Hard Money "Holdbacks"

[John Geldert]

Earlier this summer I funded one of my BRRRR properties using a HML (for the first time). The terms were not that bad considering I got the the property at a steep discount and they were able to close in about two weeks. Shortly before closing the lender insisted that I bring All of the funds for my rehab to closing as opposed to just "showing" proof of funds. I was instructed that they would hold my money and I could make draws against it as the work got completed. This obviously threw a wrench into my strategy as I needed to come up with an additional $22k in a few days in order to get this deal closed. The deal closed, I finished the rehab and was able to recapture all of my funds...

My question is; do all hard money lenders insist one holding your rehab capital? Has anyone had experiences with HM lenders that do not require this, if so can you please share?

[Jon Holdman]

Yes, it is common for HMLs to hold the rehab funds and then give it out in "draws" as the work is completed and inspected.   When you're lending based on the value of the completed project you don't want to borrower taking the full amount up front, spending the rehab budget on something else and then leaving you holding the bag with the only security as the un-rehabbed property who's value is much less than the loan amount.