Ep 7: The Four Words That Keep Your Iowa Rehab Honest

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Episode Title: The Four Words That Keep Your Iowa Rehab Honest

 

[NEIL] Eleven thousand dollars. That's what one of my borrowers was about to pay to paint a house.

[MAGGIE] To paint it. Not build it, not remodel it. Paint it.

[NEIL] Paint it. Interior, exterior, the whole thing. And when he finally went and got three more bids, every single one came back at six thousand or less.

[MAGGIE] So where did the other five grand go?

[NEIL] That is exactly what we're digging into today.

 

[MAGGIE] Welcome back to Flipping Iowa. I'm Maggie Monroe, and I was elbow deep in rehab budgets for the blog this week, and one theme kept showing up in every conversation.

[NEIL] Let me guess. Somebody's contractor surprised them.

[MAGGIE] Every time. Sitting across from me, as always, is Neil Timmins, who has apparently spent years arguing with contractors over pieces of paper nobody bothered to write clearly.

[NEIL] Guilty. And it's not really about the contractor most of the time. It's about what we handed them to bid on in the first place.

[MAGGIE] That's the scope of work.

[NEIL] That's the scope of work. And today we're talking about why a bad one, or a missing one, is one of the fastest ways to lose your margin on an Iowa flip.

[MAGGIE] Before we get into the eleven thousand dollar paint job, I want to know what you mean by scope of work, because I think a lot of people hear that and picture something pretty loose.

[NEIL] It's not loose. It's not a punch list. It's not you and a contractor walking through a house and shaking hands. A real scope of work is a document. Every task, every material, every finish level, and who's responsible for it, all written down before anybody touches a wall.

[MAGGIE] So it's the thing the contractor prices against.

[NEIL] That's the whole point of it. You sign it, they sign it, and then it becomes the reference point for the entire job.

 

[MAGGIE] Okay, so walk me through why this matters so much. Most of the flips I hear about don't fail on the purchase, right? You've said that before.

[NEIL] Almost never. I watch flips go sideways constantly, and it's almost never the purchase price. It's somewhere between the sledgehammer and the final walkthrough.

[MAGGIE] Because nobody wrote down what the contractor was actually supposed to do.

[NEIL] Right. And here's the trap. Without a scope, you're negotiating change orders after demo day. Your leverage is gone at that point. The walls are already open, the contractor knows you're stuck, and now you're negotiating from your knees.

[MAGGIE] So the scope of work isn't paperwork for paperwork's sake. It's you protecting your own negotiating position before you need it.

[NEIL] Exactly. I've watched Iowa investors lose five figures of margin because a scope lived in somebody's head instead of on paper. Five figures. Not because the contractor was a bad guy necessarily, just because nothing was pinned down.

[MAGGIE] What actually goes into a good one? Because I imagine "fix the kitchen" doesn't cut it.

[NEIL] Not even close. I break every scope into the same buckets, whether it's a fifties ranch in Urbandale or a two story in Norwalk that needs a full mechanical redo. Structural and systems. Roof, foundation, electrical panel, plumbing stack, furnace, water heater. Then exterior, siding, windows, gutters, the driveway, grading. Then interior finishes, flooring room by room, paint, trim, doors, cabinets, countertops. Then kitchen and bath specifics, and permits.

[MAGGIE] That's a lot of categories for what people probably think is a one page document.

[NEIL] And every single line needs a material spec, not just a task name. "Replace kitchen flooring" is an invitation to argue later. "Replace kitchen flooring with twelve millimeter luxury vinyl plank, mid grade, contractor supplied," nobody's arguing about that one.

[MAGGIE] What about the permits category? That seems like the one people skip over because it feels like paperwork instead of construction.

[NEIL] It's the one that bites people the hardest when it's skipped. Your scope needs to say what the city actually requires and who's pulling it. Electrical panel upgrade in Des Moines, that's a permit and an inspection. New water heater in a lot of these older Polk County houses, same thing. If that line isn't in the scope, contractors will quietly skip it to save time, and now you've got unpermitted work sitting behind a wall that a buyer's inspector or an appraiser can flag later.

[MAGGIE] So it's not just about avoiding a fine. It's about avoiding a problem that shows back up right before you sell.

[NEIL] Exactly, and that's a much more expensive time to find it.

 

[MAGGIE] Alright, now I want the paint story. Because eleven thousand dollars to paint a house is a number that should stop anybody in their tracks.

[NEIL] So this was a borrower I'd worked with for years. And when I say years, I mean over fifty properties together with the same painter. Fifty plus deals, same guy, every single time.

[MAGGIE] That's a real relationship at that point.

[NEIL] It is, and that's exactly what got expensive. I was reviewing his scope of work one time, just going line by line like I always do, and I got to the paint line and stopped.

[MAGGIE] What tipped you off?

[NEIL] The number. It was almost fifty percent higher than what I'd normally see for paint on a comparable job. Not ten percent, not a rounding difference. Fifty percent.

[MAGGIE] So what did you do, just tell him he was getting ripped off?

[NEIL] No, I asked him questions first. What's actually being painted, what grade of paint, is it one coat or two, interior and exterior both. Basic stuff you should be able to answer about your own scope. And once we talked it through, I told him, go get three more bids before you sign this.

[MAGGIE] And?

[NEIL] He came back with quotes between five and seven thousand dollars for the exact same scope. Full interior, walls, trim, ceilings, plus the entire exterior. His longtime guy was sitting at right around eleven thousand.

[MAGGIE] For the identical job.

[NEIL] For the identical job. That's contractor creep. It's real, and it happens even with people you trust, maybe especially with people you trust. When a contractor knows you're comfortable, knows you're not shopping it, the price drifts up a little at a time until one day it's not a little anymore.

[MAGGIE] So if someone's been with the same contractor for years and hasn't gotten a second bid in a while, that's probably exactly where this is happening to them right now.

[NEIL] That's probably happening to somebody listening to this right now, yeah. And the fix isn't complicated. Get multiple bids periodically, even on people you love working with. And make sure your contractor knows you still do that. The second they know you'll walk if the number's wrong, the pricing gets a lot more honest.

[MAGGIE] This is a business relationship first, even when it doesn't feel like one.

[NEIL] Investment first. Always.

 

[MAGGIE] Let's talk about the money side of this. How does the scope actually connect to how you pay the contractor?

[NEIL] Once it's priced, the scope becomes your draw schedule. You're not handing over a lump sum on day one and hoping for the best. You tie each draw to a completed, inspected phase. Demo and rough mechanicals is one draw. Drywall and paint is another. Flooring and trim. Final punch list.

[MAGGIE] So the money follows the work instead of the other way around.

[NEIL] That's the whole idea. It keeps cash out of a contractor's hands before the work justifies it, and it gives you a built in checkpoint. If a job's drifting off schedule, you catch it at the draw, not three months later when your holding costs have eaten the deal.

[MAGGIE] And overruns, when they happen, where do they actually sneak in? Because I doubt it's usually one giant surprise.

[NEIL] Almost never one big thing. It's a dozen small ones. A plumbing issue that was honestly visible at the walkthrough gets called "unexpected." A material upgrade nobody approved shows up on the invoice. A labor line quietly grows between the bid and the final bill.

[MAGGIE] So how do you keep that in check without living on the job site?

[NEIL] Three habits, every deal I underwrite. Require a written, priced, signed change order before anything outside the scope starts, no exceptions. Walk the property at every draw request and compare it to the scope line by line, not against whatever invoice they hand you. And keep your own cost library from past Iowa jobs, so you know when a bid's out of range before you ever agree to it.

[MAGGIE] And this all matters just as much when you're financing the rehab, not just paying cash out of pocket.

[NEIL] It matters more, honestly. When you're borrowing against the rehab, a detailed, accurately priced scope is what lets a lender fund up to ninety percent of the purchase price and up to one hundred percent of the rehab costs, with the loan amount capped at a maximum of seventy percent of ARV. That ARV cap is the number that actually controls. A lender can underwrite that budget with confidence instead of guessing at some round number you tossed out.

[MAGGIE] So a vague scope doesn't just cost you with the contractor, it can cost you with the lender too.

[NEIL] Both sides of that transaction want the same thing, a number they can actually trust.

 

[MAGGIE] I want a real example, because the paint story is great but I want to see this play out on a whole rehab.

[NEIL] I underwrote one recently, three bedroom ranch in Windsor Heights. The scope ran fourteen line items, right around thirty eight thousand dollars in projected rehab against a two hundred sixty thousand dollar ARV.

[MAGGIE] Fourteen lines for a whole rehab. That sounds tight compared to the paint example.

[NEIL] It was tight because it was specific. The kitchen line named the cabinet brand, the countertop material, the appliance tier, all up front. So when the draw request came in, it matched the original bid almost dollar for dollar.

[MAGGIE] Almost. What didn't match?

[NEIL] One thing. They found a cracked sewer lateral during demo. That's a real surprise, nobody's scoping a sewer line from the curb before closing. But because we had the change order process already in place, it got priced and signed before anybody touched it.

[MAGGIE] So the scope didn't prevent the surprise, it just made sure the surprise didn't turn into an argument.

[NEIL] That's exactly it. A good scope isn't magic. Cracked sewer laterals and knob and tube wiring hiding in a wall don't care how detailed your paperwork is. What it does is give you a fixed reference point, so every surprise gets priced and signed instead of quietly absorbed into your margin.

 

[MAGGIE] Let me push back a little here, because I can already hear some of our listeners groaning. This sounds like a lot of extra work and paperwork for a flip that's already moving fast.

[NEIL] I get that, and if you're doing one flip a year with a contractor you trust completely, maybe you get away without it for a while. But here's the thing. Writing a detailed scope takes you an afternoon. Losing five figures to change orders you didn't see coming takes a lot longer to recover from.

[MAGGIE] So it's not really extra work, it's work you were always going to do, just moved earlier.

[NEIL] Right. You're either doing the thinking up front, on paper, calmly, or you're doing it standing in a half demoed kitchen arguing about who approved the tile upgrade. One of those is a lot cheaper.

[MAGGIE] What about a borrower who says their contractor refuses to work off a detailed scope, says it's insulting or it's just not how they do business?

[NEIL] That tells you something important right there. A contractor who won't put specifics in writing is telling you exactly how the job's going to go. I'd treat that as a red flag, not a personality quirk.

[MAGGIE] So the willingness to sign a real scope is basically a screening tool for the contractor themselves.

[NEIL] It's one of the best ones you've got, honestly. The good ones want it in writing too. It protects them just as much as it protects you.

[MAGGIE] One more objection, because I know it's coming. What about a smaller cosmetic flip, paint and carpet, nothing structural. Does someone really need all fourteen line items for that?

[NEIL] The categories scale down with the job. A cosmetic flip might only touch three or four of those buckets, paint, flooring, maybe a light fixture package. But the discipline stays the same. Write down the material, write down the grade, get it signed. A five thousand dollar cosmetic scope written loosely can still turn into an argument. It's just a smaller argument.

[MAGGIE] So it's not about the size of the job, it's about never leaving a line item vague, no matter how small the check is.

[NEIL] That's the whole principle in one sentence.

 

[MAGGIE] Before we wrap up, you know I like to close every episode with a little piece of Iowa, or in this case American, history. Something that's got nothing to do with real estate on the surface but somehow always circles back.

[NEIL] Let's hear it.

[MAGGIE] So, income tax has only been around since the Civil War. Lincoln signed it into law back on August 5, 1861. A flat three percent on income, and the entire point was funding the war effort, not funding anybody's forever.

[NEIL] I did not know it started that recently.

[MAGGIE] It gets better. It was repealed a few years later and didn't come back for good until 1913. So the next time a tax bill eats into a flip's profit, remember the government's only been doing this for about a century and a half, and it started out as a temporary favor nobody asked for.

[NEIL] That actually fits today pretty well. Everything we've talked about, the scope, the draw schedule, the change orders, it's all about not letting a "temporary" assumption turn into a permanent hole in your budget.

[MAGGIE] Funny how that keeps happening, whether it's the government or a paint line item.

 

[NEIL] Alright, so if you take one thing from today, write the scope down. Every task, every material, every finish level, before a single wall comes down.

[MAGGIE] And get bids periodically, even from contractors you've worked with for years. Especially from those, honestly, based on what we heard today.

[NEIL] And when something outside the scope shows up, and it will eventually, get it priced and signed before anyone touches it. That's how a surprise stays a line item instead of becoming an argument.

[MAGGIE] Those are the takeaways. If you got something out of this one, share it with a friend, and be sure to subscribe so you don't miss the next one. Catch you on the next episode.

[NEIL] Thanks for listening, everybody.