free HERE (plus there are some videos that go with it for free too).

Unfortunately though, no matter how good you get at this, you may still get a surprise change order or find some hidden damage.  It is part of the game.  The key is to have it become less and less, and the way to make that happen is through education (learning from my mistakes), brining professionals with you on property walks, asking questions, and repetition.  

If you want more on this, then join me on my deep dive webinar April 17th, you can register for free HERE.  I will be going over multiple properties, walking through them with you, showing you exactly how I review a property for red flags, playing ‘i spy’ with you, and much more.

See you at the webinar and thanks again for following my newsletter.

Tarl Yarber