How do fix-and-flip lenders manage draws?

What is set before the first draw.

Most of a draw program is set at closing, in the loan documents:

• The rehab budget. The borrower's scope of work is broken into line items, such as demolition, roof, kitchen, baths and flooring, each with a dollar amount. Draw requests and inspections are measured against those lines; see what a rehab draw inspection documents.
• The holdback. The lender funds the purchase and keeps the budget back as a construction holdback, which shrinks with each draw.
• The draw terms. The loan agreement sets how many draws are allowed, any minimum draw amount, the draw fees and what each request must include, such as invoices, photos or lien waivers.
• The release basis. Many lenders pay rehab draws after the work is done, and some advance part of the first draw.

How each draw is managed.

1. Request. The borrower submits a draw request against the budget lines.
2. Inspection. The lender has the work documented by a third-party inspector, its own staff or, for small, simple draws where the risk fits, photos the borrower captures under set rules; see self-inspection draws.
3. Review. A reviewer compares percent complete on each line with the amount requested, reads the photos and exceptions, and checks title or lien status where the policy calls for it.
4. Funding and tracking. The lender releases the supported amount, less any fee or retainage, and tracks the remaining holdback against the remaining work.

Where draw programs strain.

Trouble starts when the holdback stops matching the job: early lines overstated, costs rising once demolition opens the walls, or a stalled project that stops requesting draws. For banks, the FDIC's construction and land development examination procedures ask whether the undisbursed balance is sufficient to complete the project, and they flag front-loaded budgets. Private lenders are not examined under those procedures, though the same check protects their collateral.

Why it matters for lenders.

In an FDIC Center for Financial Research working paper, Bank Monitoring with On-Site Inspections (CFR Working Paper 2022-09), Amanda Heitz, Christopher Martin and Alexander Ufier report that construction loans with more on-site inspections were less likely to default. The data come from one bank, so the finding is evidence, not a rule for private lenders. A complete draw file (request, report, photos and funding record) also answers the questions an investor or loan buyer may ask later. Draw terms live in the loan documents, so have counsel review them.

How RAZE handles it.

Private lenders order draw inspections in the Ordering Engine and route them to their own inspectors through Direct Request or to a RAZE Marketplace inspector at any U.S. address. Through RAZE it is a flat $125 per single-family inspection when RAZE sends the inspector, or $25 per request with your own inspector, per the RAZE Rate Card. Photos carry GPS coordinates and date and time stamps and link to the draw sheet line items they support, and a rejected inspection keeps the reviewer's reason. RAZE averages 1.1 days from request to submission on residential draw inspections nationwide, an average rather than a promise for any one order. RAZE documents the work; the lender decides what to fund. See draw inspections for private lenders.