Earlier this summer I funded one of my BRRRR properties using a HML (for the first time). The terms were not that bad considering I got the the property at a steep discount and they were able to close in about two weeks. Shortly before closing the lender insisted that I bring All of the funds for my rehab to closing as opposed to just "showing" proof of funds. I was instructed that they would hold my money and I could make draws against it as the work got completed. This obviously threw a wrench into my strategy as I needed to come up with an additional $22k in a few days in order to get this deal closed. The deal closed, I finished the rehab and was able to recapture all of my funds...
My question is; do all hard money lenders insist one holding your rehab capital? Has anyone had experiences with HM lenders that do not require this, if so can you please share?
I lent money to a rehabber once with him showing proof of rehab funds, he then spent the money elsewhere leaving no money for the rehab ... so I can see their point.
In my view, if rehabber truly intends to spend the money on the rehab it shouldn't make any difference if the money is in rehabbers bank account or in an escrow account.
Can you explain why this threw a wrench in your strategy?
all I can say is "wow" John. You will be glad we met then!
Yes, it is common for HMLs to hold the rehab funds and then give it out in "draws" as the work is completed and inspected. When you're lending based on the value of the completed project you don't want to borrower taking the full amount up front, spending the rehab budget on something else and then leaving you holding the bag with the only security as the un-rehabbed property who's value is much less than the loan amount.
Yes, as a mortgage underwriter for HML when there's a incomplete project or rehab, in CA HML will do a escrow hold back or builder trust fund and it will be a draw upon completion part of the subject property. we only request for evidence of funds to close and reserves just in case if the rehab need additional funds to cover the unfinished section of the subject property. Otherwise depending on Loan to Value (LTV) of the subject property most HML doing flip property our offer an extended funding as needed to cover the unfinished section of the project within the LTV parameters. I hope this help.
Depending on the amount the HML will lend up to you shouldn't have to bring the rehab capital unless your property didn't appraise high enough. If a property appraises for 100k and I'm lending 70% of ARV then I will obviously only give the investor 70k. If that's not enough to purchase and rehab the property then the investor would need to bring the difference to closing to go into escrow.
I can't speak for all Hard money lenders, but we don't. You don't even have to prove the money for rehab, because it is funded 100%, in fact, we allow first draw at closing. And the reserve just has to be proven via bank statement (no seasoning) but we dont make you escrow it or tie that money up in any way. If you choose to escrow your interest payments, and it's YOUR CHOICE, WE WILL FUND UP TO 90% LTV AND 100% REHAB. THEm 10% DOWN PAYMENT IS ONLY ON THE PURCHASE PRICE, NOT ThE REHAB PART, BECAUSE ITS FUNDED 100%...NO SURPRISES. The bad point is what if you didn't have it because you didn't know? The loan falls through? I can't see many lenders doing that sort of stuff, or there would be talk all over this blog, right? We give first draw at closing if requested. I think you should ask exactly what you need to close with upfront. and get that in writing! You do have to prove the money to close is in the bank, to be clear.
Hi, I recently got a HML for a property in AZ. The loan is a 12 month interest only at 13% APR, with 60k available towards construction. The construction loan amount is available in up to 5 draws with a minimum of 10k at a time. I have to submit invoices and have the job inspected before the lender will pay out to the vendor. They want to insure the job is done to their satisfaction. It's a little risky because they could deny a payment, but I'm hoping that doesn't happen. I would recommend asking specifically what each lenders terms are in writing before signing any papers. I have to negotiate with my vendors to let them know I will not be able to pay them until the job is complete. Luckily in AZ, my vendors have been really understanding and willing to work with me. Each vendor also has to sign a waiver that they will not put a mechanics lien against the property for any work completed or in process. Good luck to you!
First, I would say, yes, most hard money lenders that I'm familiar with are going to require you to wait for your rehab escrow money until you complete phases of work.
Some will front you the first 10k to get the rehab going, and then will dole out draws every 10k or so. But then the final 10k won't get sent until after you've completed the project.
What I don't understand though is why are you pulling money out of your pocket to fund the rehab and sticking it in escrow for them to hold? Thats the part that doesn't make sense for.
Typically, when I use hard money, the lender puts up for the purchase and rehab and I pay closing costs and points out of pocket. I know most hml's only put up a percentage of the purchase (say 90%) and then do 100% of the rehab. So you do come out of pocket at the closing for the 10% but then the rehab money is coming from the hml.
I've never heard of a deal where the borrower has to give the hml their own cash to hold in escrow while repairs are being done.
I guess it makes a little sense so that they can aren't lending you money on a house that needs repairs, you tell them that you have that money and then you don't use it to do any repairs.
But its still a bit odd to me. Why didn't you have them financing the rehab? Would have saved you the out of pocket....
@John Geldert Not surprisingly, the HML game is mostly based on relationships.
To answer your question, this is not a requirement, but if the lender feels that they need to ask for it, then they can as we have seen here.
What I suggest you do is look for a HML lender that can lend you the 100% of the construction loan, so that way you only bring the 25% to fund the acquisition in the front end.
Hope this helps. Good luck. Thanks! - Ola
@Mike H. One way or another the borrower needs to have some cash in the deal, even if (s)he gets it back in the end. If there's no skin in the game it spells trouble all around. If it's a loan-to-own lender I can see them not requiring borrower cash in the deal. If lender wants borrower to succeed there needs to be skin in the game.
I understand skin in the game. But this is not the same thing. As I said, I understand that many hml's typically do 90% of the purchase and 100% of the rehab. And that usually means that the borrower comes out of pocket 10% of the purchase at the closing.
What I'm not getting is that this lender appears to have required the borrower to put down a percentage of the purchase AND then to fund the rehab themselves. But not only fund the rehab themselves, they required the borrower to give them (the lender) the rehab funds for them to hold.
Thats the part that makes no sense to me. If I'm having to pay for my own rehab, there's no way I'm giving that money to a hard money lender for them to hold. Thats nonsense.
@Mike H. If the lender was to provide 100% rehab money I see your point. I took the OP to mean borrower was paying 100% rehab and lender was holding the money and disbursing draws as rehab progressed.
Account Closed Did you end up foreclosing on that property?
In this case the HML lent 80% of the total project which was a purchase price of $115k + $22k rehab=$137k giving me a principle loan of $109,600. My issue was that on top of the the money I put down, the 2 points up front and all the other excessive closing costs that HM comes with I now had to come up with an additional $22k(or a portion of) to get the rehab started.
@Paul Alvarez Thank you, that may explain it as this lender was based out of CA.
@Mike H. Thanks for the response. The only thing I can think of is because of the logistics, 2 weeks to close and lender being on the other side of the country. They did not order the appraisal until weeks after the deal closed, which may be why the holdback contingency was included.
Thats a great point on having them finance the rehab, this was my first go round with an HML, I learned a ton and will definitely be more educated next time I need to use this structure.
It is pretty common to have a construction disbursement amount held in escrow.
@John Geldert It is quite common for a HML to hold back the rehab funds and disperse in draws. But if I'm reading your comment correctly, it sounds like the lender required you to cover the rehab costs and provide it up front for them to hold in escrow. That is not normal and I would suggest you find another lender.
Most rehab lenders will generally loan you 80% of purchase price and 100% of rehab to be dispersed in draws. Most will require you to have reserves in your bank account to cover the first part of the rehab and several months of interest only pmts). Many lenders require you to start the project with your own funds and then the reimburse you.
The more experience you have, the better terms you will get.
I can speak for conventional lenders when I say that we would always require the required cash injection from the borrower to go in first and then we would set up a draw schedule tied to completion milestones with the loaned funds. In my banking days and even now with Castle Rock, we don't hold your money, but we close and don't inject the loaned funds until you've completely injected all of yours. We'll have an inspector visit at scheduled times to ensure the required work has been completed to each agreed upon milestone and then we cut the checks directly to the contractors.
@John Geldert , I started the foreclosure but flipper found a buyer and closed in time. I have to make these guys do the right thing or they will flub it up, I made him put rehab money in his LLC before loan and show statement, so I said go. He spent the money on another project he had going then borrowing money from his buddy to finish my project, it still wasn't enough to finish ... so much for bank statements, I know make them escrow funds and disburse draws.
I've only had to start foreclosure 2 or 3 times, rehabber usually gets his s*** together and gets it done before trustee sale. Except one time I had to take foreclosure to completion. I immediately sold it to another rehabber I knew and he rehabbed it and made a nice profit, it was a rising market at the time otherwise I would have been SOL. I really, really don't want some crappy rehab project, just my principal and interest.
You got a LTC (Loan to Cost) loan. 80% of cost. So, yes, you have to come up with the other 20% of cost ($27,400). You didn't understand what you were getting, or they didn't explain it right. There's no standard when it comes to HML/PML loans so it's really important to get clarity. I don't think you got cheated.
There are plenty HML within the USA. Any rehab project is always treated as construction loan. One of the tool to search HML in your area is Scotsman Guide or here's the website: www.scotsmanguide.com. I hope this help and good luck to your new endeavor. Just let me know if you have any other questions. Have a great Friday!!!!
Account Closed Thanks for the explanation, your correct I didn't understand what I was getting into and they did not explain thoroughly. I was working on my third(and final) extension of close date and just wanted to get this deal done. At the end of the day it all worked out...
I am a little confused here, John G. who asked the question, was talking about HIS MONEY, not the lender's money right? And Jon Holdman is talking about LENDERS MONEY. I can understand holding back draw money, I just don't understand why one would have to put their OWN money, essentially funding the rehab with their own money. Why get a rehab loan then? Why not just a purchase if that's the case. NO lender should be able to distribute your own money under their terms. Only the lender's money, right??