There’s no greater thrill for fix and flip investors than breaking ground on a new investment project. However, the excitement of new opportunities can quickly dissipate when unforeseen challenges and costs arise. Experienced flippers understand that the unexpected can be expected, which is why professional investors emphasize the importance of real estate contingency plans.
What are contingencies in real estate?
Contingencies are a form of real estate budgeting, forecasting, and planning that protect and prepare fix and flip investors for the unexpected. In this article, we’ll explain the importance of contingency planning and how to create real estate contingencies on your own.
What are contingencies in real estate?
Contingencies are a form of real estate budgeting, forecasting, and planning that protect and prepare fix and flip investors for the unexpected. In this article, we’ll explain the importance of contingency planning and how to create real estate contingencies on your own.
Why Real Estate Contingencies are Important
Even with a stellar fix and flip strategy, business planning, and contractor communication, unknown damages and unexpected costs can arise during any construction project. Contingency planning is a project budgeting method with strategic forecasting that ensures a renovation project has the resources to be completed on time and as planned, regardless of unforeseen obstacles.
By creating a fix-and-flip contingency plan, investors reap the benefits of:
By creating a fix-and-flip contingency plan, investors reap the benefits of:
- Financial Stability: Contingency planning, most notably, helps investors avoid the stresses of additional costs outside of the original scope of work (SOW).
- A Well-Rounded SOW: A comprehensive SOW acts as a roadmap to completion, outlining project plans, upgrades, repairs, and costs. Real estate contingency planning solidifies your SOW, ensuring investors fully consider and strategize for each project phase and cost.
- Mitigate Risks: By accurately researching and estimating the costs for each phase of a fix-and-flip project, you minimize the risks associated with the unknown and ensure you are not biting off more than you can chew from a financing standpoint.
- Better Funding Options: The best lenders require a contingency plan within an investor’s scope of work documentation. A well-researched and funded contingency plan gives investors access to more and better funding options.
- Peace of Mind: At the end of the day, fix and flip investing is a stressful business. Real estate contingencies with well-formulated project budgeting methods give investors peace of mind that they have the funding and processes to succeed–no matter what problems may arise.
Real Estate Budgeting: How to Create a Contingency Plan
Now that we know the “why,” it’s time to discuss the “how” of contingency planning. Real estate contingencies require a lot of research and planning. By meticulously detailing, estimating, and budgeting for each aspect of the project, you mitigate the chances of running into unexpected problems, while creating solutions in case they do.
Simply put, each contingency plan requires detailed and accurate quoting followed by proper project budgeting.
Simply put, each contingency plan requires detailed and accurate quoting followed by proper project budgeting.
Accurate Quoting
The ability to identify and accurately quote crucial steps and renovation costs throughout the project separates successful investors from those who struggle.
Real Estate Contingencies List
When it comes to fix and flip project planning, investors must consider several phases and the costs associated with each, including:
- Acquisition Costs, including purchasing price, closing costs, inspections, appraisals, and loan origination fees
- Renovation Expenses, including construction materials, labor, permitting fees, contractor services, and waste removal
- Holding Costs, including loan payments, property taxes, insurances, utilities, security systems, and HOA fees (if applicable)
- Selling Costs, including real estate agent commissions, closing costs, marketing expenses, concessions to buyer, staging costs
Within these phases, investors must be mindful of timelines and resources necessary to accurately assess and estimate overall costs to achieve each aspect of the fix and flip project.
Real Estate Budgeting Estimates
To accurately quote and estimate each phase of a home flipping project, investors must:
Whatever your project’s overall costs are, the real estate contingency budget should be 5% to 10% of those costs. Also keep in mind that some real estate lenders may require a minimum contingency of 10% or more accounted for in the budget.
- Break down each phase of the project’s SOW into tasks. For example, within the renovation phase, a single task could be to update the kitchen.
- Identify and estimate any costs associated with each task. This includes any and all materials and services needed to complete the task. For updating a kitchen, costs can include laborers for demolition of original cabinetry, granite for countertops, new appliances, etc.
- Add up all costs. After thoroughly researching costs and setting honest estimates on each task, add all the costs together. This will help determine initial project costs for your entire scope of work.
Whatever your project’s overall costs are, the real estate contingency budget should be 5% to 10% of those costs. Also keep in mind that some real estate lenders may require a minimum contingency of 10% or more accounted for in the budget.
Contingency Example
Let’s say you find a fixer-upper selling for $100,000. After accurately quoting the costs for the entire SOW, you estimate that the overall costs of the project, from purchasing through selling, would be $250,000.
To mitigate risks, enhance peace of mind, and ensure you are adequately covered for the unexpected, your contingency budget should be between $12,500 ($250,000 x 0.05%) and $25,000 ($250,000 x 0.10%). With a solidified project budgeting method in place, your job is securely funded for the known and potential unknowns of the home flipping process.
To mitigate risks, enhance peace of mind, and ensure you are adequately covered for the unexpected, your contingency budget should be between $12,500 ($250,000 x 0.05%) and $25,000 ($250,000 x 0.10%). With a solidified project budgeting method in place, your job is securely funded for the known and potential unknowns of the home flipping process.
Common Contingency Costs
By accurately estimating the costs and creating a real estate contingency budget, investors can plan and prepare for the most common unexpected obstacles, including:
- Electrical deficiencies
- Structural hazards
- Mold
- Appliance and ventilation issues
- Plumbing problems
Adequate Funding to Meet Your Fix and Flip Project Goals
In order to find investment success, home flippers must have access to reliable and adequate funding throughout their project’s entire SOW. Finance of America Commercial (FACo) has been helping fix and flip investors estimate project costs, develop real estate contingency plans, and fund rehabilitation ventures from beginning to end for over a decade.
Our versatile fix and flip loan packages and our team of industry experts ensure your project has the capital, structure, and strategy in place to be successful in today’s markets.
Our fix-and-flip loans provide:
Our versatile fix and flip loan packages and our team of industry experts ensure your project has the capital, structure, and strategy in place to be successful in today’s markets.
Our fix-and-flip loans provide:
- Up to 100% of rehab budget financing
- Financing for SFR, 1-4 unit properties, townhomes, and condos
- 12 to 24 month loan terms
If you’re looking to perfect your real estate project budgeting methods while accessing fast and reliable capital backing, FACo is the lending partner for you. CLICK HERE to schedule a FREE consultation with a FACo team member today.
