Learn about Funds Control and why it is important
With summer upon us, Hard Money Lenders and Trust Deed Investors should make sure a Borrower applies the funds from the Rehab or Construction loan to the rehab or construction project and not a trip to Cabo. The best way to ensure the money from the loan goes into the project is through a process called “Funds Control.” Properly used Funds Control adds value to the collateral improving the Loan to Value Ratio and also helps to complete the project and facilitate a sale or refinance exit from the loan. This month’s Blog will explain the basic Who, What, When, Where Why and How of the Funds Control process along with a few tips on Best Practices:
- Who Uses Funds Control? Lenders and Borrower’s engage in a Funds Control process on loans where construction or rehab is needed.
- What is Funds Control? The act of putting construction monies into an Escrow or Funds Control Account that is to be disbursed when the Borrower shows proof of expenditure and installation.
- When to use Funds Control? Generally Funds Control is initiated at loan origination in the following loan scenarios:
a) Ground-Up Construction
i) Purchase and/or Refinance
b) Rehab Construction
i) Initial Funds to finish construction to completion
- Where are the Funds Held? Funds Control is typically held at the Escrow Company conducting the transaction or at a specialized Funds Control Company. Funds are usually held in a Trust Account and disbursed based on a Funds Control Agreement between the Borrower and Lender.
- How does it Work?
a) A specialized Funds Control Company should be used for Construction Budgets > $100k and Escrow Based Funds Control can be used for Budgets of <$100k
b) Lender makes the loan and a portion is put into the Funds Control Account. Borrower spends his own funds and advances the initial construction before being reimbursed by the Funds Control funds.
- What are Best Practices of Funds Control?
a) Review Construction Budget and Schedule to ensure that the amount of funds being withheld will provide enough funds to finish the construction
b) Require proof of permits for any major remodel, construction, square footage addition, significant plumbing, roofing or HVAC issues
c) Collect Photos, conduct inspections, verify status, and review receipts on every draw
d) Obtain Lien Releases and a close out summary when the project is complete
e) If applicable, verify Certificate of Occupancy
f) Recently, on a project that needed $150k of work to complete we deployed a Funds Control Strategy where the Borrower paid $25k of their own money, then $50k of Funds Control, then the Borrower needs to provide another $25k and then the final $50k of Funds Control. This structure ensured that enough funds would be deployed to finish the remodel without lending above the LTV limit.Have you successfully used Funds Control in your Hard Money loans? We would like to know. Please submit a post on our Mortgage Vintage, Inc. Facebook Page or our LinkedIn Company page. If you enjoy discussions like this, please sign up for our Linked in Group called Southern California Trust Deed Investment Group.