We’ve been focusing on house flipping as an investment strategy for self-directed IRA and 401(k) plans of late. The current economic and demographic factors in many parts of the country continue to provide great flipping opportunities. For this article, we wanted to take a deeper dive into one of the most critical tools for success in this type of investing – the Scope of Work.
What Is the Scope of Work?
The Scope of Work is just what it sounds like, a document that outlines what work will be done during the remodeling or upgrade of a property. But really, the role it serves covers much, much more than that. Without a good scope of work, you risk miscommunication that can result in delays, cost overruns, or even litigation. With a good scope of work, you can get your flip project completed on time and on budget, and generate good relations with your contracting resources so they will be ready to do great work for you on your next IRA flip house, and the flip after that…
A scope of work can take many forms, and different investors or different projects may require more or less detail, but the basic purpose of the document is to outline what work needs to be done, who will be doing it, and when it needs to be done. The scope of work is essentially your project plan.
The better you get at creating a scope of work suitable to each project your self-directed IRA is working on, the easier and more profitable those projects will become.
A Cost Estimating Tool
The earlier in your project cycle you can put the scope or work in play, the better. As you are evaluating a property for purchase, you should start working on at least the framework of your plan so that you can put rough numbers on the overall rehab costs you expect. Depending on how much experience you have and whether you have a contractor you are familiar with or not, the level of detail at this stage can vary greatly.
A seasoned investor with knowledge of project costs might be able to get away with a very simple outline such as:
- Paint throughout
- New carpet in 3 bedrooms and den
- Refinish hardwood floors in kitchen, dining, and living rooms
- Light bathroom updates, paint, fixtures & vinyl floors
- Full kitchen upgrade; cabinets, fixtures & countertops
An investor with fewer projects on their resume, or who may be needing to get bids from contractors on the project might go into much more detail. For example:
- Painter: Ceiling White, Walls Mocha. Trim Cream. Paint supplied by customer.
Prep and patch required.
- Electrical: 2 new Ceiling Fixtures, replace switches & outlets (customer supplied materials).
- Flooring: Refinish hardwood floors.
If you cost jobs yourself, a thorough scope of work will ensure you don’t miss anything. If you are hiring contractors, being able to present the same scope of work to several bidders will ensure that you the estimates you get are comparable and fully address your expectations.
A Project Plan
The main focus of the scope of work is making sure that your self-directed IRA flip project is completed as quickly as possible so the home can be offered for sale. The faster you can turn properties around, the more profitable your projects will be, as you will minimize holding costs such as taxes and insurance, and can turn your capital over more quickly.
By clearly outlining not only what needs to be done, but also who needs to address each component of the project, you can develop a clear timeline and progression. You don’t want to have the carpet installed before you paint, for example. And, being able to book your carpet install a week or more in advance, as the other components of the project start coming together, will help minimize dead time. If you did not have a clear plan, and waited to call the flooring contractor a few days ahead of time once you see prior steps completed, you might find they are booked out for 2 weeks. Your project would stall out.
At this stage, even a seasoned investor will want to get more detail into the plan. Some people prefer to create a plan by room, others prefer to look at the project by type of work (painting, electrical, etc.). Either way works, but the goal is to make sure you have the right contractors executing the right steps, in the right order, while minimizing idle time.
Of course, no project ever goes exactly as planned, but it certainly is a lot easier to put minor adjustments on a well-crafted plan than to try and sort out the down-timeline repercussions of a delay in one area when you are just winging it. With a good plan in place, if a delay happens, you can easily see that you will need to call the tile installer you have scheduled for Thursday and plan to have him come next Monday instead, for example.
Expectation vs. Reality
The words “paint this room” can mean very different things to different people. You might have been thinking white ceilings, latte walls and cream trim. Without those details, you might find that the painter thought that getting a fresh coat of latte on the walls and ceiling would do the trick. By having a clear project plan, you can eliminate unexpected surprises and potential conflicts with your contractors. As you work with the same contractors over time, the level of detail required may decrease, but it may not. When work does not meet your expectations, you end up with tension, delay, cost overruns and a whole lot of unnecessary drama. That may be what some folks like to watch on late night TV reality shows, but it is not a recipe for a successful flip. Having a scope of work that clearly outlines the work to be done eliminates any he-said, she-said moments. It is all there in writing.
Building a Successful Team
Because a good scope of work helps get everyone on the same page, and reduces the potential for unexpected delays or cost overruns, it can be part of helping you build a top-notch flipping team. Contractors would much rather work on a project where they know what they need to do, can bid a fair price, and can predict their work schedule with some degree of accuracy. If you put together project plans that make their job easier, they will want to work for you. Then, when you end up on a new project and find you have an unexpected need for, say, a plumber. That plumber will be more likely to shift their schedule around to accommodate your needs than those of a client who may not be as easy to work with.
Good relationships can also help you reduce costs. Many contractors include a contingency cost for the unexpected, as it is so commonly part of their projects. If your contractors see that you know what you are doing and they can execute their role more easily, they should be able to pass on that savings to you while still making a fair profit for themselves.
Plan for Success
Like so many key components of a successful investing strategy, the scope of work is a well thought out road map. When you plan well, consider pitfalls and potential contingencies, and communicate well with your team, you are much more likely to achieve your goals. This is true when evaluating potential investments and when executing any specific investment strategy. When it comes to flipping houses with IRA or Solo 401(k) funds, a good scope of work can be the difference between a slam-dunk profitable job and a time-wasting, money loser of a project.