The Draw Process, the single most important factor associated with your real-estate investment.
Your first thought is probably interest rate or maybe even lender fees, right? What about term of the loan? While these items are particularly important and can make or break a deal, they are all negotiated prior to the loan closing and the lender will not hesitate to tell you. While expecting double-digit interest rates, plus origination can seem like all that matters, there is more to consider! (See my blog “Hard Money vs Private money and why do I need it”)
What can really make or break your deal is the draw process. Huh? How can the draw process make or break my deal? Well I am happy you asked.
The draw process carries the “meat and potatoes” of the loan and for that matter the deal because it’s where/how you access the rehab funds to complete your project to flip or to convert into a rental with a refinance.
Understanding how and when to access the fund you borrowed to complete your rehab is just as important as interest rate, lender fees, or loan term. If you don’t understand the Draw Process it could easily cost more money than all of the other 3 combined.
Let’s dive into the draw process and things you need to understand prior to closing with any lender:
In almost all cases, the rehab funds are treated on a reimbursement basis. That means you fund the rehab or a portion of the rehab out of pocket then submit a draw request, and the funds are wired to you.
Why wouldn’t the lender just issue the funds at closing? You did just sign loan documents with the lender, right? You are paying interest on the funds, right? (If you know, you know)
It’s all about risk and mitigating risk as best as possible for the lender. If you walk away from the deal, the lender has protection. Remember that “Knowledge is Power” and knowing what to expect with the draw process and how to plan for it will save you money. That’s why our Blink team wants to help you understand it to its fullest (and you can always call us directly with questions).
DRAW Process questions you need answered before closing… (If you know, you know)
- Is there a Draw schedule? Draw schedule can be anything from the order things are to be completed to (like in phases or tiers) to what things are considered reimbursable and even when specific items can be reimbursed from your rehab budget. Understanding this structure can really make or break the project and your wallet.
- Are there Escrow (rehab) hold backs? Is any part of your draw request that is not funded when a draw requested. Example: you submit your draw request for $10,000 but the lender will only wire $7,500. The other $2,500 will be reimbursed only when the final draw or credited on the pay off.
- How much is the Inspection Fee? What is the charge to have the property inspected or draw processed?
- How much is the Wire Fee? What is the charge to send the money you requested from the Draw request?
- Timeline to disburse the funds? This one isself-explanatory. You need to really understand the expectations and timelines from the submission of the draw request to you receiving the funds, and most importantly, get it in writing.
- Is there interest being accrued on the undraw rehab budget? Is day one interest being charged on the full loan amount or since the rehab hasn’t been technically borrowed, just on the purchase price (minus down payments or “skin in the game”)?
Having complete understanding of the draw process and the expectation the lender has for the rehab completion will help limit the chance of surprises. No one wants surprises when it comes to an investment property; especially those extremely costly surprises that could wreck your budget or set you back in time.
It’s important to understand the above items and the overall draw process, plus working with a possible lender who will assist in you making the best decisions for your business model and giving you an advantage to succeed. That’s what we do here at Blink, and we’d love to help you.
