Are there any HML's who fund upfront?

Question

Hi All,

I just finished reading Rental Property Investing by Brandon Turner. It's a great read wherein he references the community of real estate investors here at Bigger Pockets, so here I am. I'm new to hard money lending and I'm trying to understand if it is standard for the lender to pay for the rehab as the work is done or if they give you the money so you can pay the contractors immediately after each part of the rehab is completed. Also, if it's standard that the lender must inspect and approve the work done before releasing any money, can anyone here refer me to a great GC in Atlanta that is used to buying materials and doing the work and being paid after?

I've met with NetWorth Realty here in Atlanta and they work exclusively with 212 Loans. It isn't making much sense to me that I'd be responsible for all the upfront costs of down payment, closings, six months of loan interest and other fees and then be expected to have the funds necessary to pay the GC & crew to get started on the property. Is this how it goes?

I'm also concerned that the lenders inspection/funds payment approval process might not reimburse me the actual amount I paid out of pocket. Example: I pay the GC $15k to do the front porch, living room and dining room. But the lender's inspector somehow decides that what she/he sees as complete only looks like $8k in materials and labor. Is this a valid concern? Then there's the concern of how long will it take for the lender to dispatch the inspector and reimburse me.

Are there any HM lenders who actually release the funds upfront so the buyer is in control of paying in a timely fashion?

Thanks in advance!

Jay Hinrichs · Answer

these are valid concerns.. with HML in the past learning their lessons about advancing rehab money until components are in place.reality though is if you are going to be stuck because a draw is 5k short.. then you probably wont get the loan in the first place. you need to have a lot of liquidity to be in the fix and flip business.. I know what is written and for some it works that way but keep in mind those are very experienced flippers who have been with their lender for man years and many successful projects behind them.. But those are valid questions.. I am in the middle of building my second phase of 30 lots so larger loan than a rehab. Loan and my bank inspector came back with 43% finished and my contractor has 85% complete with a 530k draw.. so suffice it to say I had to front the money so my contractor stays happy and go back to the bank get their inspector back out there etc.. it will work out no problem BC inspector is just wrong.. However you just need to be liquid enough to cover the unexpected .. after building 300 plus lots in the last 5 years or so.. this is the first time this occurred ..

Steven Harris · Answer

@Jay Hinrichs,,Thanks for your input on my concerns and confirming they are valid. I guess you're right, it comes down to just having enough cash available to keep things going in the event the lender's inspector determines that your finished work doesn't look as finished as you & your GC says it is. Because I'm working with small dollars, my best bet is to take the project in smaller chunks to make sure the crew is paid for what they've done. Establishing a healthy working relationship with a reliable GC & crew is just as important as finding a good HML. So much rides on the successful completion of my first project!Thanks again for your experienced perspective!

Jay Hinrichs · Answer

its very much a catch 22 with doing fix and flip rehab.. you need the best price possible .. and that generally puts you with contractors that either have NO credit and you must advance for materials etc.. or they wont do it as they have been burned.in our new construction all of our subs carry the jobs materials and labor.. Draws are due on the 25th for that month and payment ( after inspection) is made on the 10th .. if they miss submitting the draw then it gets paid the next pay cycle. paying weekly is VERY difficult to a non starter if your doing any kind of volume.So subs that can carry the job are more established and frankly are going to cost more if not alot more than johnny lunch bucket if I dont get my check on Friday I cant buy beer on sat.

Sergey Sidelnikov · Answer

Most of the HML lenders will require itemized budget for the project before they will finance purchasing of the property. Some of the HMLs will also add 10% Contingency as additional amount to your presented budget. Each draw you'll ask from the lender costs money, in average from $180.00 to $250.00, so you'll need to decide how often to request an inspection. Inspector's job is to confirm if one or another item from your budget list, you'll present to inspector, is done. Inspector, at least per my experience, will never ask about invoices. Regardless of how much you spent on one or another item from your budget list you'll be reimbursed exactly the same amount. You can use "Contingency" funds if you're over budget for some items, and if some funds are there still. Please keep in mind most likely lender won't reimburse you for the items that are not completed 100% on the moment of the inspection. For example, you purchased kitchen cabinets, but they are not installed yet when inspector will be at your property.

Karen Margrave · Answer

Ask yourself, would you do that? Loans are about risk. You can't ask the people with the money to bear all the risk, you have to have skin in the game. What is it that you are bringing to the table? Do you have any experience in real estate or construction? Project management? What are the numbers for the loan going to be based on? Do you have a list of what repairs you'd be doing, and estimates from licensed contractors or materials suppliers on the costs? Would you be using a licensed general or licensed subs on the job? What do you know about the permitting process? Do you know what permits are needed, costs, etc.? Does the property have public sewer or is it on a septic? Without any experience and a track record there's few lenders that will loan a person money, let alone release funds upfront and trust you, unless you have something to put up of equal value for security.

Jason Taken · Answer

Your concerns are valid. Communication with the lender is crucial for your inspection. As far as inspection costs, your detailed scope of work will dictate what you're owed at the draw. If you need to draw 10k, you should be able to show us 10k of work. Receipts/invoices/that you actually spent 10k.As far as timing, we do 3 business days in and out, then wire funds next day.I believe this to be typical across the industry. Again, valid concerns but could all be addressed up front. It's not typical though, that you will be paid upfront. To start your flip, I'd encourage you to have the 20% down, 2-3% origination, 1% for other fees, 6 months of reserves (no seasoning), and at least the FIRST draw amount ready to go. (30k rehab, hold 10k for the rehab)

Steven Harris · Answer

@Jay Hinrichs "Johnny lunch bucket" LOL!!!! I know exactly what you mean & I want to stay clear of him & his crew! May I ask you if there is a source to find the *maybe* more expensive but reliable contractors who are prepared to be repaid as the job is done? This would be ideal! I wouldn't have to come out of pocket so much, if at all. I understand your crew has a great working relationship with you & so they know they'll be paid or reimbursed. But if there are GC's & subs who have no problem acquiring materials and getting started with the expectation that they'll be paid as the project progresses, yea, that'd be pretty perfect. So, so much rides on the successful completion of my first project. Lenders would be more flexible/generous and my crew would know they'll be paid on time.Major thanks again Jay!

Steven Harris · Answer

@Sergey Sidelnikov, thank you for your input on this! My lender tells me that it will cost $250 to draw & $150 to dispatch an inspector and they can't say how much time it'll take to dispatch the inspector or how long it'll take for me to be reimbursed. So I'm paying $400 and I have no timeframe as to how quickly an inspector will come out. I don't think I'm going to use this HML. You addressed my concern perfectly which is, what happens if the inspector determines that only $5k of a $15k budget has been completed, and they only reimburse me $5k. This is why I must connect with a reliable, reputable, skilled GC & crew in order to get into this area of RE investing.Thanks very much Sergey.

Steven Harris · Answer

Thanks Jason, Karen & Aidan. I figured receipts and invoices would prove what I paid out, just wasn't sure if the lender's inspector might say "this doesn't look like $15k in work completed, it looks like $5k so that's what we'll reimburse.." I'm about to liquidate my Roth so I'm ready to jump on my first "easy" quick cosmetic fix & flip. As I understand it so far, lending gets easier after I have my first flip under my belt. I will have probably established a good working relationship with my GC & crew and so I imagine they'd be more comfortable & confident working with me on future projects. It's my goal to get quality & quick work done and to make sure they're paid promptly. Thanks again!