Where To Hold Private Money During Rehabs

Question

Hello All!

I am about to purchase a house to flip in Alabama at a great price. A private money lender is going to send me $200,000 to buy and rehab the house. It sounds like there are no escrow companies in the area that can hold the money for the rehab work out there. I would rather not put the money in my account. Do you all know of other methods I could use to hold the extra $60,000 in a seperate place? So that everything stays clean and neat?

Thanks

Brock Dowis · Answer

Possible to open a joint account? Maybe use something like slack or Asana to upload receipts when draws are taken. Lender has access to view funds/transactions, if they act on that or not is up to them. Uploading receipts for draws is a good check and balance for yourself. I would hash out as much of these details with you and lender ahead of time. Big difference maker in money conversations is timing. Ask before and it’s usually not a big deal, confirm after the fact leaves big opportunity for misunderstanding. best of luck. I would keep this lender as happy as possible. Sounds like the set up everyone dreams about!

Alex Bekeza · Answer

@Robert Herrick Call a local title company.  They often perform escrow services and if not they'll have a local attorney to refer you to or another 3rd party to hold the funds.  Rehab funds are typically held in "fund controlled" or "draw accounts" where a third party releases the funds in stages as the work is completed.

I could be wrong but I believe Boston National Title does more-or-less nationwide title & escrow services.

David M. · Answer

@Robert Herrick

Not sure exactly what is a "private money lender" --- just not enough experience.  They really sending you the acquisition and rehab funds?  I would think the acquisition funds would go the Closing Agent to be held in escrow for closing...

Again not sure of your situation, but I don't other wise see why you wouldn't just put it in your bank account (whatever entity is holding Title which should be taking out the loan).  You SHOULD have your bookkeeping in place to handle this.  As I've written in many other posts, I'm NOT a big fan of creating more accounts to handle bookkeeping matters.

That being said, why does it need to be in an escrow account?  What are the terms for the release of the funds?  Without terms, there is no point in having an escrow.  You mean some sort of Trust account, because you don't feel its "yours?"  If youare borrowing the the funds, then it is yours.  Its not much different than a cash out refinance in my mind.  You don't put the "cash out" portion into an escrow account of some sort.

I suppose if you really aren't comfortable, just open another bank account and put it there...  Then, charge / pay all your rehab expenses from that account.  Honestly, this is just using an account to do your bookkeeping...

Good luck.

Jeff S. · Answer

“I would rather not put the money in my account.”

Very wise, @Robert Herrick.

Surprisingly, escrow companies are not set up for this. It depends on how formal you want to be.  Maybe not too formal if your lender is willing to provide all the rehab money at once.

Your lender could set up an account at your bank and transfer money to you electronically as you go.  Personally, I don’t like the idea of the lender controlling the money.  It’s not fair to either you or your lender and I think you recognize that. There’s too much temptation to use it, lend it elsewhere hoping to get it back when you need it, or simply change their mind.  This actually happens a lot and is the reason CA mandated that all brokered construction loans over $100k be fully funded by the lender at loan origination.  Can’t speak to AL.

A loan servicer, like FCI, will act like escrow and hold the $60k for the two of you and disburse it at the direction of your lender, per an agreed-upon draw schedule with milestones and the disbursement amount for each.  These could be Demo, Rough utilities, Roof, Final finishes, CofO, etc. – whatever you and your lender agree to.  Even some money upfront.

As each milestone is completed, your lender would notify the servicer to send you the pre-agreed amount.  I like this because it keeps everyone honest and doesn’t put anyone in a compromising position.

To be even more formal, and total overkill for your loan, there are construction fund control companies like Hasz that will hold the money and also perform the construction inspections, so your lender knows these were done per code, with formal lien releases, etc.  They would notify your lender when each milestone is completed for their approval to send money to you.  Very, very expensive and they’re good for large construction projects, not a $60k flip.

Hope your job goes well, Robert. Good luck to you.

Chris Seveney · Answer

@Robert Herrick

Bank account shouldn’t matter what matters is your bookkeeping to track all expenses and make sure it’s classified properly

Also make sure keep copies of invoices in case partner ever wants to audit the books.