Whether you’re a private lender, hard money investor, or funding your own flips, knowing how to properly screen rehab projects before releasing a single dollar is one of the most critical skills you can master. It’s not just about the property — it’s about protecting your capital, ensuring the borrower’s success, and minimizing downside risk.
1. Know the Exit Strategy
Start with the end in mind. Is the borrower flipping? BRRRRing? Holding as a rental? Each strategy carries different timelines, budgets, and risks. A flip might be short and high-margin — but heavily reliant on market timing. A BRRRR project requires the right comps and a smooth refinance.
Ask: What’s the exit plan, and is it realistic for this market?
2. Evaluate the Borrower’s Track Record
A great project in the wrong hands can turn into a disaster. Check the borrower’s experience with similar rehabs. Ask for past projects and photos, contractor relationships, and how they’ve handled delays or budget overruns in the past. If they’ve never flipped or managed a rehab, add buffers — or consider funding less aggressive projects first.
3. Break Down the Scope of Work
Don’t just take a number at face value — break it down. Request a detailed Scope of Work (SOW) that includes itemized line items (roof, HVAC, plumbing, paint, flooring, etc.), labor and material costs, and a timeline by phase. Be on the lookout for vague estimates like “full rehab” or “$30K cosmetic.” That’s not enough. You need clarity and specifics.
4. Check the Numbers Against ARV
Run your own comps. Verify that the After Repair Value (ARV) is accurate using recently sold, renovated homes within 0.5 miles. Double-check bed/bath count, square footage, and quality of finishes. Then, make sure the budget and purchase price leave room for profit — and your safety as a lender.
Use the MAO formula:
MAO = ARV × 70% – Rehab Costs
If the deal doesn’t pencil in conservatively — pass or renegotiate.
5. Understand the Draw Schedule
Never fund 100% of the rehab upfront. Set up a draw schedule tied to actual progress. For example:
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First draw: after demo
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Second draw: after mechanicals
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Third draw: after rough-in
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Final draw: after punch list
Verify each phase with photos or in-person inspections before releasing the next payment. This keeps the borrower on track — and your money protected.
6. Vet the Contractor (Not Just the Borrower)
Borrowers often outsource the entire rehab to contractors — so the contractor’s credibility matters just as much. Ask for their license and insurance, project timeline, crew size and capacity, and references or reviews. If you’re uncomfortable with the contractor, you should be cautious about the project.
7. Know the Market
Even a solid borrower and contractor can’t fix a bad market. Understand the local dynamics. Is demand growing or shrinking? What’s inventory like? How quickly are renovated homes selling? What are buyers actually looking for? If your borrower is planning high-end finishes in a first-time buyer market — that’s a red flag.
Final Thoughts
As a lender, your job isn’t just to hand out capital. It’s to underwrite risk. By learning how to screen rehab projects before funding — you protect your money, empower good borrowers, and stay in the game long-term. Don’t fund based on hype. Fund based on homework. Because a few hours of due diligence can save you from months of damage control.
