How does a construction draw work?

Question

Hello all.  I am in need of some help.  I have a few properties that I am rehabbing and one property that I would like to build on.

I have been talking with banks about construction loans with fund controls.  However I am a little new at the rehabbing portion and I am wondering about how I go about the draws. From what I can gather is that if I have a rehab project that lets say costs $50k. I have a contractor draw up a bid that has each cost involved (I am right that a contractor does this?) then I provide that to the fund control.  However I am learning that I need to come out of pocket again to buy materials and have them installed and then I am reimbursed for this.  Is this typical and standard? is this also how a new construction project is?

Basically, if I put $50k into a rehab fund control do I then need an additional $50k to go then be reimbursed?

Any insight or guidance would be helpful.  This is in California FYI

Andrew Taylor · Answer

Somebody submits budget to lender (could be you, could be contractor - lender doesn't care). Some lenders will divvy up the budget and tell you when you can request a draw, and some lenders will provide a draw schedule that says when they'll pay for what (i.e. foundation draw is paid up-front, then draw #2 is paid after dry-in, draw #3 after mechanical roughs, etc.).

Good lenders will negotiate the draw schedule with you - they realize not everybody has enough funds in their account to buy the property and do a bunch of rehab work without getting a draw first.

Jonathan Orr · Answer

apreciated

Joel Owens · Answer

The bank will generally send their inspector out at each stage to make sure the work is completed properly with the correct permits in place and approvals before they release the money.