The Speed of a Draw Release From Your Lender Matters. Do You Know Why?on July 10, 2018 4:43 pm under Real Estate Investment Tips
Choosing the right lender to fund your house flip can be a make-or-break decision. Successful real estate investors know not to take this decision lightly. Making a smart choice involves getting potential lenders on the phone and understanding the whole process, not just points and rates. You’ll want to dig into how the experience will work – from application approval timelines, to draw release procedures, to payoff details. Find the most reliable lender with the best timelines to keep your project on track.
One thing experienced real estate investors know to ask potential lenders about is the speed with which they can deliver funds for each draw request. If your money doesn’t get to you quickly, at the time when you need it, it can hold up the whole project and/or anger your contractors. Remember that time is money when you are borrowing funds. You don’t want to have to wait to pay your bills to keep the project moving. The speed with which your lender can process a draw request and disburse funds is a legitimate concern for successful house flippers. Read below to see why the speed of a draw release matters so much.
If You’re Doing the Work Yourself:
Some investors have handyman skills to do the work on a rehab themselves. This type of investor can get started on the work right away and don’t require a downpayment like most contractors would. They are funding the labor of repairs with sweat equity. For this investor, quick draw releases mean that they get money back in their pocket quickly. The next part of the project can be started, supplies ordered, or specialists hired right away. Basically, a quick draw release keeps do-it-yourselfers financially liquid with a much lower cash reserve.
If You’re Paying a Contractor:
Many real estate investors hire a contractor, or at the very least, subcontract-out some of the work to professionals of a certain skilled trade. A contractor’s agreement can vary depending on your relationship with them, meaning the out-of-pocket costs are subject to negotiation. One investor may know his or her contractor very well and be able to use that relationship to get work started on a project without paying a portion of the fee upfront. Another investor may have to front material costs or pay the contractor in multiple installments. The typical arrangement is one installment up-front, one at the halfway point, and one at the end. We’ve heard stories of contractors walking off the job because the borrower did not pay them. That should never be your lender’s fault for delaying draws.
Quick Draw Releases Prevent Unnecessary Delays
Below are two scenarios that show how a project can be affected by a lender’s inability to release repair funds in a timely fashion:
Planning + Quick Draw Release = Smooth Project Progress
Paul (Real Estate Investor) carefully schedules when work will be done on his project and knows how long it should take. He does most of the work himself but due to other projects he is working on, decides to subcontract some of it out to John, an electrician and plumber he met at an REI meeting not long ago. Upon agreement to work together, John tells Paul he will start the work but must be paid for the current job immediately after finishing and will not start the next phase until payment is received.
Paul knows the demo and rough electric work will be done on Monday of next week, at which time his inspector will take pictures and prepare a report, send them to the lender, and the lender will release Paul’s funds Monday/Tuesday to pay John. John is now ready to start the next round of work on Tuesday afternoon.
Paul’s loan amount was $300,000 (purchase and rehab combined). Due to proper planning by Paul and the alignment with a good lender that released funds in a timely fashion, Paul finished, sold, and paid off the lender in six months and made a significant profit in the process.
Sluggish Lenders Delayed Funds = Massive Lost Profits!
The same agreement and situation between Paul and John applies as above. Paul schedules for the inspector to come out Monday. The lender receives the report Tuesday, but they are not able to process and send payment until the following Tuesday. John does not receive payment until the following Tuesday, at which time he starts the next round of work.
Paul’s loan amount was $300,000 (purchase and rehab combined). Although Paul properly planned his stages of repairs, Paul’s lender did not release funds in a timely fashion. Paul had planned for six months, but due to a seven day delay between the lender receiving a report and actually releasing the funds on each of Paul’s 6 draws, the project took an additional 42 days. Over the 42 day span, Paul will incur interest amounting to approximately $4,200 and holding costs amounting to approximately $500. Because Paul’s lender took a week to send out repair funds for each draw, Paul incurred an additional $4,700 in costs.
In addition, John could have started another job in the intervening week, and might not be able to get back to Paul’s project for two weeks or longer. This would further delay Paul’s project and consequently, add even more to Paul’s incurred interest and holding costs.
Ask Your Lender about Timelines and Customer Service
When real estate investors are searching for a lender, it is important that they delve deeper into what a lender does and how they operate. Experienced investors know that even a week delay in getting funds can be a costly trade off. Points and ratesare key talking points in your conversation with a potential lender, but an investorshould ask about the application process, whom they will be working with in each stage, the lead up to and the actual closing, and of course, how the draw procedures are carried out.
Rehab Financial Group is known for our quick draw release of funds for our borrowers. We understand how important it is to keep a project on schedule and want you to be successful. Call us today to talk about how these procedures work and how quickly we can get you your money. Whether you are just starting out, or looking to upgrade the service you get from your current lender, we are proud to put your borrowing needs first.