Hard Money Draw Question

[Ron Hollingsworth]

So I've done a few flips using hard money and I'm running into the issue of them sending out their inspector to verify work, however between the time that I sent the lender the SOW (while in escrow) and the time we actually start work, the scope changes.  Usually once we start the project, we learn of new or additional repairs that have to be done.  We spend the time and money to address these "new" issues, however the lender/inspector have not been taking these repairs into consideration when approving the next draw.  So, the draw is less than it needs to be putting me in a situation where I need to come in with additional cash outside of what I have budgeted for the project.  This screws up other projects or my personal finances.  Can anyone share with me what I could do differently to circumvent this issue?

[Ron Hollingsworth]

Quote from @John McDonald:

Addressing the issue of changing the scope of work (SOW) during a flip project financed by hard money loans involves several specific steps:

Detailed Initial Assessment: Before finalizing your SOW, conduct a thorough inspection of the property. This might mean investing more time or bringing in various specialists (like structural engineers, plumbers, electricians) to identify potential hidden problems before submitting the initial SOW. This approach can minimize surprises once work begins.

Flexible SOW with Contingencies: When drafting your SOW, include potential contingencies for common issues that might arise during the renovation. This way, you have pre-approval for certain types of additional work and won’t need to renegotiate the SOW for every change.

Regular Communication with the Lender: Establish a clear line of communication with your lender. When unexpected issues arise, update them immediately. This might involve submitting a revised SOW or providing additional documentation to justify the changes and additional costs.

Documentation and Evidence: Document every step of the renovation, especially when unexpected issues arise. Take photos, keep receipts, and maintain detailed records. This evidence can be crucial when negotiating additional funding with your lender.

Scheduled Inspections and Progress Reports: Coordinate with your lender’s inspector to schedule regular inspections. During these inspections, present your documented changes and explain why they were necessary. Regular updates can keep the lender informed and more receptive to approving additional funds.

Negotiate a Flexible Draw Schedule: When negotiating the loan terms, try to include a more flexible draw schedule. This could involve more frequent draws or draws based on milestones rather than a fixed schedule, allowing for more adaptability to changes in the project.

Seek Legal or Financial Advice: Consult with a legal or financial professional who specializes in real estate investment. They can provide advice on negotiating terms with hard money lenders and might suggest strategies to better protect your interests in future deals.

 Wow, sounds like a ChatGBT response.