As a real estate investor, you might be a great networker skilled in discovering incredible deals. Still, without strong project management competencies, your potential profits are likely to be reduced. As a hard money lender, we often see our borrowers struggling to maintain control over their renovation process. The truth is that by developing a roadmap for your rehab project, you can stay clear of many potential issues. Such a roadmap is called a statement of work (SOW). A well-written statement of work is the foundation of your fix-and-flip success.
Statement of Work (SOW) is a document used in construction management to detail the work to be performed. It includes the tasks to be accomplished, their costs, and the timeline in which they need to be delivered. Generally, the scope of work is written by either a client financing the renovation or a contractor accountable for the job. Commonly, it’s a collaboration between them.
There are numerous reasons why you should invest time in writing a succinct statement of work.
Are you financing your project with a hard money loan? If so, the statement of work is typically required.
Hard money lenders are a subset of mortgage lenders that specialize in financing dilapidated properties. There are several advantages of using hard money loans. The amount of leverage they provide you in one of them. Hard money lenders base their financing on the after-repair value (ARV) of the property and not on its current price. They need to know what you are planning to do to a property to properly estimate its ARV. Your statement of work needs provides them with that information.
A well-written scope of work can sway hard money lender’s decision whether to approve you for a loan or not.
When it comes to working with hard money lenders, the statement of work is not just a requirement. In some situations, it may end up being a crucial aspect of whether you receive hard money financing. Every so often, hard money lenders encounter candidates who are right on the borderline of their risk tolerance. How do you make a decision whom to pre-approve without relying too much on your gut feeling? The quality of the statement of work is a superb predictor of the applicant’s basic competency as a real estate investor.
We’ve recently worked with a man who inherited a free and clear property from his deceased uncle. The house needed significant renovations. On the positive side, it was located in the respectable area of Frederick County and had no liens or mortgages. The drawbacks were that the applicant had no savings, poor credit rating, no stable work or construction experience. Even more troubling, he preferred to delegate all interactions with us to his contractor. When we asked to see the statement of work, both his and his contractor dropped off the face of the planet for a month. They finally popped up with the most basic statement of work we’ve seen and the renovation budget 20K over we’d discussed originally. To this day, I doubt that our applicant had taken a single look at the SOW or noticed the budget increase. As you could guess, we did not feel secure funding such a transaction.
Collaborating on the statement of work might help you select the right contractor for your job.
Working on the scope of work with a contractor may give you’re an introduction to his work style, attention to detail, and overall responsiveness. The majority of contractors thrive on ambiguity. In contrast, it’s in your interest to have as much transparency as possible. If your contractor takes too long to respond, if he frowns on your request to add more details, how would you manage him down the line when your rehab process starts in earnest?
Well-crafted scope of work keeps peace and harmony with all parties involved.
The statement of work is the foundation of your success for at least one major reason – your draw schedule would be based on it. A draw schedule is a document that indicates under which conditions your contractor gets paid. Likewise, if you are using hard money, a draw schedule specifies when and how much money your lender releases back to you. Generally, hard money lenders keep your construction funds in escrow and dispense them back to you as you finish various stages of your construction. A draw schedule based upon the well-crafted scope of work helps prevent misunderstandings, conflicts, and delays.
New Funding Resources is the top hard money lender in Washington, DC, Maryland, and Virginia. In business since 2006, New Funding Resources has helped hundreds of local real estate investors make money by fixing and flipping homes.