Learn about the interest reserve requirements and the draw process for Rehab Financial Group’s 100% Financing Program for residential property fix and flip projects in 30+ states. Private Lender Link’s CEO, Rocky Butani visited the company’s office in January 2023 to interview RFG’s President, John Santilli. Watch the video or read the transcript below.
ROCKY BUTANI:
You mentioned that in addition to the closing costs and points, I have to set aside 3 months of interest payments. Is that correct?
JOHN SANTILLI:
That’s correct. For our standard fix and flip loan, we do require 3 months worth of interest reserves. And depending upon your loan situation, our loans are interest as drawn, and that’s reconciled monthly. So those 3 months worth of interest reserves, you may not have to make a payment for 1, 2, or 3 months, of course, and then that may even go longer depending upon how much you have drawn during that period of time.
ROCKY BUTANI:
But why not collect the interest payments for the entire loan term, whether it is 6, 9, or 12 months?
JOHN SANTILLI:
We don’t do that. That’s part of the reason why we take a look at your income compared to your outgoing expenses and your assets in combination to make sure that you do have enough to afford this loan. Ultimately, the 100% product was really designed to make sure the affordability for the loan is there. So it’s not just based off of the assets that you have in the bank, because that can disappear tomorrow, for whatever reason. And the fact is that if you have that ongoing viable job that you’ve had for the last year or two, and it’s an ongoing job, you can afford this loan, and that gives us the comfort of giving you the 100% financing and that you’re going to be successful.
ROCKY BUTANI:
And you mentioned that as far as the reserves that I need to have, it’s about 15% of the renovation budget?
JOHN SANTILLI:
15% of your renovation budget is the additional reserves that we require over and above what you need to have in the bank to cover your closing costs and any interest reserves that you already have. So those funds are not required to come to the table with, but those funds are required that you have in your bank account so that you can afford to pay your contractor without going into credit card debt or your line of credit or something like that.
ROCKY BUTANI:
Let’s talk about the process of the rehab draws. How does that work? Do I need to pay for all the expenses before I get the first draw, or do you advance the first draw at closing?
JOHN SANTILLI:
No, we do not advance any funds on your draws. The way our typical process works is very simple. Effectively, you do the work. We’ll send the inspector out to validate the work. The funds are released the next day from when we receive the report. Most of our investors suggest that our process is completely simple once you understand it. There’s no delay in getting that money to you. So effectively, as soon as we have the inspection report in our hand, we have an internal review process that really is expedited to try and get you the funds back into your account the next day.
ROCKY BUTANI:
Can I use that 15% of the rehab budget as my cash reserves to pay for all the work that needs to be done before I get my first draw?
JOHN SANTILLI:
Correct. That’s exactly why we require the interest reserves. We want to make sure that you have this interest reserve. We get concerned when somebody comes to the table… in fact, we won’t approve you… If you come to the table and you have no cash left after you close our loan. That’s very concerning. Some people will come to us and say to us that we want to utilize our line of credit or our credit cards. That’s borrowing money to borrow money, and we just think that’s a little bit more risky. And for 100% financing, that’s not something that we want to offer.
ROCKY BUTANI:
So now I understand the 3 months of interest reserve correlated with the funds I need for the first draw. While I’m paying all these expenses to pay for all the contractors to get the project started, I don’t have to worry about paying for the interest payments because that’s already taken care of. And hopefully within 3 months, then I’ll receive my first draw.
JOHN SANTILLI:
Once you get into a rhythm, I think that most of our investors kind of get it, and there’s really very few complaints associated with their process. Sometimes we hear the nightmare stories that it takes longer to get your draws from certain lenders or whatever. For us, we try to make that process very simple. Call the inspector. Usually the inspector’s out there within 2 to 3 days. They check against the line items. We’re looking for 100% completion of the line items. Once that’s complete, it’s checked off, the report is sent to us. Like I said, if it’s not the same day, it’s within 24 hours.
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