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Originally Posted On: https://getbuilt.com/blog/construction-lending-basics-draw-inspections/
You’ve made a construction loan and the project is now underway. If all goes well, your builder will send draw requests for labor and materials according to your draw schedule, make steady progress and complete the project on time and on budget. And while many lenders are exceptional at managing credit risk, construction loans require a deep understanding of construction completion risk.
A construction lending best practice used by most lenders is ordering draw inspections to validate progress in conjunction with disbursing funds.
Reduce risk with draw inspections
The simplest reason for draw inspections is to follow along with the builder so that you can ensure the loan proceeds are going into the collateral on the loan, and to identify problem loans as early as possible.
Let’s say a builder falls behind. You risk disbursing money for work that hasn’t yet been completed, or worse, won’t ever be completed. The sooner you’re made aware, the sooner you can take corrective action or work with that builder to remedy the situation. Draw inspections also prevent horror stories like a builder accidentally building on the wrong lot or requesting funds on a project that isn’t actually under construction. These are expensive mistakes that you don’t want to make.
You can mitigate these risks by scheduling regular draw inspections with experienced draw inspectors who become your eyes and ears on the jobsite. During a draw inspection, they will determine if the builder has completed work according to what has been requested and determine the appropriate funds to be released.
What to expect from draw inspections
Draw inspectors visit the work site to evaluate current progress against what has been reported. They’re looking specifically to validate that all work items and materials included in a draw request are, in fact, in place, and assist in determining the appropriate release of funds. A quality draw inspector will work with you to understand your project and report on a number of items, including:
- Tracking that each line item or stage of construction is complete, as reported, by percentage
- Line by line accounting of all cost statements and funding analysis
- Photographing materials present on-site and work put in place
- Reviewing change orders and ensuring they’re in step with project timeline
- Relaying builder questions or needs to lenders/owners
- Providing payment recommendations
And on more sophisticated projects (usually commercial in nature):
- Verifying permits, zoning, licenses, taxes, and insurance or bonding for the project/builder
- Assessing quality of work, noting any concerns
- Tracking invoices versus the work put in place and materials
At the end of the day, work with your inspector to make sure they report on the items that matter to you. Built’s web-based tool allows lenders to customize reports to fit their needs. As a final note, regular inspections can also be helpful even when no draw is requested to keep a pulse on how well the project is pushing forward. Some lenders make it their practice to schedule monthly draw inspections on all projects.
Finding the right draw inspector
There are plenty of knowledgeable draw inspectors and draw inspection companies throughout the country, and the right one(s) for you could depend on a number of factors:
- Type of construction: Single family, residential or commercial
- Territory: Single market or covering the entire country
- Frequency: One-time event or is construction lending going to be a fixture of your portfolio
- Sophistication: How knowledgeable is your team on construction
- Speed: Some draw inspectors are faster than others and this will impact your draw turnaround time and likely your client satisfaction
- Redundancy: Many lenders want a few options in case they are in a pinch or their inspector isn’t available
We recommend reaching out to other lenders in your area for referrals or feel free to contact us at Built to see if we can make the right introductions.
How Technology Has Changed Draw Inspections
In the past, lenders have played “traffic cop” managing the coordination between builders and project owners: Requesting draws, scheduling draw inspections, reviewing draw inspections, calculating the appropriate amount to disburse, getting documented approvals on the funds to be disbursed, getting the title company involved where applicable, actually disbursing funds, and ensuring the project budget remains in-balance with all systems and spreadsheets through completion. This process is extremely labor intensive and prone to human error, but it no longer has to be.