Ep 2: The Wall That Changed a Beaverdale Flip Budget

Episode 2: The Wall That Changed a Beaverdale Flip Budget

 

[NEIL] Twenty five dollars a square foot. That's the number he wrote the offer with.

 

[MAGGIE] And what did it actually cost once the crew got inside the walls?

 

[NEIL] Fifty dollars a square foot. Double. One thing hiding behind a piece of drywall did that.

 

[MAGGIE] One wall changed an entire rehab budget. That's today's episode.

 

[MAGGIE] And welcome back to Flipping Iowa. I'm Maggie Monroe, sitting across from Neil Timmins, who has apparently been elbow deep in someone's basement wiring again this week.

 

[NEIL] Beaverdale. Bungalow. Looked like paint and floors from the listing photos.

 

[MAGGIE] And that's never how it actually goes, is it.

 

[NEIL] Pulled back a section of drywall in the basement. Found knob and tube wiring behind it. So no. Not paint and floors.

 

[MAGGIE] And that's exactly what we're getting into today. 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 thing. Most flippers don't actually price the rehab before they make the offer. They guess.

 

[NEIL] They guess with a dollar sign attached to it, which makes it feel like a real number. It isn't one.

 

[MAGGIE] And by the end of this episode, you're going to know how to build a real one. Room by room, before you ever call the seller back with an offer.

 

[NEIL] That's the whole show today.

 

[MAGGIE] And let's get into it.

 

[NEIL] Here's where it goes wrong, almost every time. Somebody walks a house once, eyeballs it, and says thirty thousand dollars for rehab. That's not a scope. That's a guess wearing a dollar sign.

 

[MAGGIE] And where does that number even come from, if it's not coming from the actual house in front of them?

 

[NEIL] Usually from the last house. Or from what a buddy told them their rehab cost last year. It's not this house's number. It's a borrowed number wearing this house's address.

 

[MAGGIE] And that's the gap you're talking about then. The difference between what people think a rehab will run and what it actually runs once a crew starts tearing into walls.

 

[NEIL] That gap is where first and second flips go sideways. Not the purchase price. The rehab.

 

[MAGGIE] And you said this Beaverdale house, the wiring, changed your number by a real amount. Walk me through what happens the second you find something like that behind a wall.

 

[NEIL] Everything moves at once. The panel's not up to code, so now that's an electrician, that's permits, that's a follow-up inspection. One wall changed the whole budget.

 

[MAGGIE] And can you give me an actual example of that borrowed number causing real damage? Not hypothetical, an actual deal you've seen.

 

[NEIL] Sure. Had a guy price a rehab at twenty five dollars a square foot because that's what his buddy's cosmetic flip ran in Urbandale. His house was in an older pocket of town and needed a full mechanical update he hadn't priced at all. Real number ended up closer to fifty dollars a square foot. He wrote his offer off the wrong number and felt it the entire project.

 

[MAGGIE] And that's not a small miss. That's basically double.

 

[NEIL] Basically double. That's what a borrowed number costs you when the two houses aren't actually the same house underneath the paint.

 

[MAGGIE] And that's the part that scares a lot of people off from flipping in the first place. That a house can just change on you like that, mid project, after you've already committed.

 

[NEIL] It doesn't have to scare you off. You just have to walk the house right the first time, before you ever write the offer. That's the entire fix.

 

[MAGGIE] And a first timer listening to this is probably thinking, sure, but how do I even know what to look for on a walkthrough. What's the actual process.

 

[NEIL] That's the rest of the show. Room by room.

 

[NEIL] Before I ever write an offer, I walk every room with a notepad. Not a calculator app open later in the truck. A notepad, in the room, right then.

 

[MAGGIE] And what are you actually looking for, room to room? Because I'd guess most people are just looking at how ugly the carpet is.

 

[NEIL] Four things, every single room. Cosmetic scope, paint, flooring, fixtures, trim. Mechanical age, furnace, water heater, panel, main stack. Structural signals, sloped floors, cracked foundation walls, water staining. And anything hidden, outlets that don't work, a smell in the basement, a panel somebody patched with tape instead of fixing right.

 

[MAGGIE] And that last category is exactly where your Beaverdale wiring lived.

 

[NEIL] Right there. You can't fully price what's behind a wall until you're inside it. But you can price the risk of it. Three or more of those hidden cost signals in one house, I add a heavier contingency before I even run comps.

 

[MAGGIE] And of those four, which one trips people up the most on a first flip?

 

[NEIL] Structural signals, almost always. A sloped floor doesn't always mean the foundation's failing, sometimes it's just an old house settling the way old houses do. You don't know which one you've got until someone who knows foundations looks at it. Guessing wrong on that one is the expensive kind of guess.

 

[MAGGIE] And is that the point where you bring in an inspector, or is that still something you're eyeballing yourself on the walkthrough?

 

[NEIL] Both. I eyeball it to decide if the deal's even worth pursuing. If the number still works after I price the risk conservatively, then I bring in someone who knows foundations before I ever touch the contingency.

 

[MAGGIE] And once you've walked it and you've got your notes, what's next? Because a walkthrough by itself isn't a budget yet.

 

[NEIL] Next is the line item scope. Room by room, trade by trade, every cost priced on its own. Never lumped into one round number.

 

[MAGGIE] And you price it in a specific order. You've mentioned that to me before.

 

[NEIL] Always the same order. Mechanicals first, HVAC, electrical panel, plumbing, roof. Those are the items that quietly double a budget, and they don't move much regardless of finish level. Then structural and envelope, foundation, framing, windows, siding. Then interior finishes, flooring, paint, trim, cabinets, counters. Curb and exterior last.

 

[MAGGIE] And why mechanicals first specifically? Why not just start at the front door and work your way in room by room in order?

 

[NEIL] Because a cosmetic flip with a bad furnace and a sixty amp panel isn't a cosmetic flip anymore. If I price the paint before I know the panel's bad, I've built the wrong budget from the start of the project.

 

[MAGGIE] And so if someone skips that step, prices the pretty stuff first and finds the ugly stuff later, that's exactly where the money disappears. Has that actually happened with a borrower you've worked with directly?

 

[NEIL] Constantly. It's the single most common way a first flip goes from profitable to break even. They budgeted the kitchen before they ever budgeted the panel.

 

[MAGGIE] And let's get into real numbers, because I know people listening want the actual dollar figures, not just the process.

 

[NEIL] Numbers vary by crew and by house age, but here's roughly what I'm seeing across the Des Moines metro right now. A light cosmetic refresh, paint, flooring, fixtures, on a house that's structurally sound, runs fifteen to twenty five dollars a square foot.

 

[MAGGIE] And a full gut is a completely different world.

 

[NEIL] Completely different. New mechanicals, new kitchen, new baths, on an older home in a neighborhood like Beaverdale, Drake, or an established pocket of Ankeny, you're looking at forty five to sixty five dollars a square foot once you account for the age of the housing stock.

 

[MAGGIE] And that's a wide range. Why so wide?

 

[NEIL] Because a house built in nineteen ninety five in Waukee and a house built in nineteen forty eight in Beaverdale are not the same rehab, even at the exact same square footage. Use your own crew's real numbers once you have them. Until then, price conservative and let the line item scope drive the offer, not a rule of thumb off the internet.

 

[MAGGIE] And once the scope's built, does the money actually move all at once, or does that change how a rehab budget gets spent day to day?

 

[NEIL] It moves in draws. You don't hand a contractor the whole rehab budget on day one. Money releases in stages as work completes and gets inspected. Mechanicals draw, then structural, then finishes. It keeps the budget honest and keeps the contractor moving in the same order you priced it in.

 

[MAGGIE] And that order lines right back up with what you said earlier, mechanicals first, structural next, finishes last.

 

[NEIL] Same order the whole way through. Pricing, draws, inspection. It's all the same sequence for a reason.

 

[MAGGIE] And does that scope discipline carry all the way to the end of the project too, or does it loosen up once the big items are done?

 

[NEIL] It carries all the way through. Last thing before the house lists is a punch list, walking it room by room again, same way I walked it the first time, checking every line item off against what was actually scoped.

 

[MAGGIE] And that's basically the same walkthrough from the beginning, just running in reverse at the end.

 

[NEIL] Same discipline, both ends of the project. You priced it room by room going in. You confirm it room by room going out.

 

[MAGGIE] And that brings us to contingency, which I know is the part people always want to shortchange.

 

[NEIL] Every budget needs a real contingency line, not an afterthought tacked on at the end. Light cosmetic project, no hidden cost signals, ten percent is usually enough. Older home, any of those red flags from the walkthrough, I move that to fifteen to twenty percent before I ever run the seventy percent rule.

 

[MAGGIE] And walk me through the seventy percent rule with real numbers, because I think people hear the phrase and nod along without ever actually running it themselves.

 

[NEIL] Say you've got a house with a two hundred eighty thousand dollar after repair value. Fifty five thousand dollar rehab budget, contingency already included. The rule says pay no more than seventy percent of that after repair value, minus the rehab. That puts your max purchase price around one hundred forty one thousand dollars.

 

[MAGGIE] And if the rehab number underneath that math is soft, the whole thing falls apart.

 

[NEIL] Right. If your rehab number's soft, your max offer is soft too. That's why the estimate has to come before the offer. Not after you're already emotionally attached to the house.

 

[MAGGIE] And once someone has a real number, a rehab budget they actually trust, how does that get funded? Because knowing the number and having the cash for it are two very different problems.

 

[NEIL] That's where Little Guy Loans comes in. We finance up to ninety percent of the purchase price and up to one hundred percent of rehab costs, with a cap of seventy percent of after repair value controlling the whole loan.

 

[MAGGIE] And that seventy percent cap is what actually governs it, not the purchase price or the rehab number by themselves.

 

[NEIL] Correct. That's exactly why the accuracy of your rehab estimate matters this much before you write the offer. The lender's cap is only as good as your number underneath it.

 

[MAGGIE] And how fast does that side of it move, once someone's got their number and their offer ready to go?

 

[NEIL] We approve in twenty four hours and close in five days once title's clear. No appraisal slowing down the buy side of the deal.

 

[MAGGIE] And that's the whole loop then. Walk it, price it in order, build in the contingency, run the math, then move fast on the funding side so the good number doesn't sit around getting stale while you wait on a lender.

 

[NEIL] That's the loop.

 

[MAGGIE] And speaking of mechanicals turning into the expensive surprise, you've got a story about exactly that. Not from the estimate side this time, but from after the fact.

 

[NEIL] This one's a borrower, not me directly. Guy remodeled a house top to bottom, got it under contract, and the buyer's inspector flagged the electrical panel as a fire hazard. Had to be replaced before closing.

 

[MAGGIE] And that's about the worst possible time to find that out.

 

[NEIL] Worst timing there is. Clock's already running on a signed contract, seller's got limited leverage left to push back on anything, and now you need an electrician fast.

 

[MAGGIE] And what did the bids come back at?

 

[NEIL] He got two bids, both from established electrical contractors. Both came back high enough that absorbing the cost was going to take a real bite out of his margin on the whole deal.

 

[MAGGIE] And that's where you came in.

 

[NEIL] He mentioned it to me. I was an investor a long time before I was a lender, so I've got a bench of contractors built up over years, across every trade. Referred him to an electrician I'd used myself.

 

[MAGGIE] And what did that number come back at?

 

[NEIL] Just over fifty percent less than the lowest of the two bids he already had in hand. Same panel. Same work. Half the cost.

 

[MAGGIE] And the deal closed.

 

[NEIL] Deal closed. That's the whole point of a lender who came up as an investor instead of just underwriting from behind a desk. You're not just getting capital. You're getting a bench.

 

[MAGGIE] And how do you actually decide who makes it onto that bench versus who doesn't? I'd imagine everybody says they do good work.

 

[NEIL] Everybody says that, sure. What actually tells you is watching them on a live job. Do they show up when they say they will. Do they price close to what they quoted, or does it creep once they're already in the house. Do they tell you about a problem the day they find it, or the day before the deadline.

 

[MAGGIE] And that last one sounds like the real test, honestly. Anyone can look fine when nothing goes wrong.

 

[NEIL] That's exactly the test. The good ones call you the moment something's off. The bad ones let it sit until it's your problem and their excuse.

 

[MAGGIE] And that ties right back to what we were just talking about, doesn't it. If mechanicals are the line item that blows up a budget the most, having someone who can get you a real number instead of a panic number matters just as much after the offer as it does before it.

 

[NEIL] Same principle on either end of the deal. Get the real number, not the scared number.

 

[MAGGIE] And for somebody who doesn't have a lender with a bench like that yet, what do they actually do? Most first time flippers don't have that relationship built.

 

[NEIL] Start building it before you need it. Every rehab is a chance to vet a trade. Who showed up on time, who priced fair, who you'd never call again. Write it down. That list is worth more than people realize starting out.

 

[MAGGIE] And that's basically what you did over years, without necessarily setting out to build a business asset out of it.

 

[NEIL] Started as just knowing good people. Turned into one of the more valuable things we hand borrowers now, and it didn't cost me anything to build except time.

 

[MAGGIE] And does that change how you'd tell someone to size their contingency? If you know you can get a fair number on the back end, does that loosen the number on the front end at all?

 

[NEIL] No. Contingency's still there for the surprise itself, not the price of fixing it. A bench gets you a fair price on the fix. It doesn't make the surprise any cheaper to have found in the first place.

 

[MAGGIE] And that's a good distinction. Knowing the right people helps you survive the surprise. It doesn't replace pricing the risk before you ever make the offer in the first place.

 

[MAGGIE] And I want to push on something, because I think a lot of people listening are thinking it right now. What if the contingency eats the whole margin? Fifteen, twenty percent on top of an already tight rehab budget is real money.

 

[NEIL] It is real money. But an unbudgeted surprise costs more than a budgeted contingency, every single time. Price twenty percent and never use it, that's profit you keep. Price zero and the panel's bad, that's profit you lose and a deal that might not even pencil anymore.

 

[MAGGIE] And what if someone genuinely can't find a deal that works once they add a real contingency in? Does that just mean the deal's dead?

 

[NEIL] Sometimes, yes. And that's the contingency doing exactly its job. A deal that only works if nothing goes wrong isn't a deal. It's a bet dressed up as a deal.

 

[MAGGIE] And that's a hard thing to hear when you've already got your eye on a specific house.

 

[NEIL] It is hard to hear. But the investors who last in this business are the ones who can walk away from a house they liked because the math didn't hold up. The ones who chase the house instead of the math don't usually make it to their third flip.

 

[MAGGIE] And here's the other objection I hear a lot from newer investors. What about someone who genuinely doesn't know what mechanicals should cost yet? They haven't got years of crew pricing behind them the way you do.

 

[NEIL] Then price conservative and lean on someone who's done it before. Call your lender before you write the offer, not after you're already under contract. A good hard money lender has seen hundreds of these budgets and can sanity check yours in five minutes.

 

[MAGGIE] And that's a resource most first timers don't even think to use before they're already committed to a deal.

 

[NEIL] Most people only call the lender once they need the money. Call earlier than that. The number you bring us before the offer is the number that keeps you out of trouble after it.

 

[MAGGIE] And if you had to name the one item that surprises Iowa investors most often, more than anything else on that walkthrough list, what would it be?

 

[NEIL] Mechanical and structural, almost every time. An aging furnace, an outdated panel, foundation movement. They're the hardest things to fully assess from a walkthrough alone, and the most expensive to fix once a crew's already on site and the schedule's already moving.

 

[MAGGIE] And that's really the whole reason this episode exists. Knowing how to estimate rehab costs before you offer isn't a nice to have. It's the difference between a deal that pencils and one that quietly eats itself.

 

[NEIL] That's the whole thing in one sentence.

 

[MAGGIE] And that feels like the whole episode in one line, honestly.

 

[NEIL] It kind of is.

 

[MAGGIE] And before we close out, we like to end every episode with a piece of Iowa history. Something most people driving through never think twice about.

 

[NEIL] What have you got for us this week?

 

[MAGGIE] And this one's actually got a strange tie to everything we just talked about. Census day happened for the first time in America on August second, seventeen ninety. Federal marshals rode out on horseback and knocked on doors to count three point nine million people, using six questions total.

 

[NEIL] That's a rough way to collect data.

 

[MAGGIE] And it wasn't just trivia either. That headcount decided how many seats each state got in Congress, and how the tax bill got split up across the country. Every population trend an investor uses today to pick a flip neighborhood traces its roots back to that ride on horseback.

 

[NEIL] Which is exactly why Waukee and Beaverdale aren't priced the same, and never will be. Different growth, different history, different number showing up on the spreadsheet today.

 

[MAGGIE] And two hundred and some years later, we're still doing the same basic thing at the end of the day. Counting people to figure out where the value actually is.

 

[NEIL] Just faster now. And with a lot better data than six questions asked from horseback.

 

[MAGGIE] And that's the episode. If you take one thing from today, walk the house with a notepad before you ever walk it with a calculator.

 

[NEIL] Price mechanicals first. They're the ones that double a budget quiet, before you even notice it happening.

 

[MAGGIE] And build a real contingency in. Ten percent if the house is clean, fifteen to twenty if it's got any of those red flags we talked about.

 

[NEIL] Then let the seventy percent rule tell you what the house is actually worth to you. Not what you wish it was worth.

 

[MAGGIE] And that's Flipping Iowa. 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] Thanks for listening, everybody.

 

[MAGGIE] And see you next time.