When it comes to funding real estate deals, the numbers investors provide don’t always tell the whole story. Lenders—especially those funding fix-and-flips, BRRRRs, or value-add projects—must look beyond the surface to spot hidden costs that could jeopardize returns.
Here’s what every real estate lender should be watching for:
1. Underestimated Rehab Costs
Many investors underestimate renovation budgets—either from optimism or lack of experience. Watch for:
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Missing line items (permits, demo, utilities, etc.)
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Unrealistic contractor quotes
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No contingency buffer (should be at least 10–20%)
A detailed scope of work with itemized costs from a licensed contractor can help verify numbers.
2. Holding Costs That Add Up
Every extra month a property sits unsold or unrented can eat into profits. Common holding costs include:
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Loan interest
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Property taxes
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Utilities
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Insurance
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Maintenance and security
Always ask for the borrower’s estimated timeline—and add a few weeks. Then assess whether their budget covers the carry.
3. Inflated ARV (After Repair Value)
An overestimated ARV can derail the whole deal. If comps are cherry-picked or outdated, the borrower may be banking on value that isn’t there.
Cross-reference their comps with your own:
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Stick to sold properties within 0.5 miles
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Same bed/bath count, similar square footage
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Sold within the last 3–6 months
If the ARV is inflated, so is your risk.
4. Unaccounted-for Closing Costs
These often include:
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Transfer taxes
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Title insurance
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Attorney fees
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Escrow or recording fees
If the investor doesn’t budget for these, they may come up short at close or refinance.
5. Appraisal Surprises
A low appraisal can force investors to bring more money to the table—or sink the refinance entirely. Appraisals can vary based on market conditions, appraiser experience, or property features.
Ask if the borrower has experience contesting appraisals or working with appraiser-friendly lenders.
6. Permit Delays and Inspection Fees
Delays from permitting or failed inspections can stall progress and increase holding costs. If the borrower’s contractor isn’t licensed—or unfamiliar with local code—expect trouble.
Tip: Ask about prior projects completed in the same municipality.
7. Vacancy and Lease-Up Time
For BRRRR or rental-focused deals, the post-rehab phase is critical. Is there demand in the area? Does the investor have a leasing plan in place?
Assume at least 1–2 months of vacancy unless they have a signed lease at close.
Bottom Line:
Lending on real estate isn’t just about LTV and credit scores. The most successful lenders assess the full picture—including the hidden costs investors often overlook. By identifying red flags early, you protect your capital, build better borrower relationships, and ultimately fund deals that win.
