Does the holdback math on this gut rehab draw schedule actually work?

Add these to your read, because they're in most of these documents and they cost money.

The 350 inspection fee is per draw as stated, but check whether a failed or partial inspection triggers a re-inspection at the same fee. Five budgeted draws with two re-inspections is 2,450 rather than 1,750, which is small, and it's also the tell for how the lender behaves.

Check whether the extension options are at the lender's discretion or yours. "Two three month extensions at a point each" reads like a right. Half the time the document says the borrower may request an extension which the lender may grant. On a 450k facility a point is 4,500 and the discretion question is worth much more than that, because you're exercising it exactly when you're in trouble.

Check the interest reserve, if there is one. If interest accrues on drawn balance only and there's no reserve, you're paying monthly out of pocket from month one. Some facilities carve a reserve out of the loan proceeds, which reduces what's available for work.

And check the definition of default. Failure to complete by a milestone date is a default in some of these, separate from failure to pay.

I read three replies of this and closed the tab twice. Genuine question, not a snipe: is this level of document work normal for one house, or is it normal because it's a gut?

@marlow it's normal because it's construction. A rental purchase with a conventional loan is a much thinner stack. Once you introduce staged funding against work that doesn't exist yet, the paperwork has to describe who bears the risk at every stage, and there are a lot of stages.

@vellum, your cash math looks right to me and I'd push it one further. Peak float isn't 84k, it's whatever the largest gap is between money out and money reimbursed at any single point in time, and that peak is usually early. Demo, dumpsters, permits, structural work and rough mechanicals all happen before draw two clears. I'd build a week by week cash schedule for the first ten weeks specifically and see what the trough is. That number tends to surprise people more than the total.

On who carries the float: a GC with capacity will carry some of it and will price that into his bid. A GC who can't will ask for deposits, and then you're funding it and also carrying his performance risk.

One more from the operations end. Retainage isn't only about the lender. Whatever your lender holds, you should be holding something from your GC too, and the two need to line up.

If the lender holds 10 percent to CO and your contract pays your GC 100 percent at phase completion, you've written yourself into the gap on purpose. Mirror the retainage in the construction contract. Most GCs expect it on jobs this size. The ones who refuse outright are telling you something about their cash position.