Creating a clearly defined scope of work and a draw schedule for your hard money loan is one of the most critical pieces of a successful real estate investment project. Our underwriting team at Alpha Funding Solutions provides each borrower with a completely itemized and editable budget form to help create the perfect budget and plan. Spending thought out and intentional time when creating your budget could potentially save you money, time, and resources as you work to complete your fix and flip property.
How it works:
When you close on a hard money loan, you are funded the agreed upon cost of acquisition. The construction funds are placed into a reserve account where you will draw down on the money after phases of construction are complete.
As you complete each phase of your fix and flip project, you will submit for a draw request to the Alpha Funding underwriting team. The underwriters will then order an inspection to be completed on the property. As the borrower, it is your responsibility to pay for the inspection directly to the inspection company.
Once the work has been inspected and approved through our in-house construction manager, the portion of funds as it relates to the portion of work completed will be released.
Any money that stays in the reserve account during the length of the loan is not collecting interest. Monthly interest payments are determined by the current principal balance.
Alpha Funding does not require any minimum draw requirements or require you to draw down on the construction funds at a certain time. You can create a construction loan that works best for your unique situation.
Tips for creating a draw schedule that works:
- Think. Put great thought into creating your budget and plan and then stick to it. Your hard money lender can only disburse the funds that have been previously budgeted for. Confirming costs with your contractors up front and sticking to the plan of action will make the draw process smooth and easy. Your draw request amounts should match up to the budget as accurately as possible.
- Discuss with your contractor how they expect to be paid and work your draw schedule accordingly. Each contractor operates differently as to how they expect to be paid, materials, labor, etc. Having an in depth understanding of their expectations will benefit you in the long run. Ideally, having your draws roughly equal will save you money. Each funded draw will replace the previously floated money used to complete the previous phase of construction.
- Plan. Give the appraisers lead time. If the work is scheduled to be completed tomorrow, submit for the draw request today. Once the draw request is received, an inspection will be ordered. Consider the timing necessary for the inspector to arrive on the site, complete the inspection and submit to their company. The report will then be sent to Alpha and approved by our construction manager. Once those steps are complete, the funds will be wired. It typically is about four business days in New Jersey and can vary outside of New Jersey depending on the inspection company’s timing.
- Budget in a contingency plan. New borrowers may want to consider budgeting up to 20% of contingency funds into their loan to cover the unexpected. More seasoned borrowers may opt for no contingency or something around 10% of the project cost. Either way, contingency funds are optional but often necessary, as the unexpected does arise.
- Stay the course. Stick to your scope of work. Any major changes in the plan could be potentially detrimental to the project. Adding to the scope of work mid project and needing more money may not be feasible, as we lend up to 65% of the after repair value. If you’re already at that LTV, we would not be able to offer more funding. Reducing the amount of work mid project could alter the after repair value and result in needing a new appraisal. These changes could slow the project time, result in a lot of money out of pocket, and other hiccups in the road. It’s best to lay the plan in detail up front and stick to it as closely as possible as you complete your fix and flip.
If you’re thinking about getting started with Alpha Funding or have more questions, call us at ,a href=”tel:732-657-2014″>732-657-2014 or email [email protected] . Our team is here to support and encourage you as you pursue your investment dreams. There’s nothing to lose and everything to gain.