What is The Biggest Challenge With Managing Construction Loans?
Without a doubt, the biggest single challenge with managing construction loans is not in the process of procurement, but in draw management.
This is especially challenging when you’re working with an institutionally issued construction loan. While these bank based facilities will likely provide the lowest possible cost of financing per dollar borrowed, they come with many requirements and restrictions specific to funding construction draws.
To walk you through an example, when a draw milestone has been reached, an instituational lender will hire a third party appraiser to assess the work completed as well as the work that still is outstanding to complete the project.
If in the appraisers opinion the project has more future costs to incur than what your project management would indicate, then the lender will take that information and cut back the draw request to make sure there will be enough available funds to complete the project.
If this occurs, and it does more often than you might think, you are left scrambling to find another source of financing to cover what you are now short from your adjust draw advance.
If you can’t locate other funds quickly, the project will grind to a halt which could result in a contract breech with your builder and more overall costs being incurred if and when you get the project back on track.
And even if you can present your remaining spending in graphic detail, clearly showing you are on budget, the lender will still only consider the input from the appraiser regardless if they are out to lunch or not.
