At Ignite Funding, we believe that understanding every aspect of your investment(s) is important. This includes understanding certain lending practices and strategies that we adhere to in your Trust Deed investments. One practice you should familiarize yourself with is voucher control, which you will most commonly see in projects involving horizontal development and vertical construction. Below we delve deeper into the role that voucher control plays in development and construction loans.
What is voucher control?
In general, voucher control is a formal “check” system, where a 3rd party is used to manage and control the disbursement of funds to the receiving party for work that has been confirmed completed.
Why does Ignite Funding use voucher control for certain development and construction projects?
Private lenders, like Ignite Funding, are required by mortgage lending regulatory bodies to provide the full amount of the loan up front regardless of the type of project (i.e. acquisition, horizontal development, vertical construction). This provides a safeguard to borrowers by preventing private lenders from cutting off their financing mid-project for baseless reasons. In turn, Ignite Funding will utilize the service of a 3rd party voucher control company as a safeguard to their investor’s investment. Development or construction funds are still provided up front, but voucher control mitigates a situation where the borrower could pocket the funds and walk away without adding value to the property via development or construction work.
Is voucher control a common practice in the lending industry?
Banks already perform a similar service internally and they are not required to provide the full amount of cash on the loan upfront to the borrower for a development or construction project. Banks are known for cutting-off financing to a borrower mid-project when uncertainty surfaces in the market (i.e. the pandemic), even if the borrower itself is not experiencing any internal financial issues. This can leave the borrower in a detrimental financial pickle through no fault of their own. The banks fair weather lending practices is part of what draws borrowers to private lenders like Ignite Funding.
How does voucher control typically work for real estate projects?
Once the loan is funded and closed, Ignite Funding will send the portion of the funds to be utilized for construction to a 3rd party voucher control company. As the project progresses, the borrower sends invoices to the 3rd party company to be reimbursed for work that has been completed. The 3rd party then verifies the completion of the work by sending a representative to confirm onsite. Once the work has been verified, the 3rd party company will then disburse the amount invoiced directly to the borrower, or the general contractor and/or subcontractors.
Important Note: In the past, 3rd party voucher control companies would release the funds in two installments. The first installment would be released after the loan was funded and closed and were supposed to be used for the first phase of development and construction of the property. Once confirmed complete, the second installment would then be reimbursed via the process described above to complete the construction. Due to enhanced regulations over 3rd party voucher control companies this is no longer the standard procedure, which is to the benefit of private lenders and Ignite Funding investors.
How often are borrowers able to request reimbursement for completed work?
Borrowers can invoice for reimbursement as often as needed; it is up to their discretion. We have seen borrowers’ invoice biweekly, bimonthly, when a certain percentage of the construction is completed, or even at the very end when construction is fully finished. Each situation is unique to the borrower and the project.
Is there a cost to investors for the use of a voucher control company?
The cost of the voucher control company’s service is typically absorbed by the borrower. There are fees charged by the 3rd party voucher control company that are associated with each request for reimbursement. That is why the borrower is the one who dictates how often they draw funds from voucher control.
Are 3rd party voucher control companies regulated?
3rd party voucher companies are licensed and regulated by the mortgage lending division of the state they do business in. Ignite Funding typically works with companies located in Nevada, which is home to some of the strictest mortgage lending regulatory oversight in the nation.
Is voucher control different from construction control?
Voucher control and construction control are one in the same. They are interchangeable terms for the same concept.