Estimating repair costs is full of pitfalls for real estate investors, and done incorrectly can result in major problems…
Accurately assessing repair costs has long been one of the biggest issues for real estate investors and one repeatedly underestimated.
Underestimating repairs is perhaps the biggest danger to completing profitable flips and rehabs. If you are off it can eat up profits and even put you in the hole. At the very least it’s an annoyance, at its worst can result in bringing down your whole operation and causing financial difficulties for years.
Even for those planning to hold and rent or wholesale homes it can be a big problem which renders properties unlivable resulting in negative cash flow or destroying credibility if not accurately represented when selling on.
Most are now well aware of the need to overestimate repair costs and leave room for overages and discovering additional issues. However, even those who are great at assessing repair costs can find themselves in deep trouble when attempting overly creative financing.
Even today some are crafting what they think are slick plans to produce two repair estimates for their deals; one for them and an inflated version for mortgage lenders.
While real estate investors may find a spread if they have resources to get work done on the cheap mortgage lenders aren’t stupid. They have seen this tried for over a decade, and dealing with hundreds of these deals a month know costs as well or better than most real estate investors. Most mortgage lenders will also expect investors to put up the cash first, prove it via receipts and possibly even inspect repairs to verify they were actually done.
Whether they do or not, it’s a form of mortgage fraud and not a very unique one. When combined with mail, wire and tax fraud charges this can mean decades in the slammer. So get better at calculating repairs, leave room for unexpected items and don’t think you are the first one to have thought of pulling a fast one with lenders.
