It is critical that flippers and developers understand the mechanics of a draw schedule when borrowing hard money.
Many budding real estate entrepreneurs with limited experience are blindsided when their loan is not made available in its entirety.
This can in turn directly impact cash flow, project momentum and even contractor trust.
That’s why knowing how a draw schedule works and how to best manage it is critical to ensure the smooth operation of any project.
What is a draw schedule?
A draw schedule is a financial plan set by the lender.
It designates the stages of construction when corresponding percentages of a loan will be released.
It is used by all types of lenders for construction or renovation loans – especially hard money lenders.
The schedules payments or “draws” are aligned with various stages of the project’s completion.
In the instance of a house flip, draws may be assigned to certain stages of completion such as:
Initial draw – allowing for the purchase of the property
Demolition draw – once internal walls have been demolished
Framing draw – designed to fund the framing or structural skeleton of any refit including walls, roof trusses and flooring
Rough in draw – this includes any plumbing, electrical and HVAC to be installed before walls are closed.
Drywall draw – this is the covering of walls and ceilings with drywall before painting
Completion draw – to fund finishing touches on flooring and painting.
Final draw – any final work including landscaping, clean-up and staging including listing the property.
How draws are approved
Draws or additional funds for any project have to be approved by the lender before being released.
This normally involves an official request from the borrower detailing the work completed.
It is normally accompanied by photographic or video evidence, invoices and receipts.
The lender may accept the video evidence before releasing the next draw.
Alternatively, they may require a physical inspection of the property to verify work has been completed.
It is important that the borrower remains aligned with their original budget, SOW (scope of work) and that the work is completed on time and to a satisfactory standard.
If this is not the case, the lender may withhold or adjust the draw amount until they are satisfied.
Why lenders use a draw schedule
Lenders use a draw schedule to reduce their exposure in the event of any one of a multitude of potential problems.
Transparency and accountability – By releasing funds in stages or draws, it helps protect their investment and holds the borrower accountable by allowing them to ensure the money is being used solely for construction purposes.
Work verification – It gives them a chance to oversee projects to ensure the property remains on track to meet its ARV (After Repair Value) and that work is being completed on schedule and budget.
Flexibility – If the project encounters problems, it gives them the ability to adjust or pause funding until those issues are resolved.
Risk mitigation – If the project collapses or the borrower defaults, the lender is less exposed, having not released the entire value of the loan at once and may take possession of a partly improved property in a bid to recover funds.
Tips for borrowers
Borrowers are strongly advised to observe some basic practices to ensure the smooth release of funds from lenders.
These tips include:
- build in ample buffer time for inspections
- communicate timelines with contractors as early as possible
- keep detailed records and receipts of all expenditures
- understand exactly what documentation your lender requires
Get advice today
A draw schedule is a worthwhile device not just for the lender but for the borrower as well.
It encourages flippers and developers to run projects on time and on budget which ultimately have a direct impact with their return on investment.
There are many types of lenders and there are many different hard money lenders operating in California.
But if you want a hard money lender that will not only fund your project but can mentor you, offering sage advice every step of your journey, then you need look no further than Equidy.
Equidy has one of the most respected and enviable reputations on the west coast.
They have an intimate knowledge of real estate entrepreneurship and work around the clock to provide hard money solutions for every circumstance.
They stand by their core belief that anything is possible and are determined to prove it each and every day.
Even in tough economic times, they strive to reward ambition and always help their clients realize their wealth creation dreams.
But the benefits of working with Equidy don’t end there.
Equidy has covered every aspect of real estate and property development in California for more than 40 years.
They work creatively with their clients every step of the way, providing their wealth of knowledge and support network as their clients’ projects take shape.
Equidy enjoys long and established relationships with serious investors, flippers, developers and real estate professionals while leveraging their reputation and trust, using clear communication to minimise the risk to all parties.
Contact Equidy today to book your free strategy call.
