Have you ever looked at a Scope of Work before? It’s overwhelming for any real estate investor. Even if they’ve been in the business for years! Price fluctuations, contractor bids, repair schedules, it’s enough to make your head spin. Luckily, there’s a way to ensure all your i’s are dotted and t’s crossed: the Independent Deal Evaluation. Why should fix & flippers get independent deal evaluations? Isn’t the SOW enough?
Independent Deal Evaluations bring on third-party real estate professionals from your area to go over your Scope of Work and ensure you’re getting the best deal possible, are complying with current build codes, and have the most accurate ARV possible.
But you’ve probably never heard of these evaluations before unless you’ve worked with us since we seem to be one of the only hard money lenders that do this service. So let’s talk about why these evaluations are so critical and how you can do them even if you work with someone else besides us. Let’s dive in!
What’s an Independent Deal Evaluation?
Independent Deal Evaluations seem to be unique to us, which blows my mind since there’s so much benefit in it for everyone! During your hard money loan application, one of the things most lenders will request is an itemized Scope of Work (SOW). Your SOW will typically list estimates (again, itemized. Don’t skip that step if you want to be approved!) given to you by professional, licensed contractors and is one of the keystone documents used to calculate the After Repair Value (ARV) of your potential fix & flip.
The Independent Deal Evaluation takes your SOW and has it analyzed by two real estate professionals who are knowledgeable about your area and are independent of both DoHardMoney and you. Since they don’t work directly for you or us, you’re able to have an unbiased review of your SOW and might uncover some places where it can be optimized, potentially saving you thousands of dollars.
Once the evaluation is complete, you’ll have the most thorough and precise ARV that’s based on cold, hard data so you and your lender can determine just how much you need to borrow.
Why Do I Need an Independent Deal Evaluation?
Look, no one ever starts out thinking they’re getting taken advantage of by their contractors. Frankly, we don’t believe you are, either. However, you and your contractors don’t know what you don’t know, you know?
Material prices fluctuate all the time, and your estimates could be based on old pricing info that swings your costs wildly in either direction. The same goes for code enforcement regulations; new building codes get passed all the time to accommodate environmental conditions, health concerns, you name it.
Further, I hate to say this, but sometimes our contractors just don’t know any better, and mistakes get made that cost you more than you bargained for.
Here’s an example that happened to one of our colleagues: Let’s say you have an estimate for a new roof from an experienced roofer for a new roofing layer that will run $10,000. Looking over their assessment, you realize there isn’t any information about how many layers of roofing the contractor found during their initial inspection. Still, you think “they’re experienced, they know what they’re doing.”
But when they start tearing shingles off, they realize the original 50+-year-old cedar shingle roof is still there, and this now needs to be a total tear-off. Your costs have now gone from $10,000 to $15,000, and the price will keep rising thanks to the cost of lumber the longer you wait.
Having two seasoned real estate professionals who know your region look over your SOW ensures that, yes, you’re not getting ripped off, but also that your SOW reflects the most up-to-date numbers, that all your bases are covered, and that your scope covers the current legal requirements for building codes. It’s like having someone double-check your work and ensure there aren’t any typos or flipped numbers and that everything is ship-shape.
A Few Tips for Getting the Right Deal Evaluation for Your Fix & Flip
Even if you don’t use DoHardMoney for your hard money loan, getting independent evaluations can mean the difference between making a decent chunk of profit or losing your shirt so we recommend adding it to your workflow for every deal. Here are a few things to do:
Require Itemized Estimates From Every Contractor
Don’t accept “bathroom renovation” as the project; you want a detailed list of what will be done and with what materials. If you can get product information for the materials, even better. That way, your evaluator(s) can cross-reference the pricing with the manufacturer. Not only will this help your deal evaluation, but it’s going to be a dealbreaker for any hard money lender if you don’t have things laid out.
Just a heads up: there will probably be a slight difference between MSRP and your quoted rate to account for the contractor’s costs and labor, so don’t sweat it if there’s a padding of a few extra bucks. When it starts getting into the hundreds for the price difference, you should start looking elsewhere.
Get At Least Two Quotes
Having multiple estimates from different contractors will not only ensure you’re getting a fair deal but gives you the ability to have a backup contractor who’s already familiar with what needs to be done. That itemized list will also be helpful for your Plan B, so they know what work has been done and what’s left to finish.
Don’t Rely Solely on Your Real Estate Agent.
Many of our customers work with an agent in their area to help find properties. They collect their money when you buy the property. You collect your money when you flip the property to another buyer. This can be a great option, but remember that your agent’s motivation does not align with yours.
The agent is going to frequently give you a best-case scenario. This can be dangerous and often puts your lender in an awkward situation where they tell you one thing while your agent insists the values are higher.
From an entirely objective standpoint, who’s value would you trust? Two 3rd party individuals who are paid to establish an accurate after repair value (paid regardless of whether the deal is good or bad) or someone whose motivation is to get you to buy the property on which they’ll earn a commission.
Again, I’m not saying your real estate agent is out to rip you off; I’m sure they’re a great and upstanding person to work with. But bringing in independent evaluators just makes sure everything is on the straight and narrow.
You know how many plates you’ve got to keep spinning in the air when you’re an entrepreneur. It gets overwhelming quickly, and you can miss some key insights that could save you thousands. Luckily, services like Independent Deal Evaluations ensure you’re never left wondering what you might’ve missed or if you’re getting taken for a ride. We include Independent Deal Evaluations to all of our clients, but if you decide to use another lender, consider having your own deal evaluations done and use this guide to help set milestones.