What's the difference between rehab financing and a standard fix-and-flip loan?
While both loan types fund property improvements, rehab financing is designed for more extensive, longer-duration projects requiring substantial structural work, system replacements, or historical restoration. Fix-and-flip loans typically target cosmetic renovations completed within 3-6 months, while rehab financing accommodates projects lasting 12-36 months involving major construction. Rehab loans generally offer higher loan amounts, longer terms, and more flexible draw schedules appropriate for complex improvement work. The underwriting focus differs as well, rehab financing emphasizes project feasibility, contractor qualifications, and regulatory compliance, while fix-and-flip loans prioritize rapid turnover and after-repair value calculations.
Can rehab financing cover properties that are currently uninhabitable?
Yes, our rehab financing program specifically addresses properties in uninhabitable condition that conventional lenders won't finance. We regularly fund acquisitions of fire-damaged properties, buildings with failed systems, structures requiring major structural repairs, and properties with environmental contamination requiring remediation. Our asset-based lending approach evaluates property potential after rehabilitation rather than current condition. However, borrowers must demonstrate realistic rehabilitation plans, qualified contractor relationships, and adequate contingency reserves to address unexpected conditions discovered during construction. Properties requiring substantial work may require larger down payments or lower leverage ratios than those needing moderate improvements.
How are funds disbursed during a rehab project?
Rehab financing employs a draw system where funds are released incrementally as construction milestones are completed and verified. Typically, initial funding covers property acquisition and immediate pre-construction expenses. Subsequent draws are released upon completion of specified work phases, such as rough electrical/plumbing, framing completion, or finish work, verified through third-party inspections. Borrowers submit draw requests documenting completed work, inspectors verify progress, and approved funds are disbursed, usually within 3-5 business days. Interest accrues only on disbursed funds rather than the total approved loan amount, helping manage carrying costs. We typically allow 4-6 draws per project, with flexibility for projects requiring more frequent disbursements.
Do you work with contractors directly or only with property owners?
We work exclusively with property owners and investors, maintaining direct lending relationships rather than contractor financing arrangements. However, we evaluate contractor qualifications as part of our underwriting process, as successful rehabilitation depends heavily on construction team capabilities. We require documentation of contractor licensing, insurance, bonding (where applicable), and references from comparable completed projects. For larger rehab projects, we may require payment and performance bonds to protect against contractor default. While we don't pay contractors directly (funds are disbursed to borrowers who then pay their contractors), our draw verification process ensures work is completed satisfactorily before funds are released, indirectly supporting positive contractor relationships.
What happens if I discover additional problems during rehabilitation that increase project costs?
Hidden conditions are an unfortunate reality in property rehabilitation, particularly in San Francisco's older housing stock. We recommend including 15-20% contingency reserves in initial project budgets to address unexpected discoveries. If additional problems emerge during construction that exceed contingency amounts, we can potentially increase loan amounts based on revised scope, updated contractor estimates, and demonstrated progress to date. However, loan increases require formal modification requests, additional underwriting review, and potentially adjusted terms. Borrowers should maintain open communication about emerging issues so we can work collaboratively on solutions. In some cases, borrowers may need to contribute additional capital or seek supplemental financing to complete projects experiencing significant cost overruns.
