Private and Hard Money Lender Rehab Draw Requirements.
Investor · SC · Member since 2023 · 18 posts · 8 votes
Private and Hard Money Lender Rehab Draw Requirements.
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Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
2y@Felicia Walker, while I have limited experience using lenders on flips, I will say my experience mirrors yours: some require very detailed reporting of costs of completed work, some are a little more "general" accounting. One lender I had said they will send an inspector to confirm completed work, but never actually did.
All of my lenders did require me to start with my own capital for the rehabs costs, and then reimbursed 80% of those costs, so I was effectively always 20% equity, if not more, in the deal.
Some require lien releases to be signed, others didn't, but we always got them anyways, so as not to get ourselves in trouble.
All of my loans had draw fees (typically $150-$250 per draw), and they all allowed me to pick the schedule of draws. I typically opted for roughly 3 draws per deal, just to limit draw costs.
Also, all of my lenders charged me interest on the full loan balance at closing, even though I hadn't drawn the whole loan (which annoyed me, but I get their perspective).
So really, in my experience, I didn't find any to be "better or worse" they all seemed to have their own trade offs, i.e. more general accounting was easier for me, but higher draw cost.
13 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Felicia Walker:
I'm getting back into the investing game after focusing only on my W-2 for a good many years. Back in 06-09, I was a realtor, landlord, and flipper, but so much has changed since then. For "fix and flip" deals, I've been discussing the "draw system" with various lenders and they seem to all have different (but yet similar) systems. Is there a standard, good, or bad system out there? Some require me as the investor to start the process with my own funds and others provide 20% up-front. Some require an inspector to check the work each time, with me as the investor paying for those inspections each time. What is a reasonable system/protocol for using this time of financing?
Felicia
We do exactly what you noted. The investor starts with their own funds before we allow a draw and we will have inspections done as well to confirm work is complete. We allow monthly draws (some will do quarterly). We also will have the schedule of values approved as part of the agreement so there is no conflicts later on.
7e investments53 Reviews - Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Felicia Walker, while I have limited experience using lenders on flips, I will say my experience mirrors yours: some require very detailed reporting of costs of completed work, some are a little more "general" accounting. One lender I had said they will send an inspector to confirm completed work, but never actually did.
All of my lenders did require me to start with my own capital for the rehabs costs, and then reimbursed 80% of those costs, so I was effectively always 20% equity, if not more, in the deal.
Some require lien releases to be signed, others didn't, but we always got them anyways, so as not to get ourselves in trouble.
All of my loans had draw fees (typically $150-$250 per draw), and they all allowed me to pick the schedule of draws. I typically opted for roughly 3 draws per deal, just to limit draw costs.
Also, all of my lenders charged me interest on the full loan balance at closing, even though I hadn't drawn the whole loan (which annoyed me, but I get their perspective).
So really, in my experience, I didn't find any to be "better or worse" they all seemed to have their own trade offs, i.e. more general accounting was easier for me, but higher draw cost.
- 2yMatthew CrivelliBusiness MemberLender · MA · Member since 2021 · 1k+ posts · 1k+ votes
Almost all rehab loans require you to complete the work, then you are reimbursed after an inspection / you send in pictures. Typically the fee for the inspection / draw comes out of the actual draw amount so it's not like you have to pay upfront for it. (Draw was 5k, you receive $4,801) This is standard practice that protects the lender from giving money for incomplete work.
Freedom Capital Funding, LLC523 Reviews - 2yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @Felicia Walker:
I'm getting back into the investing game after focusing only on my W-2 for a good many years. Back in 06-09, I was a realtor, landlord, and flipper, but so much has changed since then. For "fix and flip" deals, I've been discussing the "draw system" with various lenders and they seem to all have different (but yet similar) systems. Is there a standard, good, or bad system out there? Some require me as the investor to start the process with my own funds and others provide 20% up-front. Some require an inspector to check the work each time, with me as the investor paying for those inspections each time. What is a reasonable system/protocol for using this time of financing?
Felicia
Hey Felicia,
Most Fix and Flip lenders typically require you to complete the work THEN request draws. There is a fee for doing this each time. Now when it comes to paying interest on the draws, a handful will allow you to pay interest only on the drawn amount.
LuxePrivate Investments LLC 572 Reviews - 2yJake BakerBusiness MemberFlipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 696 votes
This is typical to have a reimbursement-style draw schedule. The hard money lenders I use don't require an inspection. Pictures or a walkthrough video will suffice. However, maybe for newer investors they require an inspection?... not sure.
Another lesson learned - Don't rely on the hard money draw to continue your rehab. During the draw request process, it can take several business days (sometimes a week) for the draw to hit your bank account depending on how much they push back. Make sure to have some extra cash for your project so you can keep the rehab moving along. It's all about speed in this market.
BookkeepingRE - Bookkeeping for Real Estate & Service-Based Businesses52 Reviews - 2yBill J FayPro MemberLender · San Diego · Member since 2023 · 216 posts · 209 votes
This is an important question to ask your lender. Different lenders have different policies when it comes to draws. Ask your lender what their process is. Some allow you to upload a picture of the progress without having an inspector step into your project, some require physical inspections.
- Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes2y
The inspection process has often been a real time suck on projects. There's a real push in the industry to go digital with it. Use an app to upload pictures, work is verified by lender and money wired out same day. Some have gone this way, some still do the traditional route of Request - Forms - Schedule - Inspection - Report - Approval - Wire. If people drop the ball or make mistakes in that process it can take 5+ days to get the money which means your contractor can't start back up until the money comes in. My investors, who can afford it, fund their draws and then just keep the draw when it comes. The can cause they are liquid. I had another investor who was a first timer and he had just enough money for his first deal and through his project he lost at least 15 days over 4 draws. My contracting team and I have talked about them getting like a 100k line of business credit that we can use to off set draw lag. Projects can be done 25% faster, loans exited sooner, less loan payments.
- Lender · PA · Member since 2019 · 535 posts · 461 votes2y
I have a unique perspective as a broker and flipper. I believe you should not be working in this space without some liquid capital. This makes the entire process easier. I prefer to use lenders who only charge you interest on the amount of the money drawn. On a larger project this saves a substantial amount of money. Requesting and receiving a draw is not rocket science. If you have a good scope of work to begin with than it is a matter of showing the lender that you have completed a facet of the work consistent with the scope of work. A good rehab lender will have the inspection performed and turn the draw request in 72 hours.
You should work at establishing a relationship with a contractor who can move forward for a day or two without you paying the current invoice. If your contractor is so rigid and broke that he can not or will not carry a few days of work you need a new contractor. Also develop a credit relationship with your material providers. Good luck and keep moving forward.
- Lender · Denver · Member since 2023 · 127 posts · 26 votes2y
Hey Felicia! All lenders are going to be different. It is standard to have you start the rehab process with your own money then get reimbursed. We do our draw process over zoom and don't require anyone to go check your work in person. Happy to chat and go into more detail.
- Member since 2023 · 120 posts · 26 votes2y
Honestly, if you need to do a reimbursement draw schedule on flip project, that is awful. Ask for advanced draws or that they pay the contractor directly. The lender takes basically zero risk otherwise. And it damages the IRR on your project.
It's not gonna matter that much if you have a short term project and pay interest on the drawn or full amount in the end. There are certainly more than a handful of lenders that charges interest only on drawn funds, I would say more than half do. Well, good luck. - Lender · PA · Member since 2019 · 535 posts · 461 votes2y
Quote from @Felicia Walker:
I'm getting back into the investing game after focusing only on my W-2 for a good many years. Back in 06-09, I was a realtor, landlord, and flipper, but so much has changed since then. For "fix and flip" deals, I've been discussing the "draw system" with various lenders and they seem to all have different (but yet similar) systems. Is there a standard, good, or bad system out there? Some require me as the investor to start the process with my own funds and others provide 20% up-front. Some require an inspector to check the work each time, with me as the investor paying for those inspections each time. What is a reasonable system/protocol for using this time of financing?
FeliciaI prefer using rehab lenders who only charge interest on the total amount advanced as opposed to the entire amount escrowed.
I prefer using lenders that charge only for the total amount advanced as opposed to the total amount escrowed. The lenders I use are prompt in reviewing the draw request and funding the draw. Not all lenders are good at executing on the release of funds. It comes down to working with a good lender who can both originate the loan and administer the construction draws. I will not start a project unless I have enough capital to keep moving regardless of the status of a particular draw. Good luck. - Real Estate Agent · Atlanta, GA · Member since 2022 · 352 posts · 219 votes2y
Hey Felicia!
Every lender is going to be different from the next. Find the lender that offers the terms and loan products most appealing and manageable for you.
99.99% of HM lenders will have a 70%-75% LTV Loan program with terms between 6-9 months.
With origination fees between 1.99-4.99 and interest 10.99-13.99. They will probably also have the money in an escrow account set up on a draw process.I would say that's pretty much the standard and based on starting with your own funds.
Now in regards to the inspection process, I have worked with lenders who have done in-person inspections for $195.00 each time they came out. The way we got around this was, to do as much as we possibly could and stretch funds. Then request the draw, replenish the goose egg, and do it again. It worked pretty well, with only three inspections in total. Now in-person inspections also have your back as the investor, having someone come out and check the quality of work your contractor is producing is good to know. However, you may prefer the take a pic and upload route. One of my investors does this and it works out well for him since he does multiple projects per month it makes more sense!
- Investor · NC/SC · Member since 2023 · 150 posts · 77 votes2y
Quote from @Felicia Walker:
I'm getting back into the investing game after focusing only on my W-2 for a good many years. Back in 06-09, I was a realtor, landlord, and flipper, but so much has changed since then. For "fix and flip" deals, I've been discussing the "draw system" with various lenders and they seem to all have different (but yet similar) systems. Is there a standard, good, or bad system out there? Some require me as the investor to start the process with my own funds and others provide 20% up-front. Some require an inspector to check the work each time, with me as the investor paying for those inspections each time. What is a reasonable system/protocol for using this time of financing?
Felicia
Hey Felicia,
Now is a great time to get back into the game, and you're fortunate there just so happens to be many opportunities in your back yard, more so in the areas surrounding Charlotte as the city has become so competitive...
A solid lender will help you take your business further than you ever could by yourself using just your own cash.
While you're able to derive tremendous value from the service they can offer your business, there is a cost associated...
In our experience, the better the deal, the lower the cost of entry. Most lenders do have similar processes.
Most of the people who will advertise their services to you here on BP are brokers for direct lenders.
Most of the Brokers on here charge an arm and a leg for their services which is the reason why, initially, I did not utilize private lending.
I'd be happy to recommend the Broker we use who is great at what he does and is very reasonable when it comes to the commission he adds for his services.
We do a lot of investing just outside of Charlotte in the York, Chester, and Lancaster Counties. If you need any referrals for members of your team, or any help otherwise, let me know as I'd be happy to recommend just about any one of the rockstar members we have on our team.
Good Luck!
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