Construction Draws: Where’s the Rest of It?

“Where’s the rest of it!?” This is a frequent question from new borrowers after receiving rehab funds from a recent construction draw. The construction draw process can result in a lot of questions from new investors, which is why the accuracy of your construction budget and your ability to be “hands on” as much as possible with your project is very important for the construction process.

Below are some tips to minimize surprises and keep the process running smoothly for you and your general contractor:

Don’t Work in Generalities: Your presence during the appraisal is very important. It gives you a chance to paint the appropriate picture and add detail where the budget itself may be lacking. If there is a description for a line item in your budget, use it! Seeing a $10,000 line item reading “bathroom” isn’t sufficient. Take a few extra minutes to add the details as they will help speed up the draw approval process/draw payouts and keep your general contractor happy!

You’re Not in Kansas Anymore: Try to work close to home on your first few projects. Remember, it’s your project, so don’t rely on your general contractor and the inspector to fulfill all of the checks and balances. While there are many wonderful general contractors and inspectors out there, they may not be the ones that you are working with. If your project is geographically distant or in another state, have somebody you trust, and who does not directly benefit from the transaction, regularly tour the work-site and do walk-throughs.

“The only guarantee with any construction project is that there will be surprises, so be sure you are set up with funds to handle the unexpected so that you aren’t stuck self-funding necessary repairs.”

Contingencies are Key: Lenders love to approve deals with a good contingency line item on the budget – if your budget contains a line item for contingency and still sizes up it’s a huge win for your deal. The only guarantee with any construction project is that there will be surprises, so be sure you are set up with funds to handle the unexpected so that you aren’t stuck self-funding necessary repairs. Lenders like to see budgets at market pricing, but remember that anything not used, including unused contingency funds, are paid back to you when you sell the property or deducted from the final payoff to the lender.

Make Your General Contractor a Specific Contractor: Be sure that your general contractor provides specific information about not only what has been completed but what is partially completed for your project as construction funds can be released for partially completed work. Don’t assume that the inspector knows the plumbing is complete just because the drywall is finished, and if you can’t be there for the draw inspection, make sure your general contractor is on site to account for any finished work. Be sure that what the general contractor is representing as “complete” is finished and not scheduled for completion within 48 hours – funds will only be released for work documented by the inspector, so even if the work will be completed by the time draw funds are received, funds for work done after the inspection will not be sent. Stick to requesting funds only for work you know has been done.