First things first–what is a draw? A simple, general definition for a draw is a percentage payout for partial work completed and/or a good faith payment for work that is contracted to be completed in the future. Even simpler, a draw is one of the payments of a payment plan for construction or restoration work. Draws are normal in the construction industry with a common payment plan being half up front, half upon completion. For the mortgage industry it becomes a little more complicated, but is based off of the same principle.
So how do draws work in regards to mortgage companies? First off, draws will only ever come into play if the mitigation/restoration claim you are working on goes over the monitored amount for that particular mortgage company. For any claim amount under a monitored amount, the check you send out will simply be endorsed and released–meaning they will physically stamp the same check you sent them, and send it back to you. For claims totaling over their monitored amount, they will deposit your check in an escrow account and release money back to you in draws by issuing new checks. Please read our article Sign or Not to Sign? When to Sign Your Claim Check Before Sending for a guideline of when to sign your check before sending.
So what is the normal draw schedule or payment plan for mortgage companies? There isn’t one and each mortgage company is different, but many of them release one third of the initial check up front, one third after you have completed approximately 66% of the work, and release the final third upon completion. Let’s use Wells Fargo as a quick example. You receive a State Farm claim check that is payable to Your Company, Your Customer and Wells Fargo for $30,000. You have already had the customer call their loss/drafts processing center to open the claim and you have faxed in your third party authorization so that you may now speak with them. The loss/drafts processing center will now advise you to send in your fully endorsed check along with the adjuster’s worksheet and W-9 so that they can deposit your check into escrow and release your initial $10,000.
Now, with only the adjuster’s estimate and your W-9, Wells Fargo will issue you a check for one third, or $10,000, to help pay for some of your up front costs. They hold the remaining $20,000 in escrow until further documentation and/or inspections are received. Once your work progresses past halfway you call and order your 66% inspection. Your inspection results come back at 70% so Wells Fargo issues you another check for $10,000. You finish your work, you complete and fax in all required documents, and order your final inspection. The inspection comes back at 100% so Wells Fargo issues you a final check out of their escrow account for $10,000. This is how draws are ‘normally’ issued.
So, finally returning to the title of this post, how could their possibly be a strategy for getting draws? Well, the major problem with getting draws is that each one requires an inspection. As you will learn, or already know, each inspection takes a long time. From the day you call until the day that the results are posted is going to be at least two to three weeks! If you have perfect timing, the progress of your work goes exactly as planned, and the inspector knows exactly what they are looking for, this won’t be much of an issue–so basically, ordering an inspection is going to be an issue! Please read our Ordering Inspections article for further information and strategies regarding inspections.
To mitigate the time aspect and uncertainty of the inspection results, the best strategy I have found is to simply skip the middle or 66% inspection and, if it is financially feasible for your company, only order one inspection when your work is complete, or better yet, almost complete. This means that you will be getting two draws instead of three. One up front, and one upon completion. It may not seem like an overly brilliant scheme, but trust me, skipping one draw can speed up your final payment by a month or more!
While draws that are issued from mortgage companies are mostly inconvenient, there are some positives. First, it is way better to have your money sitting in a mortgage company’s restricted escrow account than in Your Customer’s checking account! Your Customer’s itch for a new flat screen TV is now not an option. Second, and along those same lines, even if the initial claim check was only made out to Your Customer and Wells Fargo, once it has been deposited and must be re-issued, mortgage companies almost always re-issue as a dual party check, now with Your Company’s name on it.
To summarize, a draw is simply one payment issued as a portion of a total loss/draft claim for work completed or that will be completed. Yes draws can be complicated, and are different for each mortgage company, but if properly handled can actually mitigate some monetary risk. If draws are viewed by Your Company as another part of the endorsement process they will not slow you down too much and may even help cover up front costs that Your Customer may not have been willing or able to pay.
Now go and get Your Money Faster.