Fund Control and Rehab Loans

One of the elements of most rehab or fix and flip loans is a fund control account. It is a common question for me to be asked when putting these types of loans together whether we will allow an investor to do the work out of pocket and forgo the fund control account. The answer to this question is always no, but it is a common enough question that I'm going to address the reasons today.

Rehab loans are typically based on the after repair value of a property, or the ARV for short. With this being said, it is very common for the loans we put together to be larger than the actual purchase price of the property. This poses some security problems for investors.

For investors who are secured by a first deed of trust on a rehab project, the security really comes from the completed property. The uncompleted property is not typically going to be able to get put back on the market as is, bear the cost of selling the property and of the foreclosure action and still return the trust deed investors full principal amount. For this reason it is imperative that we ensure the property is completed. The solution for us is a fund control account.

A fund control account is pretty basic. It is an account set up for the borrower to draw on that enables them to do the work to increase the value of the subject property. As work gets done it is documented and additional funds are released. This provides security for the trust deed investor.

There are many types of fund control accounts, and depending on who is administering it the process can be very flexible or very rigid. With most of our rehab projects we are able to use a very flexible fund control set up. Typically speaking the initial draw will be released in advance of work being done. This is in contrast to other fund control accounts where the work may be required to be done prior to funds being released. Once the initial draw is made and the work is completed for that portion of the project a second draw request can be made. For most projects we do not require inspections but rather pictures and/or walk through videos showing the work having been completed. At that point more funds will be released to the client to continue working on the project.

When working with a hard money lender it is important to know upfront what their expectations and requirements are with regards to the fund control account. This can help avoid future problems. Fund control problems are one issue that can stall a project - and we all know that a stalled project is not the best way to be successful in the fix and flip world.

For more information about rehab loans or hard money loans in general, visit our website at acalending.com. We specialize in California hard money loans and are always happy to take your call and discuss your scenario in detail.