How to properly handle draw requests ?

Question

How are other small private lenders handling draw requests without a dedicated draw team?

The pattern I keep running into, talking to lenders with a handful of rehab loans: draw requests are the one part of servicing that doesn't scale down cleanly. A bank has a whole draw department. A solo lender with 8-10 active loans doesn't — so it becomes phone calls, texted photos, and someone's memory of what was approved last time.

The part that seems to actually bite people isn't the full draw approvals — it's partial ones. A borrower asks for $15k, you're comfortable with $10k based on what's actually done, and now there needs to be a real reason attached to that difference — something you can point back to in three months if the borrower disputes it, or if an investor asks.

Genuinely curious: is everyone just doing this by phone/text and hoping they remember the reasoning later, or has anyone found something that actually holds up when someone asks "why was this draw only partially approved" six weeks after the fact?

Erik Estrada · Answer

There are lenders that have an actual portal and team to submit and request draws. As long as what you are requesting is in line with your SOW, you should have very little issue requesting the full amount. The issue is when a borrower asks for more than what they put on their SOW that was approved for the loan.. This is where it helps to buff up the numbers a bit or have a larger contingency if allowed.

Steve Waller · Answer

Most of the thread is about proving the work is done, which is right, but the partial-draw problem you described is a budget problem more than an inspection problem, and it has three parts nobody has named yet.

Fund by line, never by percentage of a line. A line item is complete or it is not. The moment you approve "plumbing is about 60 percent there" you have put judgment back into a process that was supposed to be arithmetic, and that is precisely the decision you cannot defend six weeks later. "He asked for 15,000 and I funded 10,000 because lines 4 and 7 were complete and line 9 was materials-on-site only" survives a dispute. "I felt it was about two thirds done" does not. It also ends the argument with the borrower on the spot, because he can re-derive the number himself.

Watch for cheap-lines-first. This is the failure mode that actually costs money and it looks like nothing while it is happening. A borrower who is short on cash finishes the low-cost, fast, easily-verified lines early - paint, fixtures, landscaping, flooring - and draws against every one of them. Each inspection passes. Each draw is legitimately approved. Then you arrive in month four with the roof and the mechanicals unfunded, the budget spent, and a borrower who needs a change order to finish the house. Sequence matters as much as completion. If the structural and mechanical lines have not moved by the second draw, that is the conversation to have, not the one at the fourth.

Version the budget. The most common reason a partial draw cannot be explained later is that the baseline moved and nobody wrote it down. Change orders happen on every job. Re-issue the budget with a version number and a date each time one is approved and have the borrower acknowledge it, or in three months you are comparing a draw request against a document that no longer describes the job.

On your question to Chris about whether documentation gets stricter once a loan is flagged: it should not, and the reason is that the file you build on a performing loan is the file you will be reading if it stops performing. Anything you would start doing at that point is something you should have been doing from draw one. Consistency is also what makes the record credible. A file where the documentation suddenly tightens at month five reads, to anyone looking at it afterward, like the lender already knew something.

Jarred Sleeth · Answer

When I got started in lending working at a small lender, we did all the inspections ourselves. Nothing was approved until the work was completed. That means no funding for cabinets that are onsite but not installed, etc. It just gets messy and a dishonest client can take advantage. Lessons learned, and all...

Stacy Raskin · Answer

Draw requests usually are matching the budget numbers that were submitted on the rehab budget for the loan when it was approved. Generally, depending on the lender, a written request is made for the draw after the rehab work has been completed and then the work is verified and funds are released if the rehab work verification shows that the work was done.

Jeff S. · Answer

Don’t think you must fund the purchase as well as the construction, @Aidan Santiago . But if you do, proper funds control is an integral part of the construction lending process and absolutely mandatory.

Partial or not, this means having a sensible draw schedule and requiring a real human being to personally inspect the property and independently evaluate construction progress. Never rely solely on photos taken by the borrower, which might not even be of the property in question and/or can easily be manipulated. Nor should you conduct the review or even the inspections yourself.

An independent inspection report makes it difficult for a borrower to coerce or pressure you into releasing funds before you should. It also provides an independent set of eyes from someone who arguably knows what they are looking at and can protect you from the games some borrowers play.

There are many construction funds control companies that will work with small lenders.  Here's a short list.

Aidan Santiago · Answer

This is helpful, thanks. The written reason for partial approvals is the part most people skip and then regret.

Since you run both performing and non-performing funds — does the documentation get stricter once a loan's flagged, or same either way?

Chris Seveney · Answer

Every draw request must be put in writing, then a formal inspection must be done, and a response in writing on what is approved or what is not approved and the reason why .