Why I always fund 100% of construction as a hard money lender?
Borrowers wonder why my hard money loan program requires that I holdback 100% of the construction budget. The reason is simple. I am underwriting the property’s future value or after repair value (ARV). Therefore, I need to control the construction funds that get me to that value. I made a mistake early on in my lending career where I relied on a borrower to fund the first 50% of construction. On paper at the time the borrower had more than enough liquidity to fund his portion of the project. What I didn’t know was that the borrower’s other projects were over budget and under funded. The borrower never even started construction, my loan went into default, and I was forced to foreclose. The portion of the loan I funded at closing was higher than it would have been if I had funded on an “as-is” LTV basis. Luckily, demand in the market was strong and we were able to sell the house for more than we were in the house for because we used our in house broker to sell it.