Key Takeaways
- Three-scenario estimation with probability weighting for uncertain properties.
- Expected value for offers, worst case for contingency.
- Auction properties warrant 25-30% contingency.
- Never assume good exterior means good interior.
Strategies for limited-access and high-uncertainty properties.
Limited-Access Strategies
Use exterior observation, property records, and comparable analysis. Three scenarios: Best (cosmetic), Base (moderate), Worst (heavy).
Probability-Weighted Estimation
Expected Cost = Σ(Probability × Scenario Cost). Use expected value for offer, worst case for contingency.
Auction Estimation
Apply worst-case parametric estimate with 25-30% contingency. Set max bid at worst-case all-in cost producing minimum returns.
Watch Out For
Using base-case without worst-case contingency
Budget shortfall when hidden conditions appear
Fix: Expected value for offer, worst case for reserves
Auction bidding on best-case estimates
Overpaying when conditions are worse
Fix: Max bid based on worst-case achieving minimum returns
Equating exterior and interior condition
Neglected MEP behind cosmetic exterior
Fix: Weight interior toward base/worst regardless of exterior
Key Takeaways
- ✓Three-scenario estimation with probability weighting for uncertain properties.
- ✓Expected value for offers, worst case for contingency.
- ✓Auction properties warrant 25-30% contingency.
- ✓Never assume good exterior means good interior.
Sources
- RSMeans/Gordian Residential Cost Data(2025-01-15)
- NAHB Construction Cost Survey(2025-01-15)
Common Mistakes to Avoid
Using base-case without worst-case contingency
Consequence: Budget shortfall when hidden conditions appear
Correction: Expected value for offer, worst case for reserves
Auction bidding on best-case estimates
Consequence: Overpaying when conditions are worse
Correction: Max bid based on worst-case achieving minimum returns
Equating exterior and interior condition
Consequence: Neglected MEP behind cosmetic exterior
Correction: Weight interior toward base/worst regardless of exterior
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Test Your Knowledge
1.What method addresses uncertainty in property condition estimates?
2.What contingency is appropriate for auction properties with limited access?