Hard Money Draws on a reimbursement basis

8 Replies

I recently financed a deal using Hard Money with the typical LTV 80% and they cover 100% of rehab. My question is "Is it standard practice that the Draws are on a reimbursement basis?" This totally messed up my calculations because now I have to come up with the rehab costs even though they say they will reimburse.

Yes this is almost always the case. Most lenders will pay for 50% complete work. So if half the fence is up they will pay out 50% of what you put on the line budget for the fence. Your lender should of clearly explained how the process works prior to closing. Work gets complete, inspection is preformed, the money is then released out of escrow.  

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@Jose Bordes Although most lenders fund construction in "arrears" or after the work is complete, it does not necessarily mean the investor has paid for the work yet. In many parts of the construction business work is billed on a "net 30" schedule, meaning you have 30 days to pay the invoice. 

Also, even if you do pay for the work out of pocket immediately, depending on the length of the project many investors/developers want their money back to invest back into another part of their business such as lining up the next project.

Lastly, getting your draws should not be too difficult. If your lender is resistant and you are not able to get the draws in a timely manner then there is a problem. A true local hard money lender should be able to disburse funds in a matter of a few days. 

Originally posted by @Jose Bordes :

Thanks for the response. It looks like if that's the case, investors might as well cover the construction costs and not go thru the hassle of a draw. 

 Not exactly. While I agree that draws can be a hassle as you have to submit, have inspection and then wait for the draw, you should have been told this verbally and in writing with the loan docs you signed. Also, if you have a $50k rehab, you should be able to set up several draws with the lender so you do not need to come up with all $50k for the rehab, just enough to complete work to get you to the first draw and perhaps some work into the next. Once the rehab is done, you will have been reimbursed the entire $50k of rehab. SOme investors need this as they do not have the capital to cover an entire rehab on their onw without borrowed funds.

Originally posted by @Dave Schmidt :

@Jose Bordes Although most lenders fund construction in "arrears" or after the work is complete, it does not necessarily mean the investor has paid for the work yet. In many parts of the construction business work is billed on a "net 30" schedule, meaning you have 30 days to pay the invoice. 

While this may be possible, it is NOT common place in this scenario. As a contractor myself, I would not give 30 days to some investor before paying me for work completed. To accomplish getting more time, one could use credit cards and credit from large box stores like Home Depot to buy materials on 30 day credit, but the labor is going to likely need to be paid right after completion from the contractor.

@Jose Bordes funding renovation in arrears (reimbursed) is 100% industry standard. I lend advance draws, but even there it's only for experienced investors. Your lender should've explained that though, especially if they knew you were a new investor. As far as how smooth the draw process is, that's a lender by lender basis. Some lenders have turnaround times of 2 weeks, other lenders are much faster. We have a 48hr turnaround for draws and no 3rd party inspections. So it can definitely vary. It's a good learning experience for your next one. That's something you should definitely be asking lenders is about their draw process. Because you can shop rates all day long, but the draw process, to me, is just as important as well.

I know my lender wants the line item complete and installed before paying out, so I have learned to break down the budget into smaller chunks plumbing  rough in and then plumbing  fixtures etc.. 

it usually takes less than a week to get paid some lenders just have you submit pictures or livestream the inspection.  

My current project has a rehab budget of $150k, I will probably  have 20-30k in rolling cash out and then credit cards for materials and certain vendors.


Good luck with your project

Lender here. 

This is standard practice. We ask that a borrower comes with 25% of the rehab budget to show at closing. Essentially it allows someone who might have 20k for rehab to take on a larger project than they would have been able to out of pocket.  

Whether you're charged interest on the undrawn funds can vary though.