For hard money lenders, the real estate scope of work (SOW) is the most important element of a loan application. It’s the blueprint that will ensure builders and contractors stay on schedule and under budget.
But just as important, an effective SOW shows hard money lenders that you are a worthy investment. This is your chance to prove that the property will have a competitive ARV and that you have the wherewithal to make it happen.
Why is a SOW so important in fix and flip projects?
A professional SOW often includes a spreadsheet, with different sections dedicated to the various portions of your rehab or construction plan. If done correctly, the SOW will outline every single detail of an upcoming project and the materials to be used.
A good scope of work holds your contractors and subcontractors accountable throughout each project. If they see you as an organized and detailed project manager, they are more likely to also remain organized and on task.
To put the benefits into perspective, here’s a list of what investors can expect from taking the time to compile a SOW:
- Accuracy: A complete scope of work details every expected cost with the highest accuracy. This way, investors will know exactly how much each project will cost—including supplies and labor.
- Streamlined bidding: A clear idea of each cost and exactly what needs to be done makes finding a contractor much easier. Once the SOW is complete, investors just need to present it to contractors, who will then bid for the job.
- Minimal risk exposure: The exact margin of error that a proper blueprint provides will help investors work within the budget and minimize risk.
- Maximum profit potential: With a blueprint completed first, investors can fine-tune profit margins in their favor. They’ll be able to work with the right materials and include the best projects. And they can choose a contractor that helps them improve their bottom line.
- Efficiency: A good scope of work will make a job a lot more efficient, as most of the tasks at hand will already be laid out.
Components of a scope of work
The more specific and thorough your SOW, the better. Overall, it should include the work being done, who is responsible, a timeline for the project, and the project’s estimated costs. Here are the essential sections:
Project overview and description
The very first page of an SOW should include a project overview and a description. Together, they should provide a brief explanation of the overall project. Many SOWs describe the project in three specific sections: description, rehab overview, and contractor overview.
Description
The description identifies the property’s general information. A good description details everything about a home, from the year it was built and the size of the property, to any other information you think is relevant.
Rehab overview
The rehab overview is an objective summary of the rehab projects that need to be done—and how you plan do them. Paint a clear picture for the contractor you intend to hire.
Contractor overview
In the final section of the overview, discuss the individual contractors you may need for each project you want to complete. If you have particular licensed individuals in mind, identify them here.
Management team
It is essential to establish a clear understanding of who holds ultimate accountability for each portion of the SOW. This should be done up-front, so everyone’s expectations are aligned from the onset.
List who will be managing the project and their contact information. This will typically be the general contractor and/or contractor team. For contractors, list their licenses and license numbers.
Budget & Costs
This is a detailed breakdown of how much you plan to spend for each project step. Be thorough and specific—go room by room and detail what you plan to work on and how much it will cost.
Needless to say, it’s important to be as accurate as possible to minimize surprises and maximize your chances of success. The more information you put in, the easier it is to stay within your budget.
Each item should be accompanied by a description and materials, leaving no doubt for how contractor should proceed.
Exterior
In this part of the SOW, break down all the work that needs to be completed on the outside of the property and the materials needed to do so, not the least of which should include the following:
| Roof | Pools |
| Rain gutters | Fencing |
| Siding & stucco | Decks |
| Windows | Doors |
| Paint | Lighting |
| Garage | Termite damage |
| Landscaping | Demolition of unwanted fixtures |
Interior
While every house is distinctive—with unique features and needs—there are many interior items common to most homes. They include, but are not limited to:
| Floor plan | Patch walls |
| Condition | Paint |
| Flooring | Doors & hardware |
| Sheetrock & drywall | Molding |
| Demo | Light fixtures |
Kitchen
A focal point for family life and for many unique remodeling challenges, the kitchen warrants its own SOW section. This section is an opportunity to identify shortcomings and turn them into selling points.
| Floor plan | Appliances |
| Countertops | Flooring |
| Cabinets | Backsplash |
| Light fixtures |
Bathroom
Bathrooms are also important selling points, and they should be treated as such. Again, each of the following items should be painstakingly detailed, as to provide the contractor with exactly what to do:
| Shower enclosure | Vanity |
| Shower hardware | Paint |
| Flooring | Light fixtures |
| Toilet | Towel hardware |
Plumbing & Electrical
The individual components of your plumbing and electrical systems are too important to ignore. No scope of work is complete without the following additions:
- Water heater
- Outlets
- Light switches
- Bring wiring up to code
Of course, these items are just the most common. Make sure to list additional items unique to your real estate project.
And if it makes sense to organize the items differently, go ahead. Just make sure the information is presented clearly and intuitively.
Project Schedule
The schedule is the guide that helps ensure things are on track. And it makes sure the right people are involved at the right time in the project.
Explain the order in which different tasks of the construction project will be undertaken and how long each task will take. Remember, rehab projects typically take longer than expected, and things may not go 100% according to plan. So give yourself some wiggle room.
Construction requires a high degree of coordination between various parties. Therefore, a detailed understanding of when each component should start and finish is critical. Also, the overall length of a project can impact items such as property taxes, insurance, and interest expense.
Acceptance
Clearly outline all inspection requirements, testing and validation processes, permits to be obtained, approval process, and borrower sign-offs.
A well-thought-out SOW defines each person’s responsibility, helps avoid unnecessary conflicts, minimizes risks, and improves overall investment returns.
Conclusion
As hard money lenders, we at Black Brook Capital consider the property you plan to renovate—and your ability to renovate it—above other criteria. An effective scope of work will go further than any other item in convincing us that your project is a worthy investment.
As a first step, complete our Preliminary Loan Application.
Contact us today. As your partner, Black Brook Capital will provide expert guidance to turn your vision into reality.
