Hml holding Reno funds in escrow. How does this work?

[Amy Solomon]

How does this usually work? I've seen that they will pay straight to the contractor after verification of completed work. How does the gc like this?

What about the expenses that don't get paid to a gc. Like purchase and installation of window treatments, lighting fixtures, appliances etc. Like cleaning expenses and garbage haul away. Like landscaping. Etc. how do we get the money that we need for these types of expenses?

[Jon Holdman]

I've been on both the borrowing and lending side of this so I have actual experience. You must pay the contractors, buy materials, etc. yourself. Then, the HML will inspect the work and hand over the money in "draws" as the work is completed. The number of draws will depend on the size of the project. There is typically a fee for each inspection and each draw, so fewer will save you money. More will get you increments of the money quicker.

The borrower doesn't have access because initially the value is not there to support handing over all the money. The borrower has no access at all to the reno funds until the work has been completed to the desired state. If you were handed the cash up front, you may well decide keeping the money and defaulting on the loan is the more profitable course. The HML wants to prevent this. You will have to have some cash of your own to buy materials and pay contractors. Then the HML hands over the draws, if you pass inspection.

Some HMLs will allow you to take a small chunk of the money up front.

IMHO, if the HML will fund 70% of ARV and your purchase plus rehab cost is also 70% of ARV you will need about 15% of ARV of your own cash to complete a rehab. If its the first one, you'll probably need more like 20% to handle the mistakes you'll inevitably make.