How to structure draw schedules on cosmetic rehab loans where there is nothing to inspect

Funding short term paper on light rehabs surfaces a real mismatch in how draw mechanics usually work. On a full gut, framing, rough mechanical, and drywall are each a visible milestone an inspector can verify before releasing money. On a 28k cosmetic scope, paint, flooring, fixtures, and a kitchen refresh happen in a three week window with no sequence that can meaningfully be gated, and half the spend is material bought up front. Fund most of it at close and money goes out against work not yet done. Hold it back and the borrower stalls waiting on a draw inspection that costs 250 dollars and takes four days on a project with a 60 day exit. A structure worth testing: fund a materials advance against receipts at close, then release one completion draw verified by photo plus the listing going live. That still leaves exposure on the materials advance if the borrower walks. Requirements for how a mortgage or deed of trust gets recorded, and what a lender can require, differ by state, so counsel on the documents in each state matters, but the sequencing structure is the piece worth stress testing against how others are funding light rehabs without either overfunding the job or strangling the timeline.

sonia_alvarez CB4APRO 17

Answer

stephen_ok9ActivePRO

The version I've seen described most often is two draws with the split at a percentage of budget rather than at a physical milestone. Fifty at close for materials and deposits, fifty on completion, with completion defined as the property photographed and listed. The photo requirement does more work than it sounds like because a listing photo set is hard to fake and it also tells you the borrower is actually trying to exit.

What I'd push on is your materials exposure. If half of 28k goes out at close against receipts, you're 14k unsecured in practice even though it's secured on paper, because your recovery on a half-painted house is the as-is value and not the ARV. So the size of the materials advance should key off your as-is loan to value, not off the budget. If you're at 65 percent of as-is before any rehab money moves, the advance is cushioned. If you're at 80 you're funding the rehab out of hope.

Cosmetic scopes also fail differently than gut jobs. They don't fail on the work, they fail on the exit price, and your completion draw releases right at the moment the borrower discovers the exit price is 15 under plan. That's the moment you want a reserve, not a payoff.

stephen_ok9ActivePRO

2 replies

omar_haddadPassivePRO

Scope creep is what breaks this and no draw schedule catches it. Borrower says 28k cosmetic. Week two they open the bathroom vanity, find soft subfloor, and now it's plumbing. Week three the kitchen paint looks wrong against the counter so the counter goes too. I've watched a 26k scope hit 41k without anyone lying about anything.

So I'd add a term that any change over some threshold, call it 2,500, needs your written sign off before the completion draw funds. Not because you'll say no, because it makes them tell you. The projects that hurt lenders are the ones where you find out at payoff.

On @stephen_ok9's photo idea, ask for interior photos of specific rooms rather than the listing set. Listing photos are shot wide and lit to hide exactly the things you want to see.

omar_haddadPassivePRO

Reply Anonymous