When you partner with a hard money lender for help financing your fix-and-flip project, your loan might include a construction “holdback” where the lender will help fund the purchase of your fix-and-flip property, then hold back the construction portion of the loan to incrementally pay for the property’s renovation.
Why does my hard money loan include a construction holdback?
When a house flipper borrows from a hard money lender to fund their fix-and-flip project, the property will serve as collateral on the loan. This means that the loan will be recorded on the property’s Title, usually in first position, so if the borrower defaults on the loan, the lender can foreclose and recoup the money they loaned.
In many states, contractors’ liens automatically take first position on title, so in the event of foreclosure, any outstanding payments due to contractors will be paid before the lender receives any foreclosure sale proceeds. Hard money lenders that remit all of the construction funds to the borrower up front are exposed to significant loss if the borrower defaults without having paid the contractors.
Will a construction holdback slow down my loan approval and funding?
A holdback should not affect your loan approval or funding timeframe at all. When a hard money loan includes a construction holdback, the borrower simply signs an agreement that details the scope of the fix-and-flip project’s construction plan. The agreement outlines all of the terms and covenants associated with the holdback, and describes the conditions under which funds can be requested and released.
Can I request funds to pay contractors in advance?
Although there are hard money lenders who will remit construction draws in advance, in most cases a holdback draw is not advance funding for renovations—draws are typically based on work in place. That means the draw request must match the progress of the construction on‐site. For example, if a borrower with a $50,000 holdback requests a first draw of $10,000, an inspector will visit the site to verify that the work completed on the property matches the amount of the request.
Will the funds be sent to me or to the contractors who performed the work?
Where the funds are sent depends on the lender and the holdback agreement the borrower signed. Some hard money lenders will remit the funds directly to the borrower, while others will pay the contractor directly.
At Anchor Loans, our holdback agreement requires that the borrower has paid in full all sums due to contractors for work performed under the draw request. Requests approved before 11 a.m. are wired directly to the borrower the same day. Throughout the draw process, an inspector will be verifying that the construction funds in the loan’s holdback account are sufficient to complete the work.
If you’re interested in taking the next step into the world of fix-and-flip real estate investing, Anchor Loans is happy to help you. We know that this process can feel overwhelming, but it doesn’t have to be. Feel free to contact us with any questions you may have, and we’ll do all that we can to help you every step of the way.