House #36: Budget Recap

December 14, 2012 · 8 comments

The WI-1 House house been on the market for about a week now. We’ve had a few great showings and hopefully we’ll get an offer before the weather gets too bad up in Wisconsin.

This project was crazy in many respects, the biggest of which was probably the budget. We originally budgeted $95K for the major remodel (we actually originally budgeted $75K, but that was before we decided to do some major floor plan reconfiguration), and after all was said and done, we ended up spending more than $120K for the rehab. Below is the breakdown of where the money went, and below that I’ll discuss why we were so far over budget and what we’ve learned from it:

Total Final Budget

So, how did we end up more than $25K over budget? Here’s where the extra money went:

  • About $6000 went directly into “surprises.” This included the structural issues we didn’t expect and unknown work items like capping the existing well, radon remediation, fireplace repair, etc. The structural issues were truly a surprise (we didn’t realize the extent of the work until we tore down the old sheetrock and faux brick) and the other surprises were related to working on new types of houses in new locations.
  • About $1750 went towards unexpected permit and design costs. This is the first project where we needed architectural drawings for the entire house, and that expense was more than I had expected; additionally, permits in this jurisdiction and their requirement that we get a survey before releasing permits was a surprise to us.
  • We spent about $1200 more in dumpsters than I had expected. All-in-all, we used 7 dumpsters on this project (200 cubic feet of dumpster space), which was more than double what I expected.
  • Carpentry came in at about $5600 more than expected. My carpenters were much more expensive than I had planned on, but they did a great job of managing the project when I wasn’t there, so I kept them on the job and gave them lots of work that I otherwise wouldn’t have paid so much more. Ultimately, they did a great job and were instrumental in making this project a success, but the extra cost was significant. To be fair, we also had more carpentry/trim work than I had expected at the outset of the project.
  • We had mechanical overages of about $3000. This includes electrical, plumbing and HVAC overages. On the electrical side, we installed a lot more can lights than we had expected, and my electrician did a lot more work than either of us expected. Likewise, with the plumbing, where the design of the house required some intricate plumbing work and some creative solutions for placing the new lines/drains. Not to mention the surprise water heater replacement on the day we listed the house. With the HVAC, there were several issues/overages that I believe were the problem of the HVAC guy, but since he had pulled all the general construction permits for the job (he’s a GC as well), I didn’t want to get into an argument with him and just paid the overages to keep the job moving.
  • Flooring was about $3000 more than expected. This was mostly due to our last-minute decision to go with the more expensive hardwood throughout the main level, but also due to the fact that carpet was more expensive than I was accustomed to.
  • Granite overages costs us an extra $1000. I never would have expected granite to be so much more expensive up there than in Atlanta, but the cheapest supplier we could find was still 50% more than what we’re accustomed to paying. Ultimately, the cheapest supplier was someone who did fantastic work, so at least we got a good contractor out of it. But, this was just a case of “some things are more expensive in some place.”
  • We spent an extra $900 on appliances. We weren’t planning to put in a fridge, but our agent suggested that it would be necessary in this area and this level of house, so we did.
  • I spent about $1500 more on landscaping than I had budgeted for. This was another case of things just being more expensive up there than down here. The day of heavy equipment work cost $1000 more than I was expecting, and the first couple bids I received were actually thousands of dollars more than that. Then, at the end of the project, we realized that the lack of walkway from the driveway to the front porch was a major aesthetic issue, so we spent another $500 to put in a nice stone walkway.
  • Lastly, I hadn’t considered that my contractors would want to get paid in a timely matter, even when I wasn’t in the state. So, there were about $250 in postage costs to overnight and expedite checks to contractors.

So, what are the learnings here and how can I use this information to improve my estimation on future Milwaukee projects? Here are the four major things that contributed to our being over budget on this project and the takeaways that I will use to improve in the future:

  1. Older houses will have more surprises than newer houses. This was the oldest house we’ve worked on so far, and the surprise issues that came up likely wouldn’t have been so surprising to someone who had more experience with older houses. In the future, I need to budget more for surprises in older houses and, in general, just be more conservative.
  2. Houses in other areas will have rehab items/costs that I’m not accustomed to seeing. We didn’t know about capping wells, radon issues, major fireplace masonry work, etc. It’s not that these are rare issues that don’t come up often (for other investors), it’s that we don’t generally have these issues in the areas where I rehab and the types of properties I rehab. When rehabbing in a new area, I need to do a better job of investigating the types of renovation issues I’m going to run into that I’m not accustomed to seeing.
  3. Prices in different areas are different. All the labor costs in Milwaukee were about 10-20% higher than what I’m accustomed to. I should have expected prices to be higher, but I guess there was some wishful thinking going on in my head. In the future, I’ll investigate and account for the regional prices differences of labor and materials.
  4. It costs money to keep a project moving when you’re not on-site to resolve issues more cost effectively. This was a biggie. There were several situations where, if I had been on site, it would have been cheap and easy to resolve a problem that came up. But, given that I wasn’t on site, I ended up throwing money at the problem to make it go away and keep the project from falling behind. A good example was the day the project went on the market — we got a message from an agent saying there was “a considerable amount” of water on the basement floor leaking from the water heater. My plumber had just finished replacing the water heater, so I assumed he made a mistake and it was leaking. It was late on a Friday night, but I called the plumber and had him rush over to the house to fix the problem. Ultimately, there was no problem — the agent likely saw some residual water on the floor from when the water heater was replaced earlier in the day, and that water had already evaporated. The plumber wasn’t happy about the late Friday night service call, and I got charged $100. Had I been around, I would have gone to the house myself and saved $100. That’s the cost of doing business long-distance and I need to factor those costs into the project.

8 responses to “House #36: Budget Recap”

  1. Jingle says:

    Why have you decided to enter the Milwaukee market when you are so far away? Just curious….

  2. J Scott says:

    Hey Jingle –

    Several reasons:

    1. It’s been getting more and more difficult to find great deals in our own area, so this gave us an opportunity to keep busy;

    2. We wanted to partner with another investor from another state (Phoenix, Arizona) and decided to find a “neutral” location that was about equal travel time for each of us;

    3. We are considering moving to a new state in the next couple years, and this gave us the opportunity to learn about investing in new areas, get some experience building a new team and gives us the opportunity to figure out if we can move someplace where flipping wouldn’t be very lucrative (if we could still flip long-distance in places where it was).

  3. Luis says:

    Lots of lessons learned for sure….

    Don’t mean to get all in your business but here are a couple of things I am curious about:
    – Why is there both a GC fee and a Project Management fee? I assume it was different people so why not one?
    – Where are the travel costs for all of those trips/lodging between Atlanta and WI?
    – Aren’t you doing this with a partner? What was your responsibility what was his?

    P.S. – I don’t know if it’s my browser or settings but the spreadsheet is getting cut on the right side.

  4. J Scott says:

    Hey Luis –

    Answers to your questions:

    1. The GC just pulled the permits, he wasn’t involved in the project. The project manager dealt with the day-to-day project management.
    2. Travel costs are itemized separately, as they are handled differently from an accounting perspective. Travel costs are “expensed” whereas rehab costs are considered cost of goods sold (COGS). Travel costs are amortized over multiple projects, not assigned to a single project.
    3. My partner just finished writing a book on investing, and his publisher beat him up to finish it over the past few weeks :). In addition, he got his real estate license in Wisconsin, so he has been focused on the non-rehab tasks (finding more deals, identifying agents to work with, learning areas, etc).

    Thanks for letting me know about the spreadsheet!

  5. Mark in Fl says:

    As always, thanks for sharing the good and the bad.

    The place looks great and we’re all smarter.

  6. simba says:

    Jason, why the heck didn’t you just text me about the water leak… I would have checked it out for you… Also, if you guys get a chance to tour my hood here I will show you some flips/rehabs we have going… Another thing I like to do is have the painter paint the basement utility room walls (something like macadamia) and the floor like (a nice light/light grey)…

    Sometimes we even build a simple 2×8 bench/table in the room, tile it for about 16 dollars and it makes for a nice table to fold the laundry etc… More bling the better…



  7. J Scott says:

    Simba –

    Thanks for the offer, and next time we run into an issue like this, I’ll definitely give you a call!

    Great idea on the basement. We’re definitely going to pull down the old paneling and spray the walls/floors. Normally, we’d do a white spray, but I really like the idea of going beige like we’d be doing if we finished the space. Maybe buyers won’t even notice that the room isn’t finished! 🙂

    There’s already a big bench/table in the laundry area…hopefully that will be a selling point…

    I’ll be back in town in a couple weeks, and would love a tour!

  8. michel brisebois says:

    hi im from kemptville Canada [Near Ottawa]
    I have been flipping houses for 6 years. my partner and I are doing our 14 th house
    right now. Reading your stuff and really appreciate you telling it as it is. its tough.
    We have a good team, a real good realtor and real good trades.

    i wish you success and good health

    fyi your articles are real good

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