Today’s REI Classroom Lesson

Kelly McDonald talks to us today about the importance of having a detailed scope of work for your rehab projects. Without the detailed scope of work, it’s going to be more difficult for your appraiser to account for all of the upgrades you’ve done to add value to the property.

REI Classroom Summary

The more detailed the better. In addition, it’s recommended to have blueprints and detailed scopes of work if you’re adding any square footage to the property. Make sure it’s clear what the space is going to be used for.

Listen to this REI Classroom Lesson

Real Estate Investing Classroom Show Transcripts:

Mike:Welcome back to the REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Kelly:Hi, I’m Kelly McDonald. I’m the Vice President of Residential Debt here at RealtyShares, and I’m super excited to talk to you today about the importance of having a detailed scope of work when you’re looking for financing.
Mike:This REI Classroom real estate lesson is sponsored by FlipNerd Investor Coaching, your blueprint to investing success.
Kelly:So when you’re looking for financing, the first and number one thing that you want to be able to do is make sure that you paint a very good picture, not only for your underwriter, but for the appraiser who’s going to go in and value the home for you. The first and number one thing that is going to help you do that is make sure that you have a detailed scope of work outlining exactly what you’re going to do to the home to present it to its final value. Now, we see a lot of these scopes of work come in, and I can tell you that a great scope of work is what separates the newbies in this business from the experts in the business.
And what you’ll normally find is when someone’s first starting out, they go in and they’ll look at it, and they’ll say, “Hey, I’m going to do the kitchen for $5,000, and do the bathroom, $10,000.” But that doesn’t really give an appraiser a really good idea of how is that kitchen going to look when they’re done? How is the bathroom going to really add value? The bathroom already exists. Why is it going to change now that you’ve done this $10,000 of work?
So what we always recommend is to get more detailed on that. So, for example, maybe you say, “Kitchen, $5,000” but you put “$3,500 in new granite countertops” in, $1,000 in new cabinetry, $500 in new fixtures, whatever it might be. But the more detail that you can get on exactly where the money is going, including the labor and time for the demolished portion of it, is going to really help you out in terms of getting that extra bump that you’re looking for in that final number.
The last thing, the next piece of it, rather, is that if you have a contractor as most of our expert investors do, it’s always better to present the contractor version, as it’s going to include a lot more detail as I already mentioned, as well as the numbers are going to probably be fairly more accurate. And that’s going to give the appraiser a lot more confidence as well that these numbers are very much likely to be spent in this property to then turn it out.
You also want to build yourself a contingency budget. A lot of times when we see scopes of work they’re down to the dollar, but then what happens is someone gets in the home, you start removing some of the walls and, oh my goodness, there’s mold. There’s something else that you didn’t know. And, as we know, these are very fast sales that are happening, and once you get in there, you need to have a plan or a backup of how you can spend that money. So that way when you do go for that draw down the line, your lender’s not going to say, “Hey, wait a minute, this isn’t what we talked about you doing.” He’ll be more than happy to go ahead and, you know, give you that draw request.
The last piece I would say is that if you’re adding square footage, make sure that you have detailed plans. Don’t draw it out by hand on the back of a napkin and expect that your appraiser is going to look at that and/or your underwriter and say, “Hey, wow, this is a really great plan we’ve got going here.” The more accurate you can be with exactly what you’re planning to do, if you can submit blueprints or at least something that’s been generated on the computer, the more likely you’re going to see that value go up as well.
And the final, final piece I would say in reference to that, is make sure that you already have permits whenever possible prior to closing on the financing. Permits in some places can take a very long time to go ahead and obtain, and if you haven’t obtained them before getting financing, you’re going to waste a lot of months paying out interest that you don’t need to be.
So if you have further questions or anything else, please don’t hesitate to go ahead and reach out to me. My name’s Kelly McDonald, and it’s [email protected] Thanks so much.
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