By Greg Herlean
Going over budget on house flips is a fact of life. As much as you’d like to avoid it, it’s going to happen. Real estate investing is full of surprises, and not all of them are welcome. You buy a flip house at a foreclosure auction, and when you get inside, you find out that the whole place needs to be gutted. You get halfway through a rehab and find out that there’s structural damage that you need to take care of before you can move on to the rest of your projects. You think a kitchen update will only cost $5,000, but it ends up being closer to $10,000.
While these scenarios are major budget bummers, they don’t have to be the end of the world for your flip. In fact, I can’t tell you how many times Mike has called me and said, “Greg, we need more money, or this just isn’t going to work.” Thanks to my experience financing flips and finding more financing when the unexpected happens, I can help you turn a potential disaster into a mere a bump in the road.
Expect the Unexpected—And Budget for It
When you set your budget to buy and rehab a house, you can’t plan for the best. Instead, take a hard look at everything that could go wrong and assume that it’s going to. If the house has a pool, add at least $3,000-5,000 to your budget. If the roof looks old, add $5,000-10,000. You may not need to do all of the renovations and rehabs that you prepare for, but if you do plan for them, you should have the budget available to allocate to them.
Stay in Touch With Lenders and Investors
If you’re working with an investing partner, you may be able to get them to put up more money on a project when you go over budget, but you’ll have to justify every expenditure. Be ready to show them exactly what you’ve done and why you needed to do it, what still needs to be done, and how much it can improve the resale value of the house.
If this happens while the rehab is underway and you can see the progress that’s been made, you may want to bring your investing partner to the property or send them pictures of what you’ve accomplished. If the house isn’t looking so good yet, skip the pictures and stick to the numbers.
Reach Out to Friends and Family
If you can’t get your investor or lender to give you more funding, you’re going to have to go looking for it. Fortunately, you’ll usually only need a fraction of your original investment, and friends and/or family are more likely to have the capital available to help out. Present them with the problem and show them how their investment could save the deal and how they stand to profit from it. Then bring them in as an investor on the project and agree to split a certain (smaller) percentage of the profits with them.
If you’re in the real estate investing business for any length of time, this is going to happen to you. Whether you borrow more from your partner or lender, include a friend or family member as an investor, or pull from your own savings, you have options. The only “wrong” thing to do at this point is to give up and walk away from your flip house. Don’t ever be afraid to ask for more funding, especially when it can turn a potentially disastrous deal into a real winner.