Mid-project lender swap on a gut flip, has anyone actually done this clean?

Question

I'm 74 days into a full gut in Fontana, acquisition was 198k, hard money at 11.5 percent, 14-month term, and the lender is getting weird about draws. Third draw, 22k, has been sitting in underwriting for 31 days. My GC is not waiting. I covered two weeks out of pocket and I am not doing that again for a guy whose review timeline has no logic I can find. So I started asking whether I could replace the lender entirely mid-project, bring in someone new to pay off the current note and pick up the remaining draw schedule, which is about 61k left against an ARV I am comfortable at 385. The problem nobody gave me a straight answer on is what the new lender actually sees when they underwrite a half-finished house. Completed work has value to some of them and zero to others, and the ones who will not count it want me to refinance at the same basis as day one, which destroys my cushion. One lender told me they would come in but they wanted a new appraisal, a new scope review, and their own inspector to walk the site before they would commit, which adds three to five weeks I do not have if my GC keeps the crew moving. Current lender is technically not in default. I am current on payments. This is purely a performance problem on their side. I want to know whether anyone has pulled a mid-project swap without blowing up the draw schedule or eating a prepayment penalty that wiped out whatever they saved on the carry cost.

Rena Expert · Answer

The assumption doing the most work in your swap calculus is that the new lender's underwriting timeline is actually shorter than waiting out your current lender's draw review. You said three to five weeks to get the new lender committed. Your draw has been sitting 31 days. Those numbers are close enough that you need to run them side by side before you treat the swap as clearly faster.

On what the incoming lender sees: the valuation treatment of completed work varies significantly by lender and is often negotiable at the term sheet stage rather than fixed policy. Some will underwrite to as-completed value of finished phases, some use a blended approach, and some genuinely reset to acquisition basis. The ones resetting to acquisition basis are the ones destroying your cushion, and you should filter those out immediately. At 198k acquisition against a 385k ARV with 61k in remaining draws, your equity position mid-project should be readable to a competent hard money lender who works distressed renovation. If they cannot read it, they are not the right lender for a gut flip.

The prepayment penalty question is the one you did not fully price. Check your current note for the exact mechanism, whether it is a fixed fee, a percentage of the outstanding balance, or a minimum interest guarantee that charges you for months you never used. On an 11.5% rate with roughly 198k originally deployed, a six-month minimum interest clause would cost you more than most draw delays. You need that number before you sign anything with a new lender, and your attorney should review the current note language. That part is not optional.

One structure worth asking new lenders about: whether they will fund a payoff of the existing note and issue a fresh draw schedule against the remaining scope only, treating the completed work as collateral rather than as cost basis. Some lenders will write that. It keeps your equity position intact and sidesteps the day-one reset problem.

What is your current prepayment structure, fixed fee or minimum interest?

Rena Guide · Answer

Mid-project lender swaps do happen, and I can walk through what actually goes on mechanically, though the specific numbers on your deal need a real conversation with a lender and possibly a real estate attorney before you move.

Here is the core problem the new lender faces. A half-finished house is hard to value because it cannot be sold in its current state the way a finished house can. Some lenders will give you credit for completed work by ordering an "as-is, as-improved" appraisal, which values the property today and at full completion. Others underwrite strictly to your original acquisition price and scope, which is what you described as destroying your cushion. The ones who count completed work are the ones worth talking to, and they are a smaller group.

What the new lender typically requires before they fund the payoff: a title search to confirm your current lender's lien can be released, their own inspection and a review of your remaining scope, and usually a new appraisal. That three-to-five-week timeline you were quoted is realistic. The way people manage it is by running the new lender's process in parallel with their current draw fight rather than waiting for one to resolve before starting the other.

On the prepayment penalty, read your current note carefully before anything else. Some hard money notes charge six months of interest minimum regardless of when you pay off. If yours does, calculate what that costs against the carry you would save, because on a note at 11.5% the arithmetic can go either direction.

One thing worth confirming: even though you are current on payments, your current lender's draw delays could arguably constitute a breach of the loan agreement on their side. A real estate attorney can tell you whether that opens any options. I would not assume it does without asking.

What does your remaining draw schedule look like, and do you have the prepayment clause language in front of you?

Mid-project lender swap on a gut flip, has anyone actually done this clean?

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