How Fix-and-Flip Renovation Draws Work

How Fix-and-Flip Renovation Draws Work

A fix-and-flip loan may include financing for both the property acquisition and the planned renovations. However, renovation funds are generally not released to the investor as unrestricted cash at closing.

Instead, the approved renovation budget is typically held back and released incrementally through a process known as construction or renovation draws.

Understanding this process is essential. An investor can have a fully funded renovation budget on paper and still experience serious cash-flow problems if they are unprepared to pay contractors, purchase materials, document completed work, or wait for reimbursement.

Although every lender has its own procedures, most draw processes include four basic stages:

1. The investor completes an approved portion of the renovation.
2. A draw request and supporting documentation are submitted.
3. The completed work is inspected or otherwise verified.
4. Approved renovation funds are released.

The exact requirements, timing, fees, and disbursement method should be reviewed before the loan closes.

What Is a Renovation Draw?

A renovation draw is a scheduled release of funds from the portion of a fix-and-flip loan allocated to property improvements.

For example, assume an investor receives financing structured as follows:

– Purchase price: $180,000
– Approved renovation budget: $60,000
– Total project cost: $240,000
– Initial acquisition funding: $162,000
– Renovation holdback: $60,000

At closing, the acquisition portion may be applied toward purchasing the property. The $60,000 renovation allocation is generally retained in a controlled account rather than delivered directly to the investor.

As approved work is completed, the investor requests portions of that $60,000 through draws.

This structure allows the lender to confirm that loan proceeds are being used for the improvements included in the approved scope of work.

Are Renovation Draws Advances or Reimbursements?

Many fix-and-flip programs operate primarily on a reimbursement basis.

Under a reimbursement structure, the investor may need to:

– Pay the contractor or supplier
– Complete the applicable work
– Submit the draw request
– Provide the required supporting documentation
– Wait for an inspection
– Receive reimbursement after approval

This means the investor may need enough working capital to fund the initial phase of construction—and potentially subsequent phases—before receiving loan proceeds.

Selected programs may offer alternative arrangements, including direct payments, material deposits, advances, or other controlled disbursement methods. These options are program-specific and should not be assumed.

Before closing, ask:

– Are draws reimbursed or advanced?
– Must contractors be paid before a draw is requested?
– Who receives the disbursement?
– Are material deposits eligible?
– Can funds be released for stored materials?
– How long does an approved draw normally take?

Most private lenders describe their standard fix-and-flip draw process as reimbursement after completed work has been verified. Kiavi’s draw-process explanation and RCN Capital’s draw-schedule guidance provide examples of this common structure.

How the Draw Process Typically Works

Step 1: Establish the Approved Scope of Work

The draw process begins before construction starts.

During underwriting, the investor generally submits an itemized scope of work identifying:

– Each proposed improvement
– Estimated labor costs
– Estimated material costs
– Contractor information
– Projected completion timeline
– Total renovation budget

The lender may modify the submitted budget if a cost appears unsupported, ineligible, duplicated, or inconsistent with the property’s condition.

Once approved, the scope of work becomes the basis for future draw requests. An investor should not assume that unlisted improvements will automatically be reimbursed.

Step 2: Complete an Approved Phase of Work

The investor and contractor complete items included in the approved renovation budget.

Depending on the project, the first phase might include:

– Demolition
– Debris removal
– Structural repairs
– Roofing
– Rough plumbing
– Rough electrical work
– Heating and cooling installation

Some lenders allow draws based on individual completed line items. Others organize the project into broader milestones.

The investor should understand whether partially completed items are eligible. A lender may decline to reimburse an item that is only 50% or 75% complete, even if the contractor has already received a deposit.

Step 3: Submit the Draw Request

After completing eligible work, the investor submits a draw request using the lender’s required process.

A draw package may include:

– Completed draw-request form
– Requested amount
– Updated scope-of-work worksheet
– Photographs of completed improvements
– Contractor invoices
– Material receipts
– Proof of payment
– Permits or inspection records
– Change-order documentation
– Lien waivers or releases
– Updated construction schedule

Incomplete or inconsistent documentation is one of the most common reasons for draw delays.
The requested amount should correspond to the completed items in the approved budget. Asking for $15,000 when the documentation and inspection support only $11,000 may result in a reduced draw or additional review.

Step 4: Inspect the Completed Work

After receiving the request, the lender may arrange an onsite or remote inspection.

The inspector generally evaluates:

– Whether the claimed work is complete
– Whether improvements are installed at the subject property
– Whether progress corresponds with the approved budget
– The overall percentage of renovation completion
– Whether visible property conditions raise additional concerns

Some lenders use third-party field inspectors. Others may accept time-stamped photographs, video, a virtual inspection, or a technology-assisted property review.

A draw inspection is conducted primarily to verify progress for the lender. It should not be treated as a substitute for the investor’s own quality-control review, municipal inspection, or professional property inspection.

Step 5: Review and Approve the Draw

The lender or loan servicer compares the request with:

– The inspection report
– The approved scope of work
– Previously released funds
– Remaining renovation funds
– Supporting invoices and receipts
– Any unresolved loan or property conditions

The lender may approve the request in full, approve a lower amount, request additional documents, or decline items that do not qualify.

Step 6: Release the Funds

Once approved, funds may be released to:

– The borrower
– The borrowing entity
– The general contractor
– A supplier
– The title or escrow company
– Multiple parties through joint checks

The payment method depends on the lender, loan documents, property, contractor arrangement, and applicable requirements.

How Long Does a Renovation Draw Take?

There is no universal draw timeline.

Timing can be affected by:

– Whether the request is complete
– Inspector availability
– Property location
– Whether an onsite inspection is required
– Discrepancies between the request and completed work
– Missing invoices or lien waivers
– Weekends and holidays
– The lender’s review procedures
– The method used to transfer funds

Investors should avoid promising contractors’ immediate payment until they understand the lender’s actual process.

When establishing the construction schedule, allow time for:

1. Preparing the draw package
2. Scheduling the inspection
3. Receiving the inspection report
4. Resolving documentation questions
5. Funding the approved draw
6. Transferring money to the contractor or supplier

A project with tight liquidity can be delayed even when the renovation itself is progressing appropriately.

What Is a Draw Schedule?

A draw schedule outlines how the renovation budget is expected to be released throughout the project.

A simplified $60,000 renovation schedule might look like:

– Draw 1 — Demolition, roofing and structural work: $14,000
– Draw 2 — Plumbing, electrical and HVAC: $16,000
– Draw 3 — Drywall, cabinets and bathrooms: $15,000
– Draw 4 — Flooring, paint and fixtures: $10,000
– Final draw — Exterior work and project completion: $5,000

This example does not represent a required structure. Some lenders release funds by completed line item rather than predetermined phases.

– The most effective draw schedule aligns:
– Contractor payment obligations
– Material-ordering requirements
– Inspection timing
– Available investor capital
– The approved lender budget

The investor should discuss the expected draw sequence with the contractor before work begins.

Are There Fees for Renovation Draws?

A lender or loan servicer may charge a fee for each draw, inspection, wire, or construction review.
Before closing, investors should ask:

– What is the inspection fee?
– Is there a separate draw-processing fee?
– Is the fee deducted from the disbursement?
– Are remote and onsite inspections priced differently?
– Is there a maximum number of draws?
– Are additional or corrective inspections charged separately?
– Are wire fees applicable?
– Is a final inspection required?

Submitting frequent small draw requests may increase fees and administrative work. Waiting too long between draws, however, may place unnecessary strain on project cash flow.

The right draw frequency should balance cost, documentation, contractor expectations, and available liquidity.

What Can Delay or Reduce a Draw?

A draw may be delayed, reduced, or declined when:

– Work is incomplete
– The requested item is not in the approved budget
– The requested amount exceeds the allocated line item
– Required photographs or invoices are missing
– The inspection cannot be completed
– Completed work differs from the approved scope
– Required permits were not obtained
– Contractor or supplier payment cannot be documented
– Required lien waivers are missing
– A previous draw remains unresolved
– Workmanship or property conditions raise concerns
– The borrower is in default under the loan agreement
– The remaining budget appears insufficient to complete the project

Investors should compare every request against the approved scope of work before submitting it.

What Happens When the Renovation Changes?

Renovation projects frequently uncover unexpected conditions, including:

– Hidden water damage
– Mold or termite damage
– Outdated electrical systems
– Plumbing failures
– Structural deterioration
– Foundation problems
– Unpermitted work
– Increased material costs

An investor should not assume they can freely transfer funds from one budget category to another.

Depending on the program, a material change may require:

– A revised scope of work
– A written change order
– Updated contractor estimates
– Additional borrower funds
– Lender approval before work begins
– A revised renovation schedule
– Further valuation review

Expenses incurred outside the approved scope may not be eligible for reimbursement. Kiavi’s current scope-of-work guidance advises obtaining approval for changes because unapproved overages may not be covered by the draw process. Fix-and-flip scope-of-work guidance

Why Investors Need Working Capital

One of the most important draw-process lessons is that an approved renovation holdback is not the same as immediately available cash.

The investor may need money to cover:

– Contractor deposits
– Initial labor expenses
– Material orders
– Permit charges
– Draw-inspection fees
– Insurance and utilities
– Loan payments
– Unexpected repairs
– Work completed while a prior draw is pending

Consider an investor with a $60,000 approved renovation budget who expects to spend $18,000 during the first construction phase.

If the program reimburses only after work is completed, the investor may need to advance that $18,000 before requesting the first draw. If contractors begin the next phase before reimbursement arrives, the temporary cash requirement could be even greater.

Available liquidity should therefore be evaluated against the construction sequence—not only the estimated cash required at closing.

How Investors Can Avoid Draw Delays

Before construction begins:

– Review the complete draw policy
– Confirm which expenses are eligible
– Give the contractor the approved scope of work
– Align contractor payments with expected draws
– Establish a documentation system
– Confirm inspection and processing fees
– Maintain adequate working capital
– Identify who will submit each request

During construction:

– Take dated progress photographs
– Retain invoices and receipts
– Track each expense by budget category
– Obtain required lien documentation
– Request approval for material changes
– Avoid combining approved and unapproved expenses
– Keep permits and inspection records organized
– Monitor the remaining budget after every draw

A strong draw process is largely an information-management process. Organized records make it easier for the lender to verify completed work and release eligible funds.

How Does the Renovation Draw Process Work?

Renovation funds are usually not provided to the borrower as unrestricted cash at closing.

Instead, funds may be held in a renovation account and released through draws. A typical process may require the investor to:

1. Complete an approved portion of the work.
2. Submit a draw request.
3. Provide invoices, photographs or lien waivers when required.
4. Allow an inspection of the completed work.
5. Receive reimbursement for eligible completed items.

Before closing, investors should understand:

– Whether draws are advanced or reimbursed
– Whether the investor must fund initial work
– Inspection and draw fees
– Minimum draw amounts
– Expected processing time
– Required documentation
– Whether retainage applies
– How change orders are handled
– What happens if the project exceeds its budget

A project can be fully financed on paper while still requiring the investor to carry construction expenses between draw reimbursements.

Request a Preliminary Georgia Fix-and-Flip Review

Borrowers Capital provides access to competitive business-purpose real estate financing through correspondent and private lending channels.

Submit the Georgia property address, purchase price, renovation budget, projected ARV, borrower experience, available liquidity and proposed exit strategy for a preliminary review.

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