New to Real Estate · Fayetteville, NC · Member since 2021 · 20 posts · 2 votes
Okay, I'm having a hard time understanding how draws work with a rehab loan from a hard money lender. The way I understand it is: I have to pay for the work initially. Then I apply for a draw and provide invoices. They inspect the work, then they reimburse me with money I have to pay back to them anyway?? If I could afford to pay for the rehab myself, why would I need a hard money lender in the first place? None of this is making sense to me right now. Any help is appreciated.
@Kevin Mcilnay, as others mentioned, the typical route is you pay the draw out of pocket and reimburse yourself, so you can pay the next draw.
Depending on your contractors, the contract with them, and your lender, you can make it work where the draws go directly to the contractors, but the contractors need to be okay with due on 30, versus due immediately terms on their invoices. Most professional contractors will accept that, but most professional contractors cost significantly more.
I would make sure you are very clear with your contractors up front that you ONLY pay invoices with full receipts. I have dealt with some that I had to make their invoice for the contractor so they bank would reimburse me with the draw. This was the biggest PITA of dealing with bargain basement contractors and HMLs.
Your understanding is correct. You need to have some money to start the project. No need to have all. Then once you finish the first stage of work, you request a reimbursement. And then you have the money to continue the second stage, and third... until finish the whole project. People usually draw every month instead of just one draw at the end.
Okay, so ultimately I just need to make sure I've got enough cash to cover the most expensive part of the rehab and try to get that part done first. They keep paying me back, and when the house sells, they get all their money back...ideally. Any ideas on how long the draw process takes from completion of work to receiving funds? Sounds like it could make the rehab process a lot longer than it needs to be. I appreciate all the information so far.
@Kevin Mcilnay, as others mentioned, the typical route is you pay the draw out of pocket and reimburse yourself, so you can pay the next draw.
Depending on your contractors, the contract with them, and your lender, you can make it work where the draws go directly to the contractors, but the contractors need to be okay with due on 30, versus due immediately terms on their invoices. Most professional contractors will accept that, but most professional contractors cost significantly more.
I would make sure you are very clear with your contractors up front that you ONLY pay invoices with full receipts. I have dealt with some that I had to make their invoice for the contractor so they bank would reimburse me with the draw. This was the biggest PITA of dealing with bargain basement contractors and HMLs.
@Evan Polaski That's definitely some great advice. I'll make sure to be specific about what I need from them. After all, I assume the better the documentation, the quicker the draw is going to hit my account. What do you mean by "due on 30"? Luckily, my best friend is a general contractor in town and says he'll provide me with whatever subs I need, as well as helping me manage the rehab overall.
I run up credit cards for what I can when doing draws. Also depending on the lender they may want signed lien release from the subs (total pain) and my lender wants the chunk I am requesting 100% done before they disburse so if it's doors it has to be all hung painted etc. So breaking down the sow into plumbing rough in & plumbing finishes versus just plumbing will help. Good luck
@Kevin Mcilnay Pretty much agree with all the comments. However, having been on both sides of the table (flipper and lender to flippers), let me add that you should work your rehab to your satisfaction and protection. Do not let contractors or lenders run your business. There are plenty of both that you can choose the businesses that you want to do business with.
Even if the lender doesn't ask for sign-off's from contractors against mechanic liens, in my opinion, you should get them anyway. It protects your business and adds professionalism. The best time to get this is when paying the contractor. Actually the best time to get anything from a contractor (or get them to agree to something) is when you owe them money.
Develop a game plan and scope of work (SOW) for each rehab and pace it accordingly. Using other people's money as leverage can be beneficial, however comes at a cost (that needs to be factored in). If you are borrowing funds, make sure to actually take the draws as you may be paying interest on the money whether used or not. Having a very detailed scope of work can be a good idea when it comes to getting partially paid for line items as you will get paid for only what is accomplished. This way you do not get a different percentage of that line item than what you had hoped for. My SOWs are extremely detailed, as are my agreements with contractors. Good luck!
@Rob Beeman Thanks for the info! I've downloaded a couple SOW worksheets, but wondering if you have one that works especially well for you. I'm all about details and need to make sure that I'm documenting everything. Thanks again!