Following is the basic formula used in calculating construction loan progress draws:
*1.. LAND ADVANCE = up to 50% (**gross) of the current
value of the property, or the purchase price when purchased within last 6
months, whichever is less. (rule of thumb: More expensive and/or
larger parcels impose a lower land advance percentage due to "land to
improvements" ratio. This draw is released at close of loan
escrow. The loan fees, escrow fees, title insurance, etc. are taken out of this land advance, up front, at close of loan escrow.
*-we can arrange for payment of 1/2 your permits and school fees here-
*2.. FOUNDATION DRAW = Average usually approximately
$10,000.00 to $50,000.00 unless the foundo is engineered or above average in cost in
which case this figure might be adjusted. This draw released when foundo
is poured and stripped and all permits paid for and obtained.
*-you can add a subfloor and/or top plate draw here-
3.. ROOF SHEETING = Approximately 40% of the balance of funds after deducting amount of draws 1, 2, and 5. This draw is released upon completion of roof sheeting nailing.
4.. SHEETROCK =
Approximately 60% of the balance of funds after deducting amount of draws
1, 2, and 5. Draw released upon completion of sheetrock nailing.
*-many will have us create a cabinet-trim-doors-paint draw here-
*5.. COMPLETION = 20% of the principal amount of the loan plus accrued interest. This draw released when home is complete, finished and turn key. Half this draw can be set up to be released upon for example "all doors, paint, cabinets etc".
Occasionally a borrower will request more than 5 draws. We can create additional draws between some of these 5 basic draws and debit the amount of an additional draw created from the succeeding or next in line draw. There's a small fee charged for each additional draw created of approximately $100 to $150 each, depending in part on how far our inspector must travel for inspections.
* There is little, if any, room for negotiation in draws marked with an asterisk (*), so you can see that additional draws probably could not be inserted between draws 1 and 2 (COE and foundation). i.e. Additional draws are possible after draw #2 (foundation), #3 (roof sheeting) and #4 (sheetrock) from draws #3, #4 and #5. For example, one might wish to have a draw created between roof sheeting and sheetrock at "O.K. to cover" or when insulation is in.
** The loan fee, escrow fee, title insurance, etc. come off the top of the loan, they are taken from the land advance, up front, at close of loan escrow.
Also included here (below), for your perusal and advance awareness, is a copy of the form letter we send to anyone subordinating to a loan brokered by us. This letter goes out after loan escrow is opened and prior to close. Borrowers and (potential) subordinators are encouraged to phone Brad (530-272-5916) if they have questions or are in need of more information on the topic of subordination.
Notice to Subordinator
Re: Escrow ######
Dear subordinator ,
I have tentatively approved a $###,###.## first loan for borrower on the property located at address to finance a portion of the funds necessary to construct a #### square foot home.
Much of the money will be "doled" out in predefined draws as the work progresses, as per the attached sample loan draw agreement. We do not have a voucher system.
I'm sure that you are a cautious investor, however I feel it my responsibility to take this time to repeat that subordination can be risky. If we are forced to file a Notice of Default against this borrower at any time, the balance of any remaining construction funds held would be used as a principal payment to reduce our loan balance. In that case, the remainder of our loan as well as any interest due, accumulated late fees, default fees, etc., will stay against the property in first position ahead of your loan. If the borrower fails to cure a default, you as the junior lienholder, in order to foreclose and protect your interest would need to assume full responsibility for that remaining balance of our loan.
Also, in order to qualify for and obtain this construction loan from Brad Evans Real Estate Loans (funded by private investors) the borrower is not obliged to meet the criteria a bank or other conventional lender would require. The subject loan was approved primarily on the real estate equity, all or part of which in this case is being provided by you.
P.S. For more information on this topic take a look at "What the Heck is Subordination"