Real Estate Expenses: The 3 Most Common Misses

The three expenses most commonly missed in projections are (#1) Cleaning, Staging, Punch-out, (#2) Entitlement Costs, and (#3) Extension Fees.

#1 Cleaning, Staging, Punch-out

Pretty standard here. Most people literally just do not account for these three line items. These are all things that happen after construction is complete. It's so enticing to just put that hard construction number and forget about it, but let's break these down.

Cleaning

After construction, you're going to need a deep deep clean on quite literally every surface. It's a big mistake to skimp on this. First impressions matter when you're selling/renting. You know that the buyer can ask you to clean that dust off all of the surfaces. They even know it. But, they don't think about it! They remember you as the dirty house and that small detail adds to the stack of evidence that you cut corners (and what else did you cut corners on?). We also bring the cleaners back a few days before closing to make sure the buyers walk into their new home with the best impression possible. Estimated average cost - $1,000

Staging

This one is such a stupid miss. Have a plan when you buy your investment -- if you're going to sell it then assume you're going to stage it. If you're going to stage it then account for that in your budget . . . Estimated average cost - $5,000

Punch-Out

Evveerrybody has a list of inspection items. The better your initial construction was, the smaller the punch-out list. We've gotten to the point where we barely have a punch-out list, but we still usually have one. It normally only costs us a few hundred, but I've seen some as high as $10,000. Estimated average cost - $1,500

The amount of expenses that you'll miss by not including these estimates in your initial analysis will vary, but we'll estimate these as a missed expense of $7,500.

#2 Entitlement Costs

This is one that will vary with every deal. We've spent close to $100,000 on some of our deals just to get them shovel ready! There are plenty of developers who are working on bigger deals who spend multiple hundreds of thousands or even millions, just to get the land ready to build. We actually just drew up a cost estimate for a friend who's starting a 3 unit mixed use corner development so I'll use real costs from that estimate. Everybody knows about Architecture, Structural engineering & MEP plans, so let's assume that you planned for $10k in arch and $5k in both structural and MEP ($20k total), then let's look at everything that you'll miss.

Geotech testing: $2,000
Phase1/2/asbestos: $2,000
Survey: $1,000
Streets Checklist: $1,500
PWD Utility Plan: $1,000
Special Inspection Fees: $4,000
Permit Expeditor: $5,000 (optional but highly encouraged)
Continency: $3,500 (optional but highly encouraged)
Permit Fees & Developer Impact Tax: $7,000

These are all very preliminary estimates, but based on past projects. In this example, we estimate our missed expenses to be $27,000 (yikes).

#3 Extension Fees

I can already hear the grumbling -- I won't pay extension fees if I'm out of the project in time! True, and I hope that you will be! I always hope that I will be for that matter. However, there are a lot of things outside of your control as a developer and to be blunt about it there has been a lot more resistance added to the path in the past 18 months. I've seen too many 12 month timeline estimates for really complex projects lately. We're in an incredible volatile environment, so to hope that you'll be out of a project within a year is all fine and dandy, but you should be prepared for that not to be the case.

Let's look at everything that comes with an extension fee if you don't hit that 1 year timeline. And to really drive home the point, let's estimate the costs of these extension fees on a project that costs $500k to build and a 7 month delay.

Taxes: $2,000
Insurance: $4,000 (more if there's a minimum earned premium)
Debt Interest: $26,250 (assuming 9% apy)
Debt Extension: $7,500 (1/2 point for the first 6 mo & additional 1/4 point for the next 3)
Staging: $500

This is assuming that the equity in the deal is your own cash with no interest obligation. This analysis doesn't include the opportunity cost of that cash earning for you in another investment. This is also assuming a bank loan at current rates and not hard money. In this example, we estimate our missed expenses to be $40,000.

In total, our missed expenses are estimated at a staggering $74,500.

These are all such common misses, I see it happen all the time. 7 months is not a huge delay and I was fair for each estimate -- not conservative, nor aggressive. This also doesn't include any potential construction mistakes, unforeseen city interference or market shifts causing lower outsales/rents than expected -- each of these examples being extremely common in this business. All of this is to say: be careful out there and if you're new to this business make sure to add someone to your team who is not!
 

Health and Wealth!