Investor · San Jose · Member since 2023 · 5 posts · 1 vote
Good afternoon,
I am in the process of purchasing a home which requires a rehab/repair budget. The lender will be doing a holdback of the budgeted amount, and I am curious as to how this process will work in terms of actually paying the vendor for services completed?
My repair budget has different Draws timelines for me to chose, but I am unsure if I only need one draw or multiple draws. The Vendor requires a deposit to start work which means I would either be fronting the money upfront then looking to get reimbursed later, or will the lender provide the money upfront to get started. Most things I have read say that lenders usually send someone out to inspect work completed and release funds only after it has been approved. Can someone provide clarity here? I have done several deals where I just do the work myself outside of closing, but this is the first one that I am doing using a repair budget. Any information provided would be greatly appreciated.
I have worked with several private and hard money lenders who offer loans like this, and the draw process varies quite a bit from one lender to the next.
In general, you'll need to front the first payment to your contractor, then get reimbursed by your lender via a draw request.
But you need to talk with your lender about these details. They are the only ones who can tell you exactly how this loan you were approved for will function.
I have worked with several private and hard money lenders who offer loans like this, and the draw process varies quite a bit from one lender to the next.
In general, you'll need to front the first payment to your contractor, then get reimbursed by your lender via a draw request.
But you need to talk with your lender about these details. They are the only ones who can tell you exactly how this loan you were approved for will function.
Your lender will most likely ask for a invoice of work that is completed with physical or photo inspections to prove work was done. Get with your lender on your draw process. Most require you to pay the contractor then reimburse.
@Andrae Warren I can share info from both sides of the fence on this, as I was a flipper/borrower before I became a rehab lender. Lenders typically pay as work is completed and inspected. Some will hire a 3rd party inspector, others may use an app and have you (or your designee) take pictures and upload them to the app, while others may just have you take pics and email the pics to them (TIP: always take before & after pics of your projects for several reasons).
The scope of work (SOW) is the "road map" of the rehab. It is wise to be VERY detailed on the SOW line items. Normally the lender will only pay the line items that are "completely" finished (some may pay the percentage done, while others will only pay that item when it is 100% completed). For this reason I am a fan of breaking down the line items. Example: instead of a line item of INTERIOR PAINTING @ a cost of $6,000; break the interior painting out by areas of the interior (either by rooms, or by floors). This way if some areas of the interior are painted, while others are not yet completed, you can get paid on what IS completed, as opposed to NO payment for interior painting. This can also be done for tile work, flooring installation, etc. Cash flow is important to the rehab, so you want to do what you can to keep the cash coming from the lender's escrow to keep the project moving.
How you choose to pay the contractor(s)/vendor(s) is between you and them. Some investors pay their contractors as they receive draws from their lender, while others pay their contractors regardless of whether the draw was received or not. It depends on your cash reserves position. Most lenders do not limit the number of draws, so you can gain smaller draws more often if the lender is OK with that, however there may be a fee per draw from the lender. I typically broke my rehabs out into no less than 4 phases (draws) and larger rehabs would be more like 6-7 phases/draws.
TIP: Have contractors complete a W9 form for tax purposes, and have them sign a mechanic's lien release so that they can't file a mechanic's lien on the property (some lenders may require this). These forms might be available online in generic form.
Hope that this helps and good luck with your rehab sir.
Yes, the rehab process isn't what people think. They hear 100% rehab costs and they think they get that right away. If they did, think about how often people would misuse the money and then the investor left with a half completed house and the loan about to mature and the lender having to seize the property. Ugh. Ugly.
So yes, in my network I run in Philly. The investor fronts the contractor 20% of the rehab budget up front. With that, he's able to get things started and make sure a crew is at your house everyday. Once that money runs out, the contractor will apply for a draw based on what he did with the money you fronted. You fill out some forms from your loan servicer and the contractor signs some forms and requests an inspection. The inspector comes, verifies the work is complete and then oks the funds to be released. Now, most times the borrower must wait until the last draw before they see their fronted money back, but my contractor works with investors and gives them a chunk back every time get gets a draw.
Each draw will cost 200 bucks so no more than 5 draws I'd say.
Make sure the contractor works in a contingency in case he finds something he did not see upon walking through.