Building a Scope of Work for House Flips and BRRRs

TLDR

Your scope of work is where the money is made or lost, not at the closing table. Three steps: fix safety and liability issues, stop the bleeding (drainage, structural causes), then hit the baseline of your comps, not the top. Over-renovate only three things: curb appeal and the first two rooms a buyer sees. Everything else gets the cheapest finish that your neighborhood supports.

Table of Contents

• The HGTV Dilemma
• New Builder-itis
• Cutting Corners vs. Being Strategic
• Step 1: Safety and Liability
• Step 2: Stop the Bleeding
• Step 3: The Baseline
• The Big Three
• Style Is a Trap
• Why Not Xactimate?
• The Jobs Menu
• FAQ

The HGTV Dilemma

We talk a lot about the most important things in real estate investing. Getting a great deal. Managing contractors. Listing properties. But none of those are the thing that’s going to bring you the most money. The thing that’s going to bring you the most money is the strategy behind the work you’re doing, and that strategy lives in your scope of work.

The problem with building scopes of work is what I call the HGTV dilemma. Those shows have put something in our heads that we can’t get out. People think a flip or a rental should look like the things they do on those shows. I used to think the same thing. I used to make some beautiful houses. One of the big flips I did in Denver, Colorado, they put me in 5280 Magazine because of it. Two-story indoor waterfall. That was me, maybe a decade ago, building the house with my own two hands. Summer of 2014, I was living in the back of my truck, doing laundry in the backyard of that job site, which is what I did throughout my twenties.

After that project we did a few more, and ultimately HGTV themselves gave me a call. They wanted me to do a show. One of the stipulations was that I had to be able to do one flip per month. I was doing really high-end stuff that takes a lot longer than a month. I didn’t have a huge crew. I was doing a lot of the work myself. I had to turn down the opportunity because of it. Or maybe they turned me down because I refused to commit to one a month.

So I went on to do bigger and bigger projects with my own small crew, and ultimately I built what was really my masterpiece. A one-story house where I took the roof off and built a second story. I did all the things on the inside. HGTV would have been proud. But that house became my prison.

New Builder-itis

I thought the thing you had to do was the nicest work you could possibly do. I looked at that neighborhood, figured out exactly what I could do to bring the biggest dollars back, and decided mid-project to turn a one-car attached garage into more living space. Then I built a three-car garage in the back. Because of all this, I ran out of money. Anybody I had working on the project, I had to kick off and do all the work myself.

For a whole year, I got to go to that job site and think about what an idiot I was. So much so that I thought maybe there wouldn’t be a next time.

Then, to add insult to injury, this guy bought the house across the street and started renovating it. He was in khaki shorts and sandals, growing weed in the backyard, having a great time. Did he tear off the roof and build a second story? No. Did he do all kinds of brand new floors? He made a nice kitchen, but nothing to write home about. Off-the-shelf cabinets from a big box store. Basic granite countertops. Basic backsplash. He didn’t even redo the carpets in the bedrooms. He just cleaned them up.

That’s when I realized I had a sickness. I call it New Builder-itis. It’s when you lack the creativity to use what’s already there, and the only thing you can come up with is to tear it all out and start new. Tear the roof off. Build a second story. Turn a garage into living space. You need more, more, more. Bigger, bigger, bigger.

I thought my Denver masterpiece would sell for $795,000. We’d comped it out, run the numbers, felt confident. It sold for $667,000. Meanwhile, my neighbor across the street bought his house for $423,000, did barely anything to it, and sold it a few months later for $600,000. He knew he was in a truck stop neighborhood and did exactly what you do to a truck stop house. I over-renovated and lost. He matched the baseline and crushed it.

What you actually need to do is figure out what a neighborhood wants and deliver that. Not more.

Cutting Corners vs. Being Strategic

A lot of people, when they hear me say “do less” or “be more strategic with your scopes of work,” start thinking I mean cutting corners. Doing shady things. That’s not what I mean at all.

Cutting corners is when you agree to a scope of work and then don’t do it, and you hide the fact that you didn’t. Cutting corners is when you do nefarious things and cover them up. Cutting corners is when you fail to address safety and liability issues and make a house dangerous for somebody else.

Being strategic is none of those things. Being strategic is choosing the right finishes for the right neighborhood so you maximize your return on investment.

Strategic scopes of work are not about doing less work. They’re about doing the right work.

Step 1: Safety and Liability

There are three steps that make up our scope of work framework. The first one is safety and liability, and I want to tell you why this one matters more than the rest.

I think back to a Christmas party we had with the company. I was at a Christmas party we threw for the crew, talking to some of the families. My oldest daughter happened to be standing right next to me.

I heard her say, “Hey Daddy, what’s this?” Kind of in the back of my head, because I was focused on the conversation. She said it again. Still not really paying attention. Then some kind of crazy dad ninja reflex kicked in. I saw her reach for something in the corner of my eye and I just automatically reacted, grabbed her hand, stopped her from grabbing whatever she was reaching for.

It was a frayed open wire coming out of a huge electrical panel.

Before the party started, we had gone through and done safety checks. But that moment really affected me. I had to leave the party and walk around for a bit. I felt sick to my stomach. I almost let my oldest daughter get hurt in a way that I’m not sure what it would have led to. It could have been very bad.

That was the moment I realized I do not want to be giving rentals to people or selling houses to people where safety and liability concerns like that exist. Where a kid, mine or somebody else’s, could be seriously injured because we didn’t take care of things.

Step one of building any scope of work is safety and liability. Every single time. No exceptions.

I’ve been doing this for over a decade and I still use a checklist, because there are a lot of questions you need to ask when walking through a property. Here’s what’s on the list:

Fire and Life Safety

• Fire alarms and carbon monoxide detectors
• Broken glass on doors or windows
• Tempered glass in required areas
• Egress windows in each bedroom (can someone get out in a fire? Can firemen get in?)
• Rails and stairs: decks or stairs above 30 inches need a rail
• Locks on windows and doors
• Garage door sensors (so they can’t crush somebody)

EPA Issues

• Mold
• Asbestos
• Lead paint

Mechanical, Electrical, Plumbing

• Exposed or frayed wiring
• Known fire hazard breaker panels (like Stab-Lok)
• Plumbing: everything drains properly, hot water works
• Proper venting, especially for HVAC. A gas hot water heater requires a flue to vent carbon monoxide and dangerous gases outside, not building up inside the house

Structural

• Foundation cracks, wall shifts
• Sloping floors
• Misaligned doors and windows

Key Concept

If you see structural issues, call a licensed structural engineer. They’ll assess the situation, give you a write-up of exactly what needs to be done, and you hand that to your general contractor to implement. Don’t guess on structural. Get it in writing from someone licensed.

Step 2: Stop the Bleeding

After safety and liability, we need to think about what’s causing damage to the house over time. I think of this as the “stop the bleeding” step.

My buddy Brad had a job where he had to work away from home for a few days. He came back, went to open his front door, and it wouldn’t open. It opened a little bit but he couldn’t push through. So he went through the garage into the kitchen. Same thing, but he was able to force that one.

When he got inside, he noticed the floors were separated. Cracks in the drywall. All the doors in the house were rubbing, just like the front door. The kitchen cabinets wouldn’t stay closed; they wanted to pull open. His whole house had shifted.

What happened? While he was gone, it was the middle of summer, and his kids wanted to swim. They had one of those big Costco pools on the back deck, maybe three feet tall. The deck was structurally supported, so it could hold the weight of hundreds of gallons of water. The routine was: fill the pool, kids swim, then Brad would siphon the water down a big hill behind the house that led to a creek.

His wife asked how to set it up. Brad told her exactly how to do it, was very particular about siphoning the water down the hill. She stopped listening to any of that and just pulled the plug. Hundreds of gallons of water hit the back of Brad’s house at one time. His whole house sank.

Now, most of the time you don’t have hundreds of gallons of water hitting your house all at once. You get hit one rain at a time. Over time, that bleeding leads to structural issues. It might not be a structural issue today, but if it’s not stopped, it will be tomorrow.

When you’re walking through a property, you’re asking questions like:

• Are there retaining walls? Are they failing?
• Is there underground drainage, like French drains?
• Is there negative sloping toward the house?

When you’re preparing your scope of work, you want to make sure you’re not causing a problem for the next guy. Stop the bleeding before you start picking finishes.

Step 3: The Baseline

Here’s the way I like to think about this. Imagine you’re really hungover. One of those anxious-feeling hangovers where you’re starving and you just want to go to one of those truck stop diners. You want to get the most calories possible per dollar. You’ve got 20 bucks in your pocket and you want a grand slam type of meal: all the greasy stuff, pancakes, syrup, black coffee. Walk out feeling fine.

But the waitress comes with the menu, and instead of the $10 ten-pound omelette, you get this dainty gourmet dish that costs $50. That’s not what you came there for.

You have two options. Talk to the chef and say, “I came here with 20 bucks, so you can either sell me that $50 dish for $20 and give me a black coffee, or I’m going to go to the next restaurant.” Or, in our case, the next neighborhood.

Remember the house I told you about where I ran out of money? I thought it would sell for $795,000. That’s what we’d comped it at. But we were selling a gourmet dish in a truck stop diner. $667,000 is not exactly a truck stop, right in the heart of Denver during peak market. But the idea is I was trying to over-renovate for that particular neighborhood. I wasted all my money. Somebody came to the chef and said, “You’re going to have to sell that $50 dish for $20.” And I did. I had no other option.

My buddy across the street who smoked weed all the way to the bank? Bought for $423,000, sold for $600,000 a few months later, because he knew he was in a truck stop neighborhood and did exactly what you do to a truck stop house.

The baseline is about figuring out the bottom of the range of comps, not the top.

How the Baseline Works

Take your finishes: floors, paint, trim, fixture package, cabinets, countertops, tub, shower. For each one, look at what the other comparable houses in the neighborhood did.

• Floors: Did they use LVP or hardwoods?
• Cabinets: Cheapest off-the-shelf from the big box store? Shaker cabinets from the same store? High-end from a specialty manufacturer?
• Countertops: Formica? Butcher block? Hard stone like granite or quartz?
• Appliances: Used or new? Black, white, stainless steel, or the expensive matte black stainless?
• Siding: Original siding painted and repaired? Vinyl? Fiber cement?

For each item, you’re going to pick the baseline, the bottom of what the other houses in the neighborhood did.

The Range of Comps

Every neighborhood has clusters of sales. In one neighborhood, you might have houses selling in the $90,000 to $120,000 range, some in $180,000 to $210,000, and some in $300,000 to $330,000. We name each cluster:

When you’re flipping or rehabbing, you’re buying houses on the left side of the scale and moving them to the right. The best return on investment is moving a house from the farthest left into the range of comps.

But here’s the key: you’re trying to bring it to the bottom of the range of comps, not the top.

Pro Tip

If the range of comps is $300,000 to $360,000, the difference between the bottom and the top is about $60,000 in additional renovation cost for $60,000 of additional sale price. That’s a one-to-one return. No profit in that. In fact, there’s probably a loss. Every dollar you spend is a dollar of risk. Spend the least amount possible to get into the range.

But What About the Top of the Range?

There is a way to push through the range of comps without spending one-to-one ROI money. That’s where the Big Three comes in.

The Big Three

Think about a guy in a tuxedo at the self-checkout. You’d look at him and think, “That’s the type of guy who doesn’t steal from the self-checkout. That might be the type of guy you let go on a date with your daughter.”

Now take that same guy on show night, because he was the former lead drummer for a band called Slipknot. See him at the self-checkout line at Walmart and you’re thinking, “I don’t want to get caught in a dark alley with that guy.”

Why? Because first impressions matter. The first impression you get of somebody determines the way you feel about that person. I believe the same thing about houses.

Within the first few seconds of sticking your head in the front door, you’ve made the decision whether you’re going to buy that house or not. The rest of the walkthrough is about not unselling you. You’re never going to walk in, hate it, walk through the rest, and suddenly fall in love.

That’s why we implement what we call the Big Three. Instead of doing the baseline on the first three things a buyer sees, you over-renovate them. You overspend. You over-focus. This is where you push through the range of comps without blowing your entire budget.

The Approach

To do this effectively, you have to understand how people are going to approach your property:

• Are they driving in from the east or the west?
• Are they parking in the front and walking to the front door, or does something force them through the alley to park in the back?
• Once they’ve parked, how are they walking up to the house and into it?

If they park in the back and walk around the house to the front door, everything they see on that walk matters. Those might be things you have to over-renovate. But in the ideal situation, and the one you want to force, they park in front and go through the front door. Put a lockbox on the front door to make sure that happens.

Big Three #1: Curb Appeal

The first thing they see is the curb appeal of that front door. Spend extra here. You don’t have to go crazy, but be really tight and organized with what they see and feel walking up.

The curb appeal checklist:

• Mailbox
• House numbers
• Entry door (what color? Basic white, or something a little more zesty?)
• Garage door
• Entry windows and shutters
• Porch, deck, awnings
• Rails and stairs
• Walkways and driveways
• Fence
• Landscaping and plants
• Pressure wash everything. No cobwebs. No rust. No overspray of paint.

Big Three #2 and #3: The First Two Rooms

After curb appeal, they stick their head in the front door and see two more major areas. I hope one of them is the kitchen, because the kitchen is easy to put a little extra into.

If the baseline is butcher block countertops, I might go granite here. I might do a nicer backsplash, maybe a little accent tile. I’m going to do shaker cabinets. Now, it depends on the neighborhood. Maybe an off-the-shelf Home Depot cabinet that you paint is already pushing it. Maybe it’s a nice A-class neighborhood and you need soft-close custom cabinets to be ahead of the game. Either way, the first three things get more attention.

If the front door opens into a bathroom? That bathroom gets the subway tile around the tub. If that same bathroom were in the back third of the house, it gets a tub insert or a shower insert instead of tile. Save the money. People have already made their decision by the time they reach the back of the house.

Dumb Mistake

Early in my career, I over-renovated every room equally. Subway tile in the back bathroom that nobody cares about. Custom cabinets in a laundry room. There’s no ROI in over-finishing a room that buyers see after they’ve already decided they love or hate the house. Spend it where the first impression happens.

That back bathroom should still be safe, free of bleeding issues, and hit the baseline. It just doesn’t need the accented tile. The insert will do.

Style Is a Trap

This goes back to the HGTV dilemma. Those shows spend a lot of time on designs, and it leads people into hobbyist territory instead of investor territory. Investors are out there to make profit.

I hear a lot of people complaining, “All these houses look gray. Black and white, no flavor.” Exactly. That’s what people are used to seeing, and what people are used to seeing gives you the biggest pool of buyers. That’s what you want. Vanilla. Nice, but vanilla. Because vanilla gives you the biggest market.

When you get colorful, you might like it, and it might be really cool, but the number of people who’ll buy it shrinks.

The other problem with style is people get carried away. Mediterranean in this bathroom. Craftsman in the kitchen. Mosaic tile throughout the back bathroom because they saw it on Flip or Flop. What you’re selling at that point isn’t a house. It’s a collection of rooms. And a collection of rooms feels a lot smaller than a house.

What I like:

• Floors that flow from one room to the next. No transitions.
• Paint color that is the same throughout.
• Hardware package that matches. Pick one: stainless steel, brushed nickel, black, or oil-rubbed bronze. Every door hinge, cabinet pull, cabinet hinge, light fixture, plumbing fixture. All the same.

That consistency makes a house feel bigger. Save the flavor for your personal house.

Why Not Xactimate?

After the tornado that ripped apart our community maybe five years ago, houses were destroyed to the point where people walked into a closet in their basement, walked out, and could see the night sky. It was terrible. Looked like a war zone.

This was also right around the coronavirus, so there was already a huge supply and demand problem with contractors. Now add hundreds of damaged homes on top of it. Insurance adjusters couldn’t keep up with demand. They started asking us contractors to do the scopes of work for them.

They wanted us to use the software called Xactimate. I noticed the adjusters would literally spend a day writing up a scope of work for one project. I looked into it, and it says “L3,” meaning at least three levels of courses and seminars to use it properly. Days-long courses. People go to school to learn this software.

As a real estate investor, you might look at 10 or 15 houses before you find one to buy. You’re going to spend 10 or 15 days writing up scopes of work just to see if they’re worth purchasing? Not to mention, the second you buy a house and open a wall, you get kicked in the teeth with termites and you’d have to redo the whole thing.

I needed a system that gave me consistency across projects that I could also do quickly.

Xactimate is built for insurance adjusters who spend a day per house. Investors look at 10 to 15 houses per deal. The math doesn’t work.

The Jobs Menu

That’s where I came up with what we call the Larossa system. The heart of it is the Jobs Menu: every job we use on a general scope of work for investor-grade rehabs, broken into different checkpoints.

You take each item, floors, paint, trim, fixtures, cabinets, countertops, tub, shower, and you assign it to a checkpoint. The contractor does the work, hits the checkpoint, gets paid, and moves on. No micromanaging. No you driving to the job site every day.

What I Build For

For what it’s worth, you saw the really nice houses I did early in my career. I thought that’s what you were supposed to do based on HGTV. But what I found in that market was that I really did not like selling to people who could afford those houses. They picked it apart. No matter how hard I tried to be perfect, it was always deflating when I went to sell.

What I found I wanted to do was sell to people in the types of neighborhoods that maybe I would want to live in, or maybe even neighborhoods below that. People who needed the home and were appreciative of it.

That’s not for everybody. Maybe you want to go after those higher-end homes and that’s all fine. But HGTV teaches people the only way to do it is the really high-end route, and that’s not true.

The best ROI is in houses for people who need them, not people who nitpick them.

FAQ

What’s the difference between cutting corners and being strategic with a scope of work? Cutting corners is when you agree to do work and don’t do it, or when you skip safety and liability items that could hurt someone. Being strategic is choosing the right finishes for the right neighborhood. Subway tile in the front bathroom, tub insert in the back bathroom. Both are safe. Both hit the baseline. But one costs more and only matters where first impressions happen.

How do I figure out the baseline for a neighborhood? Look at the comps. What did the other renovated houses in that neighborhood use for floors, cabinets, countertops, and finishes? The baseline is the bottom of that range. If some used butcher block and some used granite, butcher block is your baseline. Use the scope of work walkthrough checklist to go item by item.

Do I really only over-renovate three things? Yes. Curb appeal and the first two rooms a buyer sees when they walk through the front door. Everything else hits the baseline. You’re not skimping on those other rooms; they still need to be safe, free of bleeding issues, and match the neighborhood standard. You’re just not putting extra money into rooms that don’t move the needle on first impressions.

What if I’m just starting out and don’t know what things should cost? Download the Jobs Menu. It breaks every job into categories with pricing reference points. Walk houses with the scope of work walkthrough checklist so you know what questions to ask. After a few walkthroughs, you’ll start developing your own instincts for what a house needs and what it doesn’t.

Should I use Xactimate or similar software for my scopes? No. Xactimate requires days of training and takes a full day per scope. Real estate investors look at 10 to 15 houses before buying one. You need a system you can use in an hour, not a day. The Jobs Menu gives you that consistency without the overhead.