"HOW TO AVOID A BUDGET BUST"





10-20-21 By Anthony Carter



Welcome to Blog #1 and I am excited to be able to share knowledge I have gained over the years in this format. With 28+ years of experience, I think I am well qualified to discuss the topics we will bring you over time. Let's get to it.





In this Blog we are going to discuss how to identify and avoid issues that may cause you to go over budget on your project. Remember, you got into this game to make money not loose it, so knowing how to mitigate situations will protect your bottom line and make sure you have a profitable project. This is for those just setting out on their real estate journey, or maybe you've been doing it for a while and want to learn some more. You might be a home owner embarking on a extensive remodel or building your dream home. Whatever it is there should be something in here for you.


Entrepreneurs gain freedom through education and mastery of systems in their industry. These systems can only function correctly with the right information to achieve the said target. That target in this situation is PROFIT. In real estate that profit can be eaten up real quick if you start encountering unforeseen conditions. These can arise in many areas throughout the design, build, or remodel phases. Hopefully after reading this you will have some understanding of at least what to look for on your next real estate project. Be it a wholesale deal, flip, or buy an hold, this should apply.


Let's start with the preconstruction phase. Preconstruction cost can vary depending on what you are trying to build. One thing new investors or homeowners forget about are cost associated with preconstruction. These cost can be for surveys, geotechnical reports, design, and consulting and range from a couple hundred dollars to thousands. If not factored into your budget you are starting off wrong already. There is a saying "you pay for what you get" and that is correct in this industry. Quality documents lead to a better flowing project and least likely to receive change orders.


If you are a house flipper and took contract of a property that you wish to build new construction on, you must have the proper loan terms to accomplish this. Or enough budget power to carry the project during this time. Some cities building departments during the pandemic have experienced a massive inflow of building permit applications. This turns into long review times and in some markets several weeks to over a year plus. If you have not financially planned for this, it could derail the project before it even brakes ground. Understand the more complex the design or construction the longer this phase of the project will be.


Other areas where money can suddenly disappear is in the purchase. A common mistake by many is thinking money is made at the sell of the property and that couldn't be further from the truth. This rule does not only pertain to investors but home owners too. If you pay "asking price" in a transaction you are paying retail, and most likely you are eating into your equity aka profit. It is best to negotiate a proper price to ensure the correct equity or profit take at the end. The rule I tell clients is take the ARV (after repair value) and multiply by .70 or 70%, then take that number and minus the cost of construction/repairs. That final number is your "maximum" offer limit to ensure profit that makes it worth while. Keep this tactic and you'll have profitable projects if managed right.


Another major area money can just disappear is during the construction phase. Whatever your budget is, it is never enough. Always make sure to have 10-20% more than what was quoted to make sure you can cover unforeseen items. This is especially key if you are remodeling a property over a certain age and condition. I have seen time and time again where budgets fall short because of lack of preparation. What should I look for? First and foremost no matter if it is a investment or primary residence get an inspection. This could save you a massive headache if the inspection was performed correctly. It can uncover electrical, plumbing, foundation, roof and other issues before start, and give you and opportunity to get funding in order or value engineer something out to make it work.


I had a client who didn't get an inspection on her flip. Her budget was tight from the start and the project went through several value engineering sessions to get final budget. Most contractor walk-throughs are non intrusive, meaning we are not going in the property and putting holes in walls to look deeply. We are strictly bidding what is visible and what was presented in drawings. This can be a sticky situation because the owner thinks the contractor is supposed to know everything about said property. The contractor gives a price based on this information gathered and begins the project. Once in the project they start seeing evidence of dry rot, water damage, and carpenter ants eating away at structural members.


If there was not a contingency in the budget, this fix has to come from somewhere in the original budget. If it can not be obtain by eliminating items from the budget, the owner must provide the difference to correct it. Do you have it? That is the big question and ultimately what will keep your project moving forward or grinding to a halt. This can create delays which again cost you profits. You didn't get in the game to loose money but to win, and winning comes from being prepared.


The last area money can slowly start disappearing is in the holding cost of a property. Say you had a near perfect run during construction, followed all pre-steps to make sure profit is there. You list the property and it doesn't move. You get zero showings and no offers even with a realtor and marketing. What you didn't factor was the changing cycles of the real estate market, maybe you didn't do your due diligence about the neighborhood. This can be a painful lesson. If you took a short term hard money loan say for 6 months, selling the property fast is crucial to your bottom line. The longer you carry the property, the less you make. To avoid this pitfall research the area you plan to invest. See how long properties sit on the market. Analyze what are the selling points of properties moving fast and duplicate if possible.


Understanding these dynamics will give you a better picture of your goal. So lets recap on how not to bust your budget.

  1. Preconstruction phase. have a proper budget to carry through this phase. This includes money for design phases, property maintenance, and loan payments.
  2. Purchase price: use the process mentioned above to make sure you are starting your offers at the right price. You make money in the purchase, not the sell.
  3. Get property inspected: This step is very important in the process. It is needed for traditional funding for homes and I suggest all investors to do the same. This can prevent many unforeseen items from arising and potentially derailing the project budget, schedule and bottom line.
  4. Property carrying cost: Allow you budget to accommodate cycles in real estate and avoid making real estate purchases in the wrong market. Different properties at different price points sit on the market for different lengths of time. Understand your market and adjust accordingly to make sure you have the most profitable outcome.

Some terms I used in this Blog may be foreign to some but don't worry, over time I will be breaking down some of these terms and giving you ways to make more money in real estate. thank you for your time and God bless.