Once you have closed a new loan for construction or fix-and-flip project, the next step is to commence the construction. As your project work is completed, you will want construction draws from loan amount to make payments for the work you have done. This is when you need fast construction draws to clear the payments of contractors and material supplies.
Know that before closing a loan, the contractors and homeowners provide lender with a comprehensive itemized schedule for the work completion. The schedule also lists the associated cost of the construction project. The contractor adds and organizes all these details in an outline called as “draw schedule”. This draw schedule becomes the basis of your future draw requests submission.
However, seemingly simple, financing fix-and-flip project is easier said done. It is because when a property flipper partners with a money lender to finance his/her fix-and-flip construction project, the loaner may impose a “construction holdback” for construction draws.
That means the hard money lenders only help house flippers fund their fix-and-flip property but hold back the construction portion. Later on, the money lenders pay this loan portion incrementally for the renovation of the property.
That is to say, fast draws on fix-and-flip projects are important to speed up the construction process. That is why it is important to have in-depth-knowledge about constriction draws, and fix-and-flip projects ‘loan approval.
Here is all what you need to know.
Why do Hard Money Lenders Include Construction Holdbacks?
When property flippers borrow from hard money lenders to finance their fix-and-flip projects, the property becomes collateral on the loan amount. Put simply, the money lenders record loan on the title of the property, generally in the first place. More money is later advanced through construction draws.
Generally, money lenders take this step to protect the loan. For instance if a house flipper defaults or fails to pay back, the lenders can recoup and foreclose the amount they loaned.
There are many states in which contractors’ liens take the first position on their titles. So in any foreclosure case or outstanding payment event, contractors are paid before the lenders receive foreclosure sales proceedings.
However, if borrowers or property flippers default without paying the contractor, hard money lenders face a significant loss. It happens because they have already remitted all the construction funds.
Why Hiring Reliable Hard Money Lenders is Important?
Hiring a reliable hard money lender is another key aspect you must consider before procuring construction loan for your fix-and-flip project. Besides this, it is essential to partner with a hard money company that quickly disburses the funds to help you get started on the project.
There are many hard money firms that visit your site before approving loan. Not only this, they require detailed photos of your property. These companies work with their own contractors who bid a heavy and new scope of construction work.
Most hard money firms have unknown and irrelevant draw amounts which make paying suppliers and labors more challenging. Their stringent terms and conditions make paying materials and planning a stressful task.
Furthermore, some companies require home flippers to complete work before issuing their first draw loan check. Or they send the first check after a week of a due date. The lengthy and cumbersome process wastes the whole lot of home flippers ‘time they could have invested in the potential work. More importantly, home flippers lose potential profit.
It is worth mentioning that hard money lenders work with different loan structures based on the conditions. That means they may have a varied loan origination fees which is usually based on length of the project.
Tips to Build Schedule for Construction Draws
As mentioned above, your draw schedule maps out all the work details you want to execute on your new construction or fix-and-flip project. Based on amount of work your investment project requires, you can sort it into various stages. It will help you calculate or estimate the number of stages your fix-and-flip project will cost you.
Remember that when you finish the each stage of the project, you need to request reimbursement or construction loan from the hard money lender you have chosen. You and your money lender will agree upon a draw schedule to get the loan or cash you require to go on with the investment.
Here are a few tips that can help you get your fast construction draws for the fix-and-flip project.
Schedule Construction Draws Request in Advance
The lender sends an assessor to inspect if the listed work on the stage is completed or not when you make request for the draw. For you, that may translate in to shaving off a few bucks from the profits while adding more days to your timeline. And that is not ideal for you.
When working with money lenders at the construction draw process, saving time throughout the process is possible. All you need is to schedule construction draws request in advance.
Flush Out Budget Details
The more thoughts you will put into the budget planning beforehand, the more accurate your draw plan will be. As a result, you do not need to negotiate and evaluate the work scope later on.
Furthermore, having a comprehensive and thorough schedule for your project is great to make everything runs smooth, allowing you a good grasp on the investment.
Keep Draw Schedule Simple
It is worth mentioning that the hard money lenders do not need to know everything. That gives you leverage to keep your draw schedule simple and concise. Plus, it can give you a wiggle room to determine the stages in which you have to complete some cosmetic fixes if you face shipment delays and setbacks.
You will only make the inspection process hard by putting minutia or unnecessary details in the draw schedule.
Bottom Line on Construction Draws
In a nutshell, fast construction draws are of paramount importance when you are investing in a fix-and-flip project to carry out construction tasks seamlessly. Also you need to focus on hiring trusted hard money lenders to keep your construction of fix-and-flip /construction run smoothly.