HML Draws- Timing and Process

[Rigo V.]

So I have a HML for a fairly large rehab. The HML is providing 75% of the purchase, 100% of the rehab. My questions is around the draws and how I should work with the contractors?

In my mind lets say I have a contractor doing HVAC for 8K. He asks for a deposit and I pay him 2K. He does the work and I ask for a draw from the HML. The HML "reimburses" me 8K and I pay him the remaining 6K and I get my initial 2K back. Is this how everyone does it? I know you should never get in front of your contractor with payments.

Should I be only floating deposits/small amounts until work is complete? I don't want to make it hard on the contractors but also don't want to float an entire reno.

[Sue Hough]

Good morning @Rigo V.!  I am an investor and am also the owner/founder of a residential construction company for 21 and 18 years respectively.  @Mike Zins is correct, “draws” operate on work complete and do not allow for money upfront.  Here are some guidelines for you to follow, and protect yourself;

1.  Draws are not something you can request every week or so as they require inspection and processing, and usually a fee of a few hundred dollars.  There is a standard “schedule”, meaning when money is requested in the construction industry, and most tradesmen are familiar with it.  Here is the typical draw request milestones;  Completion of foundation includes; excavation, foundation, architect, underground plumbing and temp electric.  Completion of project being “weather proof”; includes framing, roofing and windows.  Completion of rough inspection (which is when plumbing, HVAC, electric and framing has passed inspection and you are approved to insulate) includes; plumbing 75%, HVAC 90%, electric 75%, framing 100%.  Completion of  flooring includes; insulation, drywall, partial paint, hardwood floor and bathroom tile.  The last draw is the “final” and covers all that remains.

2.  Your subcontractors should be aware of this.  Feel free to share with them the name of the lender and a copy of your Sworn Contractors Statement, which is the document your provide your lender with the name/address of all of the subcontractors and their contract amount.  This assures them they will get paid and elevate their apprehensions.

3.  ALWAYS, let me repeat - ALWAYS, require a notarized waiver from every sub before you put a check in their hands.  Make sure it is complete.  Get a final material waiver for all materials delivered to your job site as they can lien your property if they are not paid.  There are two types of waivers; “partial”is used when work is ongoing. “Final” is just that.

4.  All contracts between you and your subs need to be in writing which include; date, amount, specific work to be performed and payment terms.  It can not be a text.

5.  Make sure all subs provide you with a certificate of insurance which includes a minimum of $2,000,000 liability.

Good Luck,

Sue Hough