We last looked at the prepayment feature of rehab loans, and the difference between a prepayment penalty, guaranteed interest and an interest reserve. Today we are going to look at another component of rehab loans, the builders control or fund control account.
There are two basic types of loans you will take if you are a fix and flip investor. There are the acquisition loans, and then there are the rehab loans, which have a fund control feature incorporated.
The most basic of the loans rehab investors will use is the straight acquisition loan. These loans will typically fund anywhere between 50-70% of the acquisition cost. They do not require a fund control account, and do not fund any of the rehab work. They allow an investor to take a loan to leverage his or her money and do the rehab work using their own cash out of pocket. The upside to this is it is very hands off, there is no fund control to work with, and you can do the rehab at your own pace. The downside, however, is that you need funds for a down payment, plus funds for the rehab.
A rehab loan, on the other hand, will loan based on the after repair value, or ARV. Typcially you are looking at private money lenders going to about 60% of the ARV on a loan amount. In order to do this, they build in a builders control or fund control account. By doing this, their risk is limited. If you walk away from the project, they have a fund contol account that allows them to rehab the property without having to invest additional funds.
The upside to this type of loan is that typcially, an invsestor can work with less cash. Instead of putting 30% or more down, plus paying for the rehab work with cash out of pocket, an investor can come to the table with 20-30% of the purchase price, and get the rest of the money needed for the project financed (including an interest reserve account, take a look at this investor rehab loan program).
The downside is that you will have to work with a fund controlled account for the rehab work to be done. This means you put in requests for the disbursement of funds to do the work. Some fund controls will allow for advances so that you can start the work with no out of pocket costs. Others require you to do work, then submit invoices to be paid. Having a fund control that will work with your needs is important, be sure to ask who you will be dealing with, and what the general process is. Having an individual you can speak with and work with directly on the disbursements is a huge benefit.
Working with a builders control does not have to be difficult. In some cases, with residential rehab projects needing only light rehab, you don’t even need inspections. Pictures of the completed work can suffice, especially if you start to build a relationship with a particular rehab lender or investor.