If you have funds escrowed for a rehab or new construction you’re going to need a draw schedule to get them. When hard money lenders reserve funds for improvements they need to set up budgetary milestones where the money will be drawn. Hence the draw schedule. Here are 6 steps for creating the perfect draw schedule.
*Different lenders have different requirements for draw schedules. The following list is what we like to see, but one thing that is true across the board is that lenders will not release funds unless work is either finished, paid for or both. So you will almost always need some operating capital to get started.
Step 1: Have a solid, detailed project budget.
This should go without saying, but you have to know what you’re getting into. Make sure you understand your project inside and out. Budget for everything. Don’t forget soft costs like architecture, engineering and permits. (Little City Investments reimburses for these too.) Know you’re fixture selections. Have a landscaping budget. Get bids from contractors. Build in a contingency percentage! Without a thourogh budget, your draw schedule won’t be based in reality, and you’ll be in trouble before you even start. At Little City Investments, we vet project budgets before closing, so if you’re working with us you’ll already have this one covered.
If you’re new to doing rehabs and construction, we suggest using a 3rd-party application to help you develop realistic budgets. We partner with househackerpro.com to help us review borrower’s budgets. However their application can just as easily be used on the rehab side to double-check budget numbers and contractor bids.
Step 2: Divide your budget into milestones.
Now, take your budget and make it chronological. Chances are it will probably be basically that way already, but you need to make sure you’re drawing money when you need it. Then divide the budget up into major project milestones. For rehabs, this can vary significantly. For new construction, the milestones are typically soft costs, demo/site prep, foundation, framing, dry-in, rough-in, trim-out, fixtures/finishes, landscaping/hardscaping, and final punch list. Make sure you aren’t allowing small items to potentially linger and delay entire draws.
Step 3: Simplify your draw schedule.
Now that you have your milestones, summarize them. Remember, the draw schedule is a method of communication with us for the purpose of dispersing funds. We will already have your approved, full budget, so we don’t need to see all of the minutia. Keep the info top level. For example, a flooring and paint draw might look like this:
Draw: Flooring and Paint
- Flooring materials and labor: $12,000
- Exterior paint and labor: $5000
- Interior pain and labor: $8000
That’s it. We don’t need to see anything else here. We’ll go out and inspect, and if it’s 100% complete, we’ll release the funds.
Step 4: Decide how many draws you need.
Once you have your project divided into clean milestones, then step back and think about when and how often you’re going to need a draw. This is a nuanced decision and will be dependent on many logistical factors. When do contractors need to get paid? How many draw fees do you want to pay? (The more draws, the more draw fees.) How much of your own money are you spending? Also remember that at LCI, we hold some funds back until the project is 100% finished and the property has it’s CO.
Step 5: Make the draw amounts as uniform as possible.
As a lender, we try to never be out more than 70% of the value of a project at any given time. The assumption is that with a rehab or construction project, as you add value, we can safely release more money and stay close to that 70% LTV. But if, early in the project, you request an enormous draw that’s half of the budget, then we have a problem. You’re effectively asking us to take on more risk and go above our 70% LTV threshold, something we will push back on. So do your best to keep the draw amounts reasonably similar to avoid conflict with your lender.
Step 6: Create an area for tracking draws and remaining funds.
This will help you throughout the project. You need to continually know if you are under or over budget and how much you have left in escrow. When you get a draw, update it. And don’t forget the draw fees! What better place to keep track of it than right there in the draw schedule? At LCI, we’ll give you a draw schedule template that you can work off of if you like. It shows the draws requested, the draw amounts paid and what funds are left. We keep it updated on our end, and you should do the same.
So that’s basically all there is to creating an effective draw schedule. By following these steps you can design a draw schedule that gets your project from beginning to end without unnecessary headaches. You’ll be happy and so will we!
Have more questions about our hard money loans? Contact us now.