Replies

1. 
   PostnBeam | Aug 28, 2002 09:21am | #1

   In my experience, it depends alot on the lending institution. Some of our homes are cash, so I can ask for __% up front. With a few banks that we deal with regularly, usually after a certain amount of work is completed, you can submit a draw. Ex.-Excavation, temp util., and say, footings are done. Bank sez ~5% done in reguards to total completion, so you can ask for about that much. You have to state when and how much is needed. (within reason). In our situation, they send out the 'bank lady', and she takes a few pictures, then viola! a check at the house in about 4-5days. Don't know about how it is with the other guys, but that is the norm for us anyways. They have a good idea, (the bank), since they already have a copy of my cost breakdown, estimates, and completion timeline. (As does the cust.) Other banks, we deal with the homeowner directly, (they get the funds, and cut it to you as time goes on.)

   Don't know if that helped or not. Others here I'm sure have alot more experience in dealing with this sort of thing.

2. 
   Mooney | Aug 28, 2002 02:31pm | #2

   I could go look this sheet up and make a long thread , but in short ; The banks here do about the same thing , but it is based on a sheet . The sheet out lines different stages with percentages of value tacked to it. Foundation in was like 5 percent. Really it was kinda a joke because the values were not right . They gave way too much for some things and not enugh for a foundation I put in on the side of a steep hill. You would run out of money quick on a cut up roof , things like that. The best way as noted before is to break your own down , and submit it to the bank. I told the bank that it was bogus and explained why. Their answer was my own cost break down submitted tieing the different stages to percentage.

   Usually the footing pays a small draw, then the floor complete , dried in with tar paper , exterior doors and windows, mechanical rough in, drywall complete , and so on .

   Heres the kicker ; the bank wants to pay the largest amount at the end with their percentages. A builder needs to pick up money in the bank at the start to have "money on hand " to pay subs when they drive the last nail to be used at the grocery store that evening , or in some cases the bar ! My subs are payed the same day on demand . Thats the way I "want" to handle my subs . All of my subs want to work for me and I can imagine using this method why. A little off the subject , but I know that Im going to have to pay them any way , so I want them to feel good packing up to leave my job. Ive always got the check book in my back pocket , and they know it. That gives me several advantages.  

   Tim Mooney

3. 
   Paularado | Aug 28, 2002 09:54pm | #3

   Just to add:

   We are homeowners building a log home. Our loan is with Bank One which is a large, corporate bank, so I assume the others are similar.

   While they do have their standard payout schedule which shows percentages of completion for different tasks, i.e. roof = 3%, flooring = 5% (just making those numbers up), they are flexible and will go off of the budget nubmers that the GC gives them.

   So, for example, if your client plans to do something really high end in a certain category, you might be able to work that out with the bank ahead of time. For example, we required 100% of the cost of the log package before a single log was in place. We spelled that out at the beginning and it was not a problem at all.

   Our bank is flexible about draws. I have heard some banks only give you 5-6 draws. That's not a lot if its a large custom house that is going to take a while to build.

1. 
   BossHog | Aug 28, 2002 10:23pm | #4

   This may be kind of a dumb question, but what exactly is a bank draw? I gather that you have to go in and prove to the bank that you actually NEED money to pay something before they'll give it to you?

   All I had to do on our construction loan was call and tell them how much I wanted. They never questioned what I wanted it for. (But they still want me to pay it back)

   Maybe this is just a small town thing ???

   I'd horsewhip you if I had a horse.

1. 
   roundrocktom | Aug 29, 2002 12:06am | #5

   Boss,

   You haven't worked with Bank Draws? Typically for a remodel project is to pay 1/3, 1/3, 1/3.   Third up front, third halfway through, third at completion of the project.

   Not a biggy, but if you are doing custom home building might make more sense to have things laid out so when a part of the project is done, it is paid after completion. So the foundation crew, framing crew, etc. 

   Sometimes the lender will set up the draws for custom home building, to make sure the GC doesn't skip town after getting all the money! Only problem is some banks/lenders might take weeks to process a draw, yet your subs want to be paid weekly! So with a smaller custom builder, also worth while to look at the TITLE company holding the money, and doing draws against that (typically they only need one day to cut the check).

   Our current house it was existing, but to be remodeled after we bought it (i.e. great deal on a three bedroom house in an area of expensive 5 bedrooms... small for that area, adding on brings it up to Market Value). Catch was a "rehab" loan carried 3 pts on financing it (typically used when you finance 100K... buy a foreclosure for $50K, put $50K into it, and sell it for $150K.  $3K overhead isn't too bad if you don't have the cash ready to go). So for us it was cheaper to use a conventional loan, 2nd, and a home improvement loan... then once the house is finished, flip those three loans into a conventional 80% loan.  Thankfully my better half is a Loan Officer with 20+ yrs of doing this. Oh, she has some funny stories over the years!  Some of the local builders suddenly would recognize her name as "that lady who worked at xxxx, out on the job site, to make sure we got paid!"  Funny as I have a crew cab truck, so they figure I "belong" on a job site, yet the lady in heels is out of place... ahem, she is the one making sure they have xx% completed so they can get their money!

   Tom

2. 
   Mooney | Aug 29, 2002 01:47am | #6

   Boss , its a small town thing for one , but most importanly its you! You are borrowing money to go into your house and they know you well Im sure . What if you were having a house built by some one else ? Would you want them hauling your money out the bank before your job was complete to that stage ? Also its for bank security . Also might depend on how much you wanted to borrow to what the house will be worth. I built a spec and only asked for 50 percent and furnished them a lot. What ever I wanted to do on that house was no problem . Also I can purchase a house at auction with a call to my bank, or write a hot check for a truck after calling them , but thats not the norm.

   Tim Mooney

1. 
   jalanx | Sep 27, 2002 07:10am | #7

   Do all banks handle the draw type system for home owners / contractors? I'd like to know that the money for a remodel is there waiting for me to complete a stage.

   Should I have an account at a local bank or national or through some other institution? We are working up to spec projects and want to set up a good relationship with a bank.

   Mike Butler

   Berkeley Craftsmen

1. 
   Mooney | Sep 27, 2002 02:46pm | #8

   Jim, you are a little vague about what you are wanting to do. A remolding loan can be different. So, I would  say no, not all banks would be the same. Boss , for example lives in a small town , where his name is is common in his bank. I have bought repos for some fraction of what they appraise for ,and I can actually borrow money to fix them with out a draw  system because they have the value in an appraisal. If you are working on a remodel doing the work for a customer , then yes,you need to know how its going to be paid for. I'm not embarrassed to ask how a customer intends to pay for the job. I guess the banks have taught me this. The best thing to do is start talking to your bankers.  

   Tim Mooney

2. 
   Mongo | Sep 27, 2002 02:54pm | #9

   If you're dealing with a traditional construction loan, then yes, the bank pays out the funds incrementally as the project progresses, and your repayment is tied to the amount of money borrowed to date. Think of it as a line of credit where you pay P&I only on what has been dispersed to you to date.

   The number of draws is negotiable. The bank I deal with has four draws in their paperwork. I always have that changed to eight. I don't always use them all, but it's nice to have the flexibility.

   With my bank, each time you ask for a draw, the bank will send an inspector out to check on progress. They tick off what has been accomplished, head back to the office, tabulate what should be dispersed, and cut a check.

   Always, always, always walk the site with the inspector and ensure that everything that has been accomplished is properly annotated.

   As to the amount to disperse for each stage completed...again, that's negotiable...within reason. I always present a laundry list, each with a dollar amount as well as a percentage of the overall budget.

   The length of a construction loan is typically 12 months, then it can be converted to a traditional loan. It helps in that there are, so to speak, two loans...a construction loan to build, and a conventional 15 or 30 year upon completion...yet only one closing.

3. 
   jalanx | Sep 30, 2002 08:01am | #10

   Tim and Mongo,

   I guess I'm talking more about working for a client on a bigger project, something over 100,000 where they could be buying all sorts of appliances and burning through the money that indeed was there at the start of the project.

   Is that a joint addendum agreement with the bank? How have you found those?

   Eventually we want to buy the foreclosures etc. but my biz is in the Bay Area and everything is selling for astronomical rates including probates and foreclosures. There is time.

   But is there a way of covering the client that has the money from spending it by having it in some sort of account. Not a construction loan but actual cash that is there for the project.

   By the way, what sort of interest rates do you get on the money borrowed against one of your investment projects for construction loans? I heard it was like 13% by one client.

   Mike Butler

   Berkeley Craftsmen

4. 
   Mooney | Sep 30, 2002 12:40pm | #11

   You are wanting to control someone elses money. I admit its a nice thought . But cash customers arent likely to let you, except in a sighned contract for your part . Your contract may include an allowance for carpet and lighting for example. Then if they go over , its past your limitations in your contract. An addendum to the contract can be written at that time , just like an additional work order that wasnt covered in the labor portion. I will add that this is done on the spot , before  the work is done. The way I see it , is that you have a sighned contract or a work order for every thing you do. Rememember ; Its not your money until performance is complete in a particualr stage.  Borrowed money is regulated by the lender .  Different ball game,  different playing feild .

   Tim Mooney

5. 
   Mongo | Sep 30, 2002 02:15pm | #12

   Mike,

   The last project was $580K. The paperwork was eight draws, and all were used.

   And I'm in with Tim in that it's either the bank's money or the customer's. It's tough to control either, but you do have better access over the bank's cash than the customer's.

   Banks that I've worked with are not very rigid in their schedules. You want 20 draws? They'll likely do it. The only hitch is that they'll charge you a site inspection fee for each extra visit. Normally in the $50-$75 dollar range.

   With the bank holding the money, a construction loan is a snap. If the customer was holding the money and you're wary of that, you may want to get your cash before each phase instead of after, or have them establish a line of credit for you to tap into.

   Construction loans generally run 1.5 to 2 points higher than the numbers on the final paperwork. 6.5% for the permanant loan? Then maybe 8% to 8.5% for the construction loan.

   If you're working foreclosures, that may give you even better terms with the bank. They're itching to get the property off their books, and if you're the man to do that, that gives you a bit of leverage with them. The hotter the market, the less pressure on them to move the property, though.

6. 
   BillHartmann | Sep 30, 2002 05:43pm | #13

   Mike

   It is done all the time. It is called an escrow account. A bank, a title company, or a lawyer would be the one that holds the money.

   One party (the HO in this case) puts money into the account. Money can only be taken out under the terms of the escrow account. Usually that means that the builder and the HO agree to release funds or a third party inspection agrees to release funds.

   There is no real problem with doing this. It is done all the time when buying a home that still has unfinished items or needs repairs that are being funded by the buyers mortgage.

   The real problem is convince the HO of the need for this.