All Forum Posts by: Joe Latson

Thanks @David Mo! @Trevor DeSimone happy to help however I can

Thanks @Bruce Woodruff - great comments and additions!

A Scope of Work (SOW) is a description of planned property renovations, with the primary components being a line item budget and a construction schedule. A detailed SOW is important for nearly every type of value-add real estate investment strategy.

Your SOW has many uses:

• as a guide for your contractors; to help keep your project on time and on budget
• to help you and others (e.g. appraisers) estimate After Repair Value (ARV), which can help ensure a smooth closing
• to support successful partnerships with co-investors and lenders
• to standardize your data, so future investments can benefit from your past experiences

Every SOW should do the all important job of holding your general contractor and subcontractors accountable. A detailed Scope of Work allows you to stay efficient – improving your chances of completing construction on schedule and within budget. On the other hand, a lackluster SOW inevitably leads to further problems. If your construction team doesn’t view you as organized, they are likely to be less organized as a result. Similarly, if your financing partners don’t view you as organized, they may be less confident in your ability to execute your business plan.

Having an accurate SOW is a critical ingredient in determining if your target ARV is achievable, or simply a dream; a clear understanding of the property's post-construction condition is a prerequisite to determining its post-construction value. Not only does a SOW help you estimate the ARV – it helps others estimate value too. One important, yet often overlooked, benefit of a detailed SOW is that it can be shared with an appraiser to improve your odds of a favorable appraisal outcome. Why risk an appraiser guessing how you plan to renovate the home, when you can equip them with a SOW that beautifully illustrates your vision? Predicting ARV is hard, especially if an appraiser does not understand which repairs and upgrades you plan to perform.

SOWs have another important duty – setting the table for your financial partners (equity and debt), so they can gain confidence in your vision and ability to execute. Additionally, the SOW enables them to complete their own financial underwriting. After closing, the rehab budget and construction schedule form the basis for future capital infusions by way of construction draws. Most competitively-priced lenders fund rehab costs using a draw process, which often incorporates an inspection confirming that the completed work is part of the agreed on SOW. Without preparing a thoughtful SOW upfront, investors can be left confused when lenders do not approve a draw for work that is not part of the original approved plan. If the lender is unwilling to approve a related change order, it can create a problematic working-capital shortfall risk, which could have been avoided.

An under-utilized benefit of consistently maintaining a detailed SOW for each project is that the dataset you are building can be used to inform future investment decisions. For example, if you have completed three roof replacements that each cost around $10K, you can be confident in your budgeting for the 4th deal. This is true for all line items in your budget, including soft costs such as insurance. Having an informed grasp on your budget reduces risk and is a secret weapon to help you efficiently determine how much you are willing to pay for an asset to achieve your return requirements. Backflip borrowers can easily maintain this dataset with our easy-to-use construction budgeting software.

For all of these reasons and more, having an institutional-quality SOW is something every investor should strive for if they want to maximize their potential. Imagine if a football coach didn’t think ahead and set a game plan? They would lose every game; and likely won’t last a full season as the coach. Why would a real estate investor expect any different? There are a lot of unknowns, variables, and people involved in real estate investing. The organized investor, like the well-planning coach, are the ones who win.

Components of Scope of Work

The more specific and thorough your SOW, the better. Overall, it should include what work is being done, who is responsible, a timeline for the project, and the project’s estimated costs.

Project Overview & Objectives – this is a high level statement describing the goals of the project. For example:

“Our business plan is to reposition the asset as a student housing rental that we will hold for cash flow returns while the overall submarket appreciates. We plan to complete the renovation by the end of June, so we can capitalize on the upcoming leasing season. We plan to implement the value-add strategies below:

• To achieve Class A rents, we will complete a moderate cosmetic renovation with a focus on the kitchen and bathrooms (based on our competitive set research).
• To increase and diversify revenue, we will convert the lower level to an individual unit with a dedicated entrance that can be leased separately.
• To lower ongoing operating expenses, we will install a more efficient HVAC system, and upgrade the building envelope.”

Team/Management – a clear understanding of who holds ultimate accountability for each portion of the SOW is a must-have ingredient for a well-executed project. This should be established up-front, so everyone’s expectations are aligned from the onset.

Project Budget – the construction costs are one of the most important inputs in your returns – they inform how much you can pay for an asset, as well as what you need to sell or rent the property for in order to meet your return requirements. Needless to say, it’s important to be as accurate as possible to minimize surprises and maximize your chances of success.

Project Schedule – the schedule is the guide that helps you ensure things are on track, and the right people are involved at the right time in the project. An accurate schedule helps to avoid surprises. Construction involves heaps of coordination between various parties, so a detailed understanding of when each component should start and finish is critical for a well-executed and efficient project (e.g. – paint can’t be complete until after drywall). Additionally, many budget line items are variable based on time – the longer the project lasts the higher the cost is (e.g. property taxes, insurance, interest expense) – so schedule delays can quickly lead to a busted budget.

• Task List – great project managers don’t attempt to keep everything sorted in their heads; they rely on tools such as tasks lists to stay organized and effective. Before starting a project, it is helpful to understand all of the different things that need to get done, and make sure you are planning from them correctly as far as budgeting, scheduling and manpower allocation.

With the government warning consumers that inflation is on the horizon, many real estate investors are wondering what that means for their business and assets. Inflation refers to the rate of increase in prices over a given period of time, but what impact does it have on real estate?

Real estate is considered to be a “staple good”, which are specific goods that are consumed by people on a regular basis. These types of goods are heavily impacted by inflation and are generally expected to appreciate. This means that during periods of inflation, property assets in your portfolio will simultaneously increase in value. Compare that to something like a car, which is classified as a “convenience good”, which actually depreciates in value over time.

So what can investors do to hedge against inflation and increase their returns?

During times of inflation, investors can think strategically about new properties and properties in their portfolio and their various exit strategies. When inflation is rising, it’s often better to hold on to properties rather than sell them. Refinancing your properties to lock in low interest rates, and maintaining them as rentals will allow you to bring in higher income while the overall value of your assets appreciate with inflation. Then, when the economy begins to rebalance, your properties are worth more than they were before, and you can make a higher profit when you’re ready to sell.

Historically, we’ve seen that while many areas of the economy suffer from inflation-related side effects, investors focused on residential real estate tend to fare quite well during times of inflation. If they know how to utilize their partnerships and financing options to their advantage, they can hedge against the effects of inflation and come out with higher returns and a more profitable portfolio.

With the government warning consumers that inflation is on the horizon, many real estate investors are wondering what that means for their business and assets. Inflation refers to the rate of increase in prices over a given period of time, but what impact does it have on real estate?

Real estate is considered to be a “staple good”, which are specific goods that are consumed by people on a regular basis. These types of goods are heavily impacted by inflation and are generally expected to appreciate. This means that during periods of inflation, property assets in your portfolio will simultaneously increase in value. Compare that to something like a car, which is classified as a “convenience good”, which actually depreciates in value over time.

So what can investors do to hedge against inflation and increase their returns?

During times of inflation, investors can think strategically about new properties and properties in their portfolio and their various exit strategies. When inflation is rising, it’s often better to hold on to properties rather than sell them. Refinancing your properties to lock in low interest rates, and maintaining them as rentals will allow you to bring in higher income while the overall value of your assets appreciate with inflation. Then, when the economy begins to rebalance, your properties are worth more than they were before, and you can make a higher profit when you’re ready to sell.

Historically, we’ve seen that while many areas of the economy suffer from inflation-related side effects, investors focused on residential real estate tend to fare quite well during times of inflation. If they know how to utilize their partnerships and financing options to their advantage, they can hedge against the effects of inflation and come out with higher returns and a more profitable portfolio.

During supply-constrained cycles like the one we’re in currently, being good at sourcing can be one of the most value-accretive, yet challenging, aspects of real estate investing. Not only must investors move quickly to put properties under contract, but they also have to know what property types will lead to favorable risk-adjusted returns. Adding new sourcing strategies to their acquisition process helps investors improve the chances of identifying lucrative opportunities.

The ‘acquisition process’ encompasses all the steps involved in purchasing an investment property – from sourcing, or actually finding the home, to performing due diligence and ultimately closing on the investment. In this article, we focus on several different ways you can execute the first step: sourcing investments.

Aside from more tried-and-true methods, there are a number of channels investors may not realize can be utilized to expand their property search. Incorporating different sourcing strategies should be a priority for investors as it increases the likelihood of uncovering attractive investments.

On-Market Properties for Sale

The most common (and competitive) sourcing method is to analyze properties being marketed for sale – this channel offers easy access to the approximately 1 million homes listed for sale at any given time on the MLS, and reposted on sites like Zillow, and Realtor.com, to name a few.

There are different ways to execute this method based on your objectives. The first is to simply spend time each day scouring the internet looking for properties that meet your criteria. However, this approach could waste a lot of time sifting through properties that aren’t a fit or have already been contracted by other purchasers.

To improve efficiency, you can set filters based on home characteristics, so you are instantaneously notified when a property becomes available that meets your pre-defined criteria. Filters can be set based on buy box characteristics such as square footage, number of bedrooms/bathrooms, or location, so you can spend more time focusing on other sourcing channels.

Using a Buy Side Agent

In addition to utilizing websites to find homes for sale, investors can partner with a Real Estate Agent who can act as a Buy Side Acquisitions Agent. Agents do the searching for you, and only send property listings that fit into your buy box. Another benefit to partnering with an agent is that they can offer expertise and help you work through other steps in the acquisition process – from negotiating prices to closing. This can be especially valuable for investors looking in a market they are not experienced in.

In exchange for their services, agents charge up to a 3% commission. It is common for the commission to be paid by the seller, which doesn’t feel like a cost to the investor. Even though it may not feel like a cost, the extra fees associated with having more people involved in the transaction could make an investor using an agent less competitive than investors not utilizing an agent. Something to consider when determining your investment strategy and whether or not utilizing an agent is right for you.

Other Ways to Acquire Properties

Now that we’ve covered the most common ways to acquire a property, let’s take a look at lesser known methods. Each of these strategies is focused on uncovering off-market opportunities, thereby increasing your universe of prospective investment properties, potentially with properties that are less competitive with other buyers.

Wholesalers

As a real estate investor, partnering with Wholesalers can greatly increase the number of opportunities in your sourcing funnel. A wholesaler’s role is to identify properties that may be good investments, contract them, and subsequently assign the contract (or double-close) to investors. Additionally, similar to an agent, they can assist with closing and other aspects of the transaction.

In exchange for procuring off-market properties, wholesalers charge an assignment fee or otherwise mark up the price of the property above what the owner is selling for. Investors typically conclude the additional cost is worth it considering they wouldn’t have seen the opportunity otherwise. However, in some cases, it can make the investment more difficult to finance if the price being paid by the investor (inclusive of the wholesaler’s fee) is above the market value of the property in its current condition.

You might ask, how does one go about finding prospective wholesale partners to begin with? Well, there are a few ways to go about it, including finding and joining REI Facebook Groups where wholesalers may post properties, attending educational or social meetups which wholesalers likely attend, and networking with other investors. Once you find promising wholesalers, you want to ask them to put you on their email list, which is usually how they distribute investment opportunities to their network.

Foreclosure Auctions

Another effective method for finding investment properties is through Foreclosure Auctions – which exist as part of the lender-owned sale process to help banks and other lenders minimize losses on loans that have gone bad.

Each state conducts real estate auctions differently. For example, Texas operates theirs the first Tuesday of every month at the county courthouse, whereas Florida has daily auctions. It’s worth researching how your state handles foreclosure auctions as it may be a great channel to help you find a good property for a low price.

In the digital age, auctions have moved online as well. Sites like Auction.com offer investors the opportunity to buy foreclosed properties from the comfort of their home.

Purchasing an investment property through an auction introduces risks since you are buying the property As-Is and usually do not have the ability to physically tour the home. Therefore, when buying at auction, it is important that the offer price is sufficiently discounted to account for the increased risk and unforeseen issues with buying properties in unknown conditions.

Direct to Seller Mass Marketing

Another channel to add to your sourcing quiver is Direct to Seller Mass Marketing. This method requires some upfront cash investment and additional work, but it can lead to great deals that may be unique opportunities for you.

To execute direct to seller marketing successfully, you want to start by using a data-driven approach to gathering a curated list of potential seller target contacts. There are tools to help with list gathering, including those offered by one of our partners Remine.com. Once you have your list, you want to try to contact the seller using one or many of several methods (direct mail, email, cold calling, etc.) to inform them you’re interested in making an offer on their property. Not every contact on the list will be interested in selling, nor even reachable, but investors willing to put in the work can uncover some of the best off-market investment opportunities.

IRL Cold Contacting

Otherwise known as “In Real Life” Cold Contacting, this channel is different from the others in that investors physically walk or drive around neighborhoods to search for off-market investment properties. Once a property piques your interest, you’ll do online research to find the owner’s contact information and inquire about the possibility of buying their property. While it can be time-intensive to locate properties that meet your criteria, you are increasing the probability of uncovering an attractive off-market investment with very little, if any, competition.

One approach that we’ve seen investors execute successfully for IRL Cold Contacting is to have others help you with some of the work. If you are unable to spend the time driving around town yourself, you can hire someone to do the legwork for you! Known as “birddogs,” they drive around and note the addresses of properties that meet your criteria.

An old school, yet fruitful, strategy to gauge an owner’s interest in selling is to simply knock on the door. Whereas cold contacting through phone or email often leads to ignored inquiries, speaking to owners directly can increase the chances of forming a relationship, leading to a higher possibility of getting a deal done today or in the future when they are ready to sell.

As you can see, there are several sourcing strategies investors can use to find off-market opportunities.

While all of these channels may not make sense based on your objectives, implementing even one new method can expose you to hundreds of properties you would not have otherwise seen. The more properties you have to choose from, the more likely you are to find one that is a good fit for your portfolio.

Thanks @Joe Villeneuve, I appreciate your feedback and perspective! I agree that things should always be kept as simple as possible. 

A couple of questions, what if you aren't buying based on cash flow? In the context of single family, what if you are flipping and your return is based on an ARV? Isn't an ARV based on then current market conditions as informed by most recent sale comps?

I agree that when you are buying on cash flow, especially for a stabilized asset, the most common return and pricing value metric is a cap rate based on the in-place and current cash flow. However, even when buying for cash flow, your going-in basis is important. 

Hey BP!

I hope some of you find this post helpful.

How do I correctly value an investment property? Simplistically, a valuation is a measure of how much a specific property (the “subject property”) is worth. Framed differently, at what price is an investor willing to buy the property, and the owner willing to sell?

When you peel back the layers, there are really two types of valuations: a “market valuation” and an “internal valuation,” sometimes called a “personal valuation.”

The market valuation is the broader market’s view on what a property is worth. Each property has only one market valuation. There is a formal process for determining this value, typically completed by a third party such as a licensed appraiser or real estate broker not involved in the transaction. Most lenders rely on a third-party valuation to inform loan amounts.

Internal valuations are more nuanced – they incorporate a wide variety of inputs and vary from investor to investor. While market valuations are largely informed by recent comparable transactions, internal valuations reflect what investors are willing to pay based on a number of factors, especially forecasted investment returns.

The significance of valuations depends on what stage a deal is in its investment lifecycle. Are you looking to buy, or considering selling? All buyer profiles – consumers, individual investors, and institutions – rely on some sort of valuation. It is a best practice to establish an internal view of a property’s value before placing an offer.

Can a property’s valuation and price be different?

In a perfect world, with efficient markets and information-parity, valuation and price would be the same. Economists often base predictions in this so-called “perfect world.” However, real world investors know better. There are times when valuations and the price someone is willing to sell differ – sometimes widely. This is especially true in illiquid markets like real estate.

As a buyer, you aim to take advantage of pricing discrepancies when your valuation is higher than the price, a phenomenon known as arbitrage. Conversely, as a seller, you want to maximize price, regardless of your valuation.

Takeaway

The best investors know that valuations should not be driven by emotions or by their perception of a competitor’s or seller’s value. Maintaining discipline can be hard, but is critical to building a durable track record as a strong investor.

A common mistake is discovering one of your assumptions was wrong or that you missed something, and not adjusting your valuation accordingly. For example, if during diligence you discover the roof needs to be replaced, your valuation should immediately adjust to account for the cost. Even if you decide not to replace it during your hold, you should assume that your buyer will include the cost in their valuation, so it will impact you either way.

If your valuation helps you place a winning offer – that’s fantastic; however, if you get beat on a deal, that’s ok. You should feel confident walking away if the valuation you set does not meet the seller’s expectations, or comes up short vs. a competitor’s offer. Instead, use your time and money to find other properties that better fit your strategy and return targets.

Questions or call outs, let me know!

Thanks,
Joe

Hey BP!

I hope some of you find this post helpful.

How do I correctly value an investment property? Simplistically, a valuation is a measure of how much a specific property (the “subject property”) is worth. Framed differently, at what price is an investor willing to buy the property, and the owner willing to sell?

When you peel back the layers, there are really two types of valuations: a “market valuation” and an “internal valuation,” sometimes called a “personal valuation.”

The market valuation is the broader market’s view on what a property is worth. Each property has only one market valuation. There is a formal process for determining this value, typically completed by a third party such as a licensed appraiser or real estate broker not involved in the transaction. Most lenders rely on a third-party valuation to inform loan amounts.

Internal valuations are more nuanced – they incorporate a wide variety of inputs and vary from investor to investor. While market valuations are largely informed by recent comparable transactions, internal valuations reflect what investors are willing to pay based on a number of factors, especially forecasted investment returns.

The significance of valuations depends on what stage a deal is in its investment lifecycle. Are you looking to buy, or considering selling? All buyer profiles – consumers, individual investors, and institutions – rely on some sort of valuation. It is a best practice to establish an internal view of a property’s value before placing an offer.

Can a property’s valuation and price be different?

In a perfect world, with efficient markets and information-parity, valuation and price would be the same. Economists often base predictions in this so-called “perfect world.” However, real world investors know better. There are times when valuations and the price someone is willing to sell differ – sometimes widely. This is especially true in illiquid markets like real estate.

As a buyer, you aim to take advantage of pricing discrepancies when your valuation is higher than the price, a phenomenon known as arbitrage. Conversely, as a seller, you want to maximize price, regardless of your valuation.

Takeaway

The best investors know that valuations should not be driven by emotions or by their perception of a competitor’s or seller’s value. Maintaining discipline can be hard, but is critical to building a durable track record as a strong investor.

A common mistake is discovering one of your assumptions was wrong or that you missed something, and not adjusting your valuation accordingly. For example, if during diligence you discover the roof needs to be replaced, your valuation should immediately adjust to account for the cost. Even if you decide not to replace it during your hold, you should assume that your buyer will include the cost in their valuation, so it will impact you either way.

If your valuation helps you place a winning offer – that’s fantastic; however, if you get beat on a deal, that’s ok. You should feel confident walking away if the valuation you set does not meet the seller’s expectations, or comes up short vs. a competitor’s offer. Instead, use your time and money to find other properties that better fit your strategy and return targets.

Questions or call outs, let me know!

Thanks, 
Joe

Thanks @Jeffrey Donis!