Fix and Flip Loans: Mastering the Construction Draw Process

Fix and flip loans are short-term, asset-based financing vehicles used by real estate investors to acquire and renovate distressed properties for a quick resale. While most sponsors understand the acquisition side of this capital, the actual mechanics of the construction holdback often become a stumbling block. At Phoenix Capital, we see operators secure their funding only to stall mid-project because they fundamentally misunderstood how rehab capital is disbursed. Mastering the draw process is what separates institutional-grade flippers from amateurs who run out of cash before the drywall is even hung.

When you close on a property using this type of facility, the lender does not hand you the entire renovation budget upfront. Instead, the rehab funds are held in escrow and disbursed in tranches as work is completed. This reimbursement model protects the lender's collateral while ensuring the capital is actually improving the asset. Typically, fix and flip loans will cover up to 85 percent of the purchase price and 100 percent of the renovation budget, provided the total loan amount does not exceed 70 to 75 percent of the After Repair Value (ARV). The acquisition capital is wired at closing, but the renovation capital stays with the lender until you prove you have earned it.

The lifeblood of a successful rehab is liquidity management. Because the draw process operates in arrears, you must bring enough working capital to fund the first phase of construction out of pocket. For example, if your total renovation budget is $100,000, you might need $20,000 in liquid cash to pay your general contractor for the initial demolition, framing, and rough plumbing. Once those specific line items from your approved scope of work are 100 percent complete, you submit a draw request to your lender.

A standard draw request triggers a specific sequence of events. First, you notify the lender that a phase of work is finished. The lender then dispatches a third-party inspector to the site. The inspector is not there to judge the aesthetic choices of your tile; they are there to verify that the specific line items on the original budget have been completed to code. They take photos, check off the line items, and submit a report to the lender. If everything aligns, the lender releases that portion of the escrowed funds to your operating account. In a well-oiled machine, this entire cycle takes three to five business days.

Failing to align your contractor's payment schedule with the lender's draw schedule is a lethal mistake. Many general contractors demand a 30 percent deposit upfront. Fix and flip loans do not fund upfront contractor deposits. If you do not have the liquidity to cover that initial deposit, your project will never get off the ground. You must negotiate a payment schedule with your crews that mirrors your draw schedule. Smart operators break their scope of work into four or five manageable draws, ensuring they never overextend their own working capital while waiting for the inspector to sign off.

Material costs introduce another layer of complexity to the draw process. Lenders generally do not reimburse for materials sitting in a warehouse or stacked in the property's driveway. Materials must be permanently installed in the property to hold value as collateral. If you order $15,000 worth of custom cabinets, you cannot draw against that invoice until those cabinets are securely fastened to the kitchen walls. Understanding this distinction prevents massive cash flow crunches during the middle phases of the project when material outlays are at their highest.

Modifying the scope of work mid-stream is another common trap. The escrowed funds are tied explicitly to the line-item budget approved during underwriting. If you decide to scrap the hardwood floors in favor of polished concrete, you cannot simply redirect the flooring budget without lender approval. Unapproved reallocations will cause the inspector to flag the project, delaying your draw and starving your project of cash. If you uncover unexpected structural issues that require moving funds from your contingency bucket to your foundation budget, you must process a formal change order with your lender before doing the work.

Interest reserves also play a critical role in managing these facilities. In many fix and flip loans, the lender will build an interest reserve into the loan amount, covering your monthly payments for the first six to twelve months. This preserves your operational cash flow for construction. However, if your project stalls because you mismanaged the draw schedule, that interest reserve will burn down quickly. Once it is depleted, you are forced to make monthly interest payments out of pocket on top of floating the construction costs, creating a vicious cycle of capital starvation that can kill the deal.

Ultimately, securing the capital is only the first step in sparking the revitalization of a distressed asset. The true test of a sponsor is their ability to execute the business plan in lockstep with the lender's mechanics. By maintaining adequate liquidity to float the initial phases, managing contractor payment expectations, and adhering strictly to the approved scope of work, operators can use fix and flip loans to rapidly scale their portfolios without stumbling over their own cash flow.