Confusion on HML Rehab Funding - What value am I getting?

[Michael Tan]

Hey everyone! So I’m finding myself unable to wrap my head around a certain aspect of Hard Money Lending as I go through my first deal.

I'm currently using an online HML provider, LimaOne, and received "Fix n' Flip" funding for 90% of purchase + rehab costs.

Closing has happened successfully (albeit with a few funding hiccups), and now that I’m heading into the rehabbing stage, I’m utterly perplexed by an aspect of their funding model — specifically, their rehab funding process  

During closing, LimaOne placed the entire rehab budget into an Escrow account and will deliver me the funds on a reimbursement basis. The basic process for reimbursement is:

1) I request a draw for a certain amount and specify which items were completed.

2) LimaOne sends out an inspector to ensure the work was completed.

3) I receive the funds after ~3-4 business days.

The problem with this model is that it doesn’t actually enable me to pay the contractors in a timely manner — the money is essentially inaccessible to me, so the end result is me paying for a high interest loan on funds I can’t functionally use while I fund the rehab out of pocket anyway. And to actually fund the rehab, I’ve had to take out an additional personal loan due to not realizing the funds wouldn’t be available for use up front.

Am I missing something obvious here? What should I have done differently? And for those who have used HMLs, how does the rehab funding process usually work?

[Caleb Jordan]

Originally posted by @Michael Tan:

Hey everyone! So I’m finding myself unable to wrap my head around a certain aspect of Hard Money Lending as I go through my first deal.

I'm currently using an online HML provider, LimaOne, and received "Fix n' Flip" funding for 90% of purchase + rehab costs.

Closing has happened successfully (albeit with a few funding hiccups), and now that I’m heading into the rehabbing stage, I’m utterly perplexed by an aspect of their funding model — specifically, their rehab funding process  

During closing, LimaOne placed the entire rehab budget into an Escrow account and will deliver me the funds on a reimbursement basis. The basic process for reimbursement is:

1) I request a draw for a certain amount and specify which items were completed.

2) LimaOne sends out an inspector to ensure the work was completed.

3) I receive the funds after ~3-4 business days.

The problem with this model is that it doesn’t actually enable me to pay the contractors in a timely manner — the money is essentially inaccessible to me, so the end result is me paying for a high interest loan on funds I can’t functionally use while I fund the rehab out of pocket anyway. And to actually fund the rehab, I’ve had to take out an additional personal loan due to not realizing the funds wouldn’t be available for use up front.

Am I missing something obvious here? What should I have done differently? And for those who have used HMLs, how does the rehab funding process usually work?

 The idea is that you front some of the money to pay contractors. Many Hard money lenders require you to have enough funds to start rehab yourself then you draw on funds to replace what you spent. Some may front you the first draw so you can get started, but that is not as common.

You also should be giving contractors only 25% to 50% upfront so they have an motivation to get the job done and receive the rest of the money. You could use credit card if you have to and repay it with draw money before interest hits

Usually hard money charges interest on rehab funds before you use them. Others may not, for example my company has a special program where you don't pay interest until you draw on funds, but most of our loans work the way you described Lima One's draw process. So that is pretty normal. From the lender's perspective they have set that money aside and can't use it, so it is tied up for them. So that is why they charge interest. If they just dumped it into a borrowers bank account they would have people running away with the rehab money and leaving an unfinished property.

The draw process allows you to repay yourself so you can keep going and not run out of money and then not have all your rehab funds stuck in property as you wait for it to sell.