What to know about construction loan draws
Many times, fix and flip investors have come to us to ask for a small bridge fund to carry them on until their construction lender(s) release the requested construction draw. To avoid any of these shortfalls during the course of construction, it is important to know these rules that construction lenders adhere to:
- The construction fund request must be completed in its entirety and signed by the owner and general contractor.
- The payee list should include the date, draw number, exact project, and owner’s name. The listing shall include the name of the material supplier and/or sub-contractor, amount of payment, payee address, corresponding cost breakdown, and line item number. This document must be signed by the owner and the contractor.
- All draw requests previously paid by the contractor must be supported by these items:
- a) material receipts marked PAID;
- b) paid receipts from construction personnel;
- c) copy of canceled checks; and
- d) unconditional labor and material releases.
- Draws will be honored only if the inspector has verified that the labor has been performed and/or the above material has been installed or integrated into the site.
Only those draws for items within the amount stated on the cost breakdown will be honored. If it is not sufficient, owner and general contractor have to make a request to tap into the contingency fund or any surplus from other line items on the cost breakdown. If you don’t think you can fulfill these requirements from your lender(s), bring it up and discuss with them before the construction has started.