Construction lending can be known to be both challenging and risky. To ensure loan proceeds are correctly disbursed for the collateral of the loan, most lenders order draw inspections as a construction lending best practice, validating construction progress and mitigating risk.
In its most simple terms, draw inspections are ordered to follow along with the builder, confirming progress and identifying problems as early in the loan process as possible. Regular draw inspections are scheduled with experienced inspectors throughout the duration of a construction project, and in a sense the inspector becomes the eyes and ears of the lender on the jobsite. In the end, a draw inspector’s report determines if the builder has completed work according to what is requested and what appropriated funds will be released.
When completing a draw inspection, the draw inspector visits the site and performs many specific tasks. However, the following three components are critical to ensure a successful completion of the inspection:
The first vital step an inspector must complete is verifying the correct property. Address verification is completed in a number of ways, most commonly by a photo of the address posted on the property, a building permit identifying the property, or meeting the owner/builder at the site location. Additionally, mailboxes or curb signs with the proper address also substantiates a property address. Whatever the methodology, site verification is a crucial step of the process, and when this step doesn’t occur, the inspection is very likely to be flawed.
Another key component of a draw inspection process involves an inspector documenting progress of the project by providing photos of the various systems and components. From a loan risk management perspective, photos prove work is being completed, which is especially important if a dispute is filed by the borrow or builder. All photos must be in focus, clearly show the item(s), and must be taken at the highest quality setting possible. If photos are blurry, are too small, or do not match the requirements on the stated documentation, an inspector may be asked to return to the property to provide better evidence of the findings. Because photos of the construction site prove what was completed at the time of the inspection – and what wasn’t completed –this step of the process is imperative for completion.
Finally, inspector comments are an important aspect to the draw inspection form. As another validation of the inspector’s findings, comments explain any differences between what is completed and what is not, helping lenders understand a project’s progress and supporting the percentage completion of each line item.
Taking measures to ensure lenders have all draw inspection supporting information can save them the costs of change orders or builder or borrower dissatisfaction. Draw inspectors play a critical role in the process and ultimately support a smoother funding process.
Trinity literally wrote the book on draw inspection and published Introduction to Residential Draw Inspections, which details residential draw inspections. To learn more about what to look for during a draw inspection, check the book out at Amazon here.