The project management goal for any construction project is to manage well those things you can control and minimize the risk of the things you can’t directly control.
When it comes to construction loan draw management, the most important aspects of this process is knowing how much money will be advanced towards incurred construction costs and at what time.
Even if you manage everything in the project to the letter, there can still be draw cut backs and draw advance delays that are completely beyond your control and are more a function of the lender and how they administer the mortgage commitment.
If you choose an institutional lender, you may want to secure a contingency allowance incremental to the construction mortgage commitment from another lending source or your own resources to project yourself from lender draw reductions which are not uncommon with institutional construction loans.
Another way to minimize draw risk is to select a private mortgage construction lender in situations where you can qualify for either an institutional or private mortgage construction loan. Roughly 90% of construction loans are provided by private mortgage lenders anyway, partially due to the builder’s desire to secure a more predictable construction draw process, but mostly because institutional lenders are not interested in the risk associated with construction financing unless they are going to get a long term take out mortgage.
Its going to cost more money in terms of interest costs and lender fees for a private construction mortgage, but the draw process on average is more straight forward and more dependable in terms of what money will be advanced and when.
At the same time, with the renewed growth in construction projects and more private lenders entering the market, you also have to be selective when choosing private lenders if at all possible.
For some projects, depending on their type and location, the private lending sources may not be easy to come by and can result in you working with a lender that you perhaps don’t have any previous experience with and that also don’t have much of a track record in the market.
And with bigger projects where the draw amounts tend to be larger, privates can create delays with advancing money as they move their own money around to cover all the projects they are funding at any one time.
So the second risk management measure to reduce the negative impacts that can be associated with construction loan draws is lender selection. Make sure you spend some time initially with a new private lending source to make sure you’re completely comfortable with the way they come across and present their business. If you can’t get comfortable, its likely a sign of things to come. Also, make sure to do some background and reference checking where possible to see what others have experienced with respect to lender service and draw advancement.
Remember that private lenders in many cases are just one individual or a small group of individuals that are putting their money into construction projects and each individual or group will have their own way of doing things which can be good and bad for their customers.
Even before lender selection is broker selection as most private mortgage lenders place their money through a mortgage broker. So having an experienced construction mortgage broker working for you that has a pre-existing relationship with the construction mortgage lender provides you with another resource to help work through and follow up on draw management issues as well.