You could be a great networker with the ability to spot amazing real estate discounts. Still, without solid project management talents, you are bound to blow much of your possible earnings. Many rehabbers c struggle to maintain control over their renovation process. However, you can avoid many issues by developing a roadmap for your renovation project early on. Such a roadmap is called a statement of work or SOW. A well-written scope of work is the bedrock of your success as a real estate investor.
Scope of work (SOW) is a document utilized in building and construction management to detail the task to be carried out at the site. Typically, it includes a list of everything that needs to be done with the corresponding costs, duties of the parties involved, and a timeline of the deliverables. The scope of work is composed by a customer paying for the construction or a contractor accountable for it. Frequently, it’s a collaboration between them.
There are numerous factors why you ought to invest time and effort in creating a comprehensive and transparent scope of work.
If you are financing your project with a private lender, the scope of work might be a requirement.
Many real estate investors finance their rehabs via private loans. Private loans are issued by private lenders, a subset of mortgage companies that work exclusively with investors. Unlike traditional lenders, private lenders provide their borrowers with incredible leverage by basing their loans on the after-repair value (ARV) of the properties and not on their existing price tags. The ARV is determined by an appraiser who compares your property – even though it’s currently distressed – to homes with the same level of renovations as in your statement of work. For instance, if you’re planning to finish the basement, the appraiser will compare it to other recently sold homes with finished basements.
A well-written scope of work can be a factor in getting you approved for a private loan.
Though private lenders must have your scope of work to determine the ARV, how well it’s written may affect their final underwriting decision. The scope of work is an exceptional forecaster of real estate investor’s expertise. A sloppy, too general SOW is often an indicator of low attention to detail, the inexperience of managing contractors, and general lack of pride in one’s own work. “A poorly written SOW by itself is unlikely to disqualify you for a private loan, – says Kyle Sennott, the Managing Partner of New Funding Resources, a private lender serving Washington, DC, and surrounding areas. “However, in combination with other negative factors, it can definitely sway your lender’s decision.”
Working together on the scope of work can give you a preview of working with your contractor down the line.
Working on the SOW with your contractor might provide you with a good feeling of their work style, attention to detail, and general responsiveness. Contractors thrive on ambiguity, but it’s your role to make your scope of work transparent. If your contractor resists broadening certain areas, frowns on adding details, or takes too long to provide requested information, is he the right choice for your project? It might be better to cut your losses early on than to struggle with him to months once you start on your rehab in earnest.
Well-crafted scope of work helps stay clear of problems with your contractor and your private lender.
The more time you place in creating your scope of work, the fewer concerns you will have down the line. One of the key documents based upon the scope of work is a draw schedule. A draw schedule identifies how the construction funds are to be dispersed to your contractor. When you work with a private lender, a draw schedule also has another purpose. Typically, private lenders hold your construction budget in escrow. A draw schedule defines what you need to accomplish to get the next draw. A logical draw schedule based on the well-crafted scope of work helps avoid conflicts and misunderstandings. Without delays created by a back-and-forth between your lender or your contractor, your project will move along with no delays.