Educational video on what’s a draw schedule, how do they work, why a lender does it and how it protects the borrower on rehab or construction lending.
“Marcy: Hello.
Jack: Anyway, this is Jack and Marcy again.
Marcy: Surprise, here we are again.
Jack: Another, educational video; we’re educators.
Marcy: We’re teaching today, yeah.
Jack: Anyway, we want to do this educational video on draws. What’s a draw request? Why do lenders ask it? What should a borrower be aware of? And some of the intricacies behind it. So, the basic premise is, whenever there’s a draw, and we’re doing draws at Gelt—you know, most of them are fairly small, under a hundred—but we’re in the middle of one now that’s a million.
Marcy: A million. Yeah, it was quite a large apartment complex, and there was a building that had burned down from a fire, and they had to rebuild it, so you know they came to us.
Jack: What was the fire cause for?
Marcy: I don’t know the details; I just know that—
Jack: I’m always interested in the details— Anyway, so a draw request. So, let’s just say, for example, let’s talk about it. A guy or girl or a person, I want to be politically correct today, is buying a property for a hundred thousand dollars. They’re spending a hundred thousand to rehab the property, and it’ll be worth 400,000 when it’s done. So, they get to closing. So, what we do is, maybe prior to closing, we ask them for the contractor’s estimate and a draw schedule, a proposed draw schedule, and it always changes a little bit. And I caution everyone that whenever we do draws—I don’t know if we’re the unluckiest lender in the whole United States—but they’re always more. So, if you think the work is going to be a hundred thousand in ninety days—
Marcy: It’s always more, and then they can run short, you know.
Jack: Yeah, it’s 150,000 in six months or a year. Everything’s always more, so you have to be prepared for it. So, at closing, maybe we’ll give the guy fifteen thousand dollars. He gives his contractor the work, and he does, let’s say, the kitchen. What they do is they send pictures when the kitchen’s done. They’ll send pictures to Marcy or someone at the office. We’ll sort— I don’t want to say re-underwrite the loan, but we’re always looking at it just to make sure that the borrower doesn’t get—
Marcy: Right, we want to make sure the money goes back into the property, so we ask for receipts, we ask for pictures, we ask for a description of what work was done. It’s very well documented.
Jack: Very well documented, and then we give them the next draw. Then we give them the next draw. So it’s kind of—we’re dispersing the money in a logical sequence to make sure the money’s going into the property. Now, once in a while, we’ll do inspections, and on big deals, we do mortgage and judgment search. That’s for mechanic liens, which I’m going to make another video on mechanic liens. That’s a whole another topic. And there are sometimes we do have construction management companies to make sure that the work is done. But ultimately, the lender is doing a draw request or a disbursement to protect the property, to make sure money goes into the property.
Marcy: ‘Cause we need it to go back in the property because that’s for the values, you know.
Jack: And two things can go wrong. One, the borrower could not do the work and take the money. I know none of our watchers or listeners would do that, but it happens. Unfortunately, they divert some of the money. You know, we advance 20, and 15 is going to the property—
Marcy: They use 5 to pay their mortgage payment or their rent or something, and you know, then we’re short money to finish the property.
Jack: Yep, or what happens a lot is they’ll advance the contractor money, and some contractors, they don’t show up and do the work. So, we’re really dispersing the draws, and lenders are dispersing the draws for the protection of the project, the borrower, and themselves. And there’s an alignment of interest between the lender and the project and the property. Some borrowers think, “Oh, it’s to protect your interest,” but it’s to protect their interests too.
Marcy: No, it’s to protect everyone, everyone. ‘Cause in focus of all this whole situation we’re talking about is the property, and the property has to have the value after the rehab is done, and it has to be done.
Jack: Yeah, so that’s why lenders do draws to protect it, and again, we do it. It works very quickly. They get the money usually within a day—
Marcy: Within 24 hours, you know. You send it to me; we do everything internally, and it’s ACH into the borrower’s account by the next day.
Jack: And I think most lenders work that way. Sometimes if you get bigger deals, you need lien releases and lien waivers, but we’ll make another video on that. But I think that we did a decent job on making on draw schedules. Anyway, check us out, like the YouTube, like the channel, hit the bell with the buzzer. If you need a loan, give us a call at 561-221-0900, ext. 103, or go to our website geltfinancial.com. If you have any comments, leave them; we’ll answer them. Take care and have a wonderful day.”
Category: Education
Tag: draw schedule
