Hard Money "Holdbacks"

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Hard Money "Holdbacks"

Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 96 votes

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?

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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

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.

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John Geldert
OP
Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 96 votes
8y
@Jamie Addeo So the way it worked for me was that the HML required me to bring the entire estimated renovation budget to the closing for them to hold until I completed the work. Basically after certain parts of the rehab were completed I would fill out a draw request listing what work was done and the cost, they would then send an adjuster to the property to verify and release the funds. At the end of the job I was under budget and they released the balance. Its by no means the ideal way to go but it was my first time using this type of lender. If you read some of the replies above it appears this is a CA requirement, this is not the common structure for most HML. May I ask which lender you are using?
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Jamie Addeo
Professional · Long Island City, NY · Member since 2014 · 22 posts · 2 votes
8y
@John Geldert Anchor Loans. Ok, I am ok with them releasing my funds if I am under budget at the conclusion of the project. They are actually really good. I just wasn't sure of the procedure.
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John Geldert
OP
Rental Property Investor · East Meadow New york · Member since 2014 · 232 posts · 96 votes
8y
@Jamie Addeo that’s who I used as well and overall It was a pretty smooth process. Good Luck!
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Sabrina Zuckerman
Lender · Calabasas, CA · Member since 2018 · 7 posts · 2 votes
8y
Hi I'm the COO at Anchor Loans. Feel free to send me a message if you have any questions about the holdback process.
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Account Closed
Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
8y
Okay, what is your holdback process, @Sabrina Zuckerman?
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Sabrina Zuckerman
Lender · Calabasas, CA · Member since 2018 · 7 posts · 2 votes
8y
Hi @Account Closed thanks for the question! Below is our process. Please let me know if you have any questions.
1. Borrower creates an estimated budget during the origination process.
2. This budget is reviewed by Anchor's internal team during an onsite inspection to ensure the scope of work aligns with the repair description provided by the borrower.
3. Once the loan funds and after the borrower completes a portion of the repairs, they will submit a draw request to Anchor which includes a line item breakdown of the work completed and money spent.
4. An inspector will visit the property to ensure the work is in place and that the budget is on track to the overall repair progress.
5. If title has any endorsement requirements, then the approved draw request would need to be sent to the title company for endorsement prior to the funds being released.
6. Once approved, Anchor will wire funds to the borrower.
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Account Closed
Lender · Los Angeles, CA · Member since 2015 · 399 posts · 174 votes
8y
Thank you @Sabrina Zuckerman
How many draws do you require?
Does borrower pay interest on the draw money before receiving it?
How much cash does borrower need to have in the deal?
David
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Sabrina Zuckerman
Lender · Calabasas, CA · Member since 2018 · 7 posts · 2 votes
8y
@Account Closed
Answers are below:
How many draws do you require?
Draws can vary given the project size and scope of work. Our average fix and flip projects will typically consist of 5 draws, while large additions and ground up projects can typically average around 15-18 draws.
Does borrower pay interest on the draw money before receiving it?
Loans can be structured both ways depending on the project. Typically for a larger construction deal, interest will be on a Line of Credit with interest paid on only the disbursed amounts. For smaller projects, the holdback is typically funded upfront with interest charged on the entire holdback from day 1.
How much cash does borrower need to have in the deal?
In most cases, we will require a cash down-payment as part of the loan structure. Your prior experience and the individual project will affect the amount of the down payment. It typically ranges from 15-20 percent.
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Steve B.
Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes
8y
my understAnding is the same as @Angel Rodriguez. If they are lending at a typical 70-80% of ARV they shouldn’t be babysitting their money.
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Account Closed
Lender · Dallas, TX · Member since 2018 · 110 posts · 32 votes
8y
John, as a hard money lender, we have never asked a borrower to give us his money to be held in escrow. If there is a shortfall in the capitalization from the lender, you should expect to make up the difference via down payment at closing. I would recommend never handing your money over to a lender as you described.
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Ashley A Merk
Member since 2017 · 6 posts · 0 votes
7y
Originally posted by @Cynthia Hairston:

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.
Hello Cynthia. Do you have a website/email I can contact you at?
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Kyle Ransom
Investor · Atlanta, GA · Member since 2016 · 241 posts · 86 votes
7y
Generally with a HML they will fund 100% of the rehab cost. You will need to provide 10-20% of the purchase price and pay the closing cost and points, if the numbers are at or below 75% of the after repair value.
You will also need capital to buy the materials to start the rehab. I am not sure why yoru lender ask you to put money is escrow unless the rehab costs put the loan over 75% ARV. Otherwise this is not he norm.
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Nate Marshall
Real Estate Consultant · Evergreen, CO · Member since 2018 · 1k+ posts · 739 votes
7y
@John Geldert
Yes. Most PML's and HML's will require you to have a scope of work and a draw schedule. Generally you pay for the first one and get reimbursed. Good lenders have 3rd Party inspectors and they build in $150-200 inspection fees.
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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
1d
That's an interesting set up.. I wouldn't let a lender touch my cash and loan it back to me..
There are many lenders that finance the rehab and do not require you to bring your own cash at closing, rather they reimburse you as you complete segments of the project.
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