Ep 13: The Three Checks That Protect Every Iowa Flip Budget

The Three Checks That Protect Every Iowa Flip Budget

 

[NEIL] A house from the nineteen forties can hide an eighty thousand dollar surprise behind one wall that looks fine.

 

[MAGGIE] Eighty thousand.

 

[NEIL] Same block, two houses, same price. One's a thirty thousand dollar job. The other one's ninety five. You can't tell which is which by standing in the kitchen.

 

[MAGGIE] Welcome back to Flipping Iowa. I'm Maggie, and across the table, as always, is Neil Timmins, real estate investor and Iowa's hard money lender.

 

[NEIL] Hey Maggie.

 

[MAGGIE] I went deep on this one for the blog this week at littleguyloans.com, and the further I got into it, the more it came down to one call every flipper has to make before they write an offer. Light rehab or full rehab.

 

[NEIL] It's the fork in the road. Before financing, before the crew shows up, before anything else. I'd say it's the single most expensive guess a new investor makes, because it's a guess dressed up as a decision.

 

[MAGGIE] Break that down for me. What's actually the difference between the two?

 

[NEIL] Light rehab is surface. Paint, flooring, light fixtures, cabinet faces, maybe a kitchen or bath refresh, landscaping. Sometimes a furnace or water heater near the end of its life. Full rehab is the bones. Roof, electrical panel or a full rewire, plumbing stack, foundation, HVAC, moving walls.

 

[MAGGIE] So if the scope only touches the first list.

 

[NEIL] Light rehab. The second that second list shows up anywhere, even one item, you plan and budget like it's a full rehab. Doesn't matter how good the kitchen looks on the walkthrough.

 

[MAGGIE] And people get that wrong in both directions, I'm guessing.

 

[NEIL] Both directions, and both cost you. Treat a full rehab like a light one because the paint's fresh, and the inspector finds knob and tube wiring behind the wall, or a cast iron sewer line collapsing under the yard. That's not a twelve thousand dollar surprise. That's thirty five thousand, and it shows up after you've closed.

 

[MAGGIE] And going the other way?

 

[NEIL] Sinking full rehab money into upgrades a house never needed. That prices you right out of the seventy percent rule before you've swung a hammer. Either mistake costs you. The scope call protects your margin. Not the purchase price.

 

[MAGGIE] Give me a sense of scale on that. What's the actual gap between getting it right and getting it wrong on a typical Des Moines metro flip?

 

[NEIL] I'd put it at twenty to forty thousand dollars on a mid range house, easy. Underscope a full rehab and you're looking at change orders that eat your entire contingency in the first month. Overscope a light rehab and you've put granite and a tile shower into a house that was only ever going to sell in the two hundred thousand range. Either direction, that gap is real money, and it's avoidable money.

 

[MAGGIE] So this isn't a five hundred dollar mistake we're talking about.

 

[NEIL] Not even close. This is the difference between a flip that pays your mortgage for a year and one that barely breaks even after you count your time.

 

[MAGGIE] So how do you actually score a house before you commit to a number? You said in the blog you run three checks on every property.

 

[NEIL] Every single one. First is age and systems. Anything built before nineteen sixty gets a hard look at wiring, plumbing, and the foundation, no matter what the finishes look like. A house from the nineties or later with an updated kitchen, that's a strong light rehab candidate walking in.

 

[MAGGIE] What's the second check?

 

[NEIL] Comps and the after repair value ceiling. I pull comps before I decide the scope, not after. If the best comp on the block caps out at two hundred sixty thousand no matter how nice you finish it, a full rehab that pushes your all in cost past that ceiling doesn't make sense. Even if the house genuinely needs the work.

 

[MAGGIE] That feels like the one people skip.

 

[NEIL] It's the one people skip, because it takes an extra hour and a phone call to your agent. The math doesn't care that you skipped it.

 

[MAGGIE] And the third?

 

[NEIL] Timeline tolerance. Light rehab, you're done in four to six weeks. Full rehab, realistically twelve to sixteen. If you're racing the fall market before it slows down, that gap should weigh on the scope call as much as the repair list does.

 

[MAGGIE] Give me the real example. You've got one in Beaverdale.

 

[NEIL] Two bungalows, same street, both built in the nineteen forties, listed within eight thousand dollars of each other. First one had updated electrical from a two thousand eighteen remodel, newer roof, just needed flooring, paint, kitchen refresh. Light rehab. Done in five weeks. Budget under thirty thousand.

 

[MAGGIE] And the second one.

 

[NEIL] Same neighborhood, same era, still had the original knob and tube wiring, a failing cast iron stack, and a foundation crack that needed an engineer to look at it before anybody touched it. Rehab budget came in near ninety five thousand. Nearly triple the first house, and the finishes on both walkthroughs told you nothing about which one you were standing in.

 

[MAGGIE] So walk me through what that does to the loan itself. Because the scope isn't just a contractor conversation, is it.

 

[NEIL] No, and this is the part people miss. Whatever scope you land on, the financing math works the same way every time. On our loans, you can access up to ninety percent of the purchase price and up to one hundred percent of rehab costs, with a max of seventy percent of after repair value controlling the total loan amount no matter what.

 

[MAGGIE] Run the numbers on the Beaverdale houses.

 

[NEIL] Say the light rehab house is a hundred forty thousand purchase. Ninety percent of that is a hundred twenty six thousand. Rehab's twenty eight thousand, financed at one hundred percent. Total loan request, a hundred fifty four thousand. After repair value on that house is two hundred sixty thousand. Seventy percent of that is a hundred eighty two thousand. You're well under the cap. Full approval, no issue.

 

[MAGGIE] And the full rehab house?

 

[NEIL] Purchase comes in a little lower, say a hundred thirty two thousand, because the seller knows what they're selling. Ninety percent is a hundred eighteen thousand eight hundred. Rehab's ninety thousand, financed at a hundred percent. Add those up and you're requesting two hundred eight thousand eight hundred. Same after repair value, two hundred sixty thousand, same seventy percent cap at a hundred eighty two thousand. You're over the cap by almost twenty seven thousand dollars.

 

[MAGGIE] So the loan doesn't just get smaller. The investor has to bring real cash to close on the full rehab, even though the deal might still work.

 

[NEIL] Exactly right. That cap is the ceiling on every project, light or full. Run your rehab number honestly before you write the offer, because that number decides how much cash you're bringing to the table, not just how much work you're signing up for.

 

[MAGGIE] What happens if you get the scope wrong after you've already closed? Say the light rehab turns into a full rehab three weeks in.

 

[NEIL] Then you're financing the correction out of pocket or out of a draw schedule that wasn't built for it. Our draws follow the rehab budget you submitted at closing, line by line. If electrical wasn't on that budget and suddenly it's a full panel swap, that's not a quick add. That's a change order, a revised scope, and a conversation about where the extra money comes from before the crew keeps moving.

 

[MAGGIE] So the scope call up front protects the draw schedule too, not just the purchase decision.

 

[NEIL] It protects everything downstream of it. A tight scope of work at closing means your draws move fast because everybody agreed on the plan before day one. A four line scope that says general remodel and a number, that's the kind of thing that turns into change orders every other week, and change orders are where timelines and margins both go to die.

 

[MAGGIE] Okay, I want to bring in something that happened to one of your borrowers, because it's basically this exact lesson from the other side. The resale side.

 

[NEIL] This one's a good one. Windsor Heights. If you know that suburb at all, you probably know where I'm headed before I say it.

 

[MAGGIE] I don't, so walk me through it.

 

[NEIL] Windsor Heights has a heavy concentration of post World War Two housing, and that means it's got more than its share of Orangeburg sewer line. Orangeburg's a fiber and pitch pipe they used after the war. Cheap, available at the time, and it degrades over decades. Shows up on sewer scopes now and it stops deals cold.

 

[MAGGIE] So this investor bought in Windsor Heights.

 

[NEIL] Bought well. Expected somewhere between thirty and forty five thousand in profit depending on where the after repair value landed. Did a clean rehab, got it under contract fast. Everything's moving right along. Then the buyer's inspection runs a sewer scope.

 

[MAGGIE] And it's Orangeburg.

 

[NEIL] Sure enough. Buyer comes back asking for a ten thousand dollar concession. And here's where a lot of investors would just write the check to save the deal.

 

[MAGGIE] But this one didn't.

 

[NEIL] He dug into it first. Turns out the Orangeburg was present, but it wasn't collapsed. Still functional. That distinction matters more than people think, because a home warranty covers a sewer line that fails. It doesn't cover one that simply exists. A working Orangeburg today is a warrantable risk tomorrow, not a repair today.

 

[MAGGIE] So what did he actually do?

 

[NEIL] Negotiated multiple years of home warranty coverage into the deal, and came down three thousand on price instead of ten. Buyer got real protection if it ever fails. He kept the majority of his margin. Deal closed.

 

[MAGGIE] Walk me through the actual math on that. What did those three thousand dollars versus ten thousand dollars mean for his profit?

 

[NEIL] He was projecting thirty to forty five thousand in profit on that flip. Losing ten thousand off the top is real, that's up to a third of the upside on the low end of his range. Losing three thousand and a home warranty policy that might cost him a few hundred dollars a year if it's ever even used, that barely moves the number. Same problem, same buyer, completely different outcome, because he asked one more question before he wrote a check.

 

[MAGGIE] So if someone skips the scope on the buy side, that's where all this bargaining room disappears. Has that actually cost people deals?

 

[NEIL] Every time, because now you're negotiating from defense instead of offense. This guy got lucky the pipe was still functional and that the warranty angle worked. The smarter play, and I'd have told him this before he ever bought it, is a sewer scope at acquisition. Runs about a hundred fifty dollars. Windsor Heights, any post war neighborhood in this market, that scope should be automatic before you close. Not after your buyer finds it for you.

 

[MAGGIE] A hundred fifty dollars to avoid a ten thousand dollar negotiation you're having from a weaker position.

 

[NEIL] That's the whole trade. Same logic as the light rehab, full rehab call. A hundred fifty dollars tells you what you're actually buying. The alternative is finding out for free, on someone else's timeline, when you have the least room to maneuver in the entire transaction.

 

[MAGGIE] Let me push on something, because I think a lot of newer investors would say they can't afford to scope every sewer line and inspect every system on every house they're bidding on. That adds up fast if you're making offers on five properties a week.

 

[NEIL] Fair pushback. You don't scope every house you look at. You scope the ones you're actually under contract on, or close to it, in the neighborhoods where the housing stock tells you to expect it. Windsor Heights, anything pre nineteen sixty, that's not optional due diligence. That's cheap insurance against a five figure mistake. On a house from the nineties with updated systems, you're not spending that money.

 

[MAGGIE] So it's targeted, not blanket.

 

[NEIL] Targeted every time. The three checks I mentioned earlier tell you where to spend the diligence dollars. Age and systems tells you if you're even in the danger zone. If the house is from nineteen eighty five and the panel's been updated, I'm not paying for a sewer scope out of paranoia. If it's a nineteen forty bungalow in a neighborhood with known Orangeburg, that hundred fifty dollars isn't a question.

 

[MAGGIE] What about someone who says, I already have a contractor walkthrough, isn't that enough?

 

[NEIL] A contractor walkthrough tells you what's visible. It doesn't tell you what's underground or behind a wall that hasn't been opened yet. Different tools for different problems. A good contractor and a sewer scope aren't competing for the same job. They're covering different ground. Literally.

 

[MAGGIE] That's a fair way to put it.

 

[NEIL] It's the difference between what a contractor can see and what a hundred fifty dollar camera can see. Use both, where the housing stock tells you to.

 

[MAGGIE] So if someone's writing an offer this week on a pre nineteen sixty house, what should actually be in that contract to protect them?

 

[NEIL] An inspection contingency that specifically names a sewer scope, not just a general home inspection. A lot of standard inspection language doesn't automatically include it. You want the right to walk or renegotiate based on what that scope finds, not just the general inspection items. It's one line added to a contingency, and it costs you nothing to ask for.

 

[MAGGIE] And if the seller pushes back on that contingency?

 

[NEIL] Then you've learned something about the deal before you're a hundred fifty dollars in, let alone thirty thousand. A seller who won't allow a sewer scope on a nineteen forty house is telling you something. Listen to it.

 

[MAGGIE] Before we close out, we like to end every episode with a piece of Iowa history, so here's this one.

 

[NEIL] This one actually connects pretty well to everything we just talked about. The Great Chicago Fire burned through the city from October eighth to October tenth, eighteen seventy one. Took out something like three square miles, and most of that was wood frame construction that went up like kindling.

 

[MAGGIE] Three square miles in two days.

 

[NEIL] Nearly. And here's the connection. The city rewrote its building codes almost immediately afterward. Not because city hall suddenly cared more about safety in the abstract. Insurance companies pushed hard for it, because they were done paying out on buildings that burned to the ground in a single night.

 

[MAGGIE] So the codes came from the people who were footing the bill for not knowing what they were insuring.

 

[NEIL] That's exactly it. Same instinct as a sewer scope or a proper scope of work. Somebody finally said, we need to know what we're actually exposed to before it costs us, instead of finding out the expensive way after the fact.

 

[MAGGIE] A hundred and fifty five years later and it's basically the same lesson.

 

[NEIL] Some things don't change. You'd think we'd all just inspect the pipe up front by now.

 

[MAGGIE] Alright, let's wrap up. Three things worth carrying out of this one. First, the scope call, light versus full, is a systems and comps question, not a finishes question. Second, that after repair value cap controls your loan no matter which way you go, so run the real number before you write the offer. And third, targeted diligence, the sewer scope, the detailed scope of work, is cheap compared to finding out the hard way.

 

[NEIL] And the finishes will lie to you every time. The systems don't.

 

[MAGGIE] If you got something out of this one, share it with a friend, and be sure to subscribe so you don't miss the next one.

 

[NEIL] Appreciate you all listening. Catch you on the next episode.