Hard Money Lending Terms for Rehabbing KC Market

[Christopher J Lemmon]

Rehabbers, 

I am learning how things work with rehab loans. I was offered a scenario by Peak Asset Lending for the Kansas City market. But the terms are a little strange to me. 

They loan 80% of After Repair Value (ARV). -- That sounds great.

They only require a payment that is around 7.5% interest of a 30 Amortization payment, the other 5% they charge out of the loan proceeds. -- That sounded okay. Its not a huge deal to me. But I understand on large loans that might free up cash flow.

Here is where the deal got strange to me. They only allow you to use 20% of the approved loan amount for repairs. The other 80% they hold in escrow and it cannot be used or accessed in any way until the property is totally completed. As in you are putting it one the market.

In my scenario is the property has an ARV of $75,000. I only want to borrow $40,000 total. That is all I have estimated that is needed to complete the project.

So they will loan out the initial 8K but will not loan anything else until the property was completed. Does this sound like how these kind of loans normally work? 

I wonder if there are any companies lending in the KC market that will at least pay for work as it is completed. For example, new roof is finished, cut a check for the roof, new electrical work done, inspector checks it and approves it, pay the electrician, plumbing fixed, pay the plumber, drywall finished, cut a check to the drywaller. 

If all the contractors we use are not paid until the entire house is finished, which is what the guy at Peak Asset seemed to be saying, I think I will have a whole lot of contractors mad at me for not getting paid.

The loan officer said, "We cannot pay out anything more than 20% of that loan until the whole house is completed. Which seems odd to me. I guess I could just tell all the contractors, "When the house is done and I sell it then I will pay you." -- I am sure they would be happy with that.

This is the first time I have looked into doing a rehab for resale and I am trying to learn the way this is usually done.

Chris Lemmon