The Fed typically reports about half of the actual lending commitments. So, with U.S. commercial real estate and land development lending volume approaching $660B (add another $200B for residential), one might assume that the amount of work and oversight required to execute a successful construction project in which all parties of the loan process are satisfied, is a tad high. Which is a gross understatement because a single draw request not only has to go through the hands of numerous professionals, but the process of working towards successful completion of a project without any legal disputes such as a mechanic’s lien is a slow, time-consuming, and painful process.
With real estate and land development lending volume reaching more than 330 billion dollars in the US, one might assume that the amount of work and oversight required to execute a successful construction project in which all parties of the loan process are satisfied, is a tad high. Which is a gross understatement because a single draw request not only has to go through the hands of numerous professionals, but the process of working towards successful completion of a project without any legal disputes such as a mechanic’s lien is a slow, time-consuming, and painful process.
Well, not anymore.
Construction loan management software simplifies every step of the construction loan process. Automating numerous mundane tasks associated with managing construction loans, payment disbursements and tracking (with every lien release automatically tied in with the payment), managing project timelines, document management and approvals, and of course, transparency for all stakeholders.
But these are just some of the advantages that a construction loan management platform brings to the table. Today, let’s focus on the top five ways lenders can use construction loan management software to track, automate, organize, expedite, and other fancy positive words that will save you time and money.
1. Collecting, Parsing, Analyzing, and Structuring Draw Documentation
If you have tackled any construction draw request, then you come face to face with the seemingly insurmountable quantity of documentation that accompanies every internal and external request, every decision, every action—from draw disbursement requests, the AIA G702, the AIA G703, invoices, to lien releases, and many more important documents that need to be processed and approved. Automating manual administration tasks is the answer to reducing the manual burden. Platforms that incorporate machine learning have made life infinitely easier for lenders by automating numerous processes, eliminating the risk of human error, and making hours-long tasks manageable in a matter of seconds. Let’s take a look at a machine learning in banking use case, shall we?
Machine Learning in Banking Use Case
While the construction draw process used to be a nightmare, a lender adopted construction loan management software to digitize all documentation, authorizations, and reporting from paper and Excel into a transparent and version-controlled platform. The software helps the construction loan administration team efficiently analyze the many PDFs, emails, and other documents of a single draw request with the help of machine learning that uses an algorithm to parse the data and search for errors along the way. The application of machine learning makes the entire process not only quick and efficient but practical as well, as it removes the “human error” factor from the equation. Plus, an integrated file manager centralizes all construction files and documents in one place—organized, digitized, archived, shareable, and downloadable.
2. Obtaining Approvals
Anyone who’s ever filed a construction loan draw request has experienced firsthand just how long and seemingly unending the approval process tends to be, as the draw request needs to be approved by numerous individuals working within both the borrower and lender teams. Included in the process are: the construction loan administrator, the third-party inspector, the title company, real estate developer, real estate development team, and other stakeholders.
Not only does handling and processing draw requests require tracking countless emails and numerous spreadsheets, but it always runs the risk of encountering the dreaded human error. This is where both machine learning and automated notifications built into construction loan software come into play.
Construction loan software makes this process pain-free for lenders and borrowers alike by tracking, coordinating, and collecting approvals from a centralized and organized location. In fact, digital draw schedules and project budgets automatically reconcile numerous opposing problems and challenges in the construction loan management process. Identifying and surfacing these issues means errors are addressed immediately, expediting approvals and thus saving time and money for all participants.
3. Centralizing Information
Have you seen the amount of documentation needed to manage the construction loan process from inception to completion? Does the mere thought give you the chills, and perhaps even a nightmare at times? Paperwork can be scary, that’s for sure, and with tens and hundreds of emails, PDFs, and spreadsheets to work with and keep track off, it’s no wonder that there is a need for centralized construction loan management platform where you can monitor and optimize every process.
With a single, organized repository containing every document, approval, critical draw disbursements info and more, you can efficiently and effectively keep track of everything that’s going on in the project. It’s something like keeping track of your shipment across the world, only here you’re tracking how the project is going, regulatory compliance, and whether or not all parties are getting what they need for lien-free completion.
4. Construction Loan Management Reporting
Construction loan management software also allows you to run a variety of reports as the project progresses.
If you want to know cash flow projections for the next month, you can quickly run a report. You can do the same for a myriad of other processes, such as finding missing lien releases and assessing your composition, all with the use of draw software and real-time analytics.
Construction loan management allows you to access the information you need quickly and produce detailed reports everyone will benefit from:
- Draw Processing Report. This report is your comprehensive overview of all aspects relating to construction draws in a specified period, such as approval dates, days to process, dates funds withdrawn, etc. One of our lenders recently discovered through their Draw Processing Report that the time to process draw packages went from 19 days on their first draw down to 1.6 days on their most recent draw. This is how quickly lenders and borrowers who adopt to construction loan software can realize efficiencies.
- Portfolio Composition Report: details the types of projects, locations, loan and projects sizes, and more.
- Loan Payments by Division Report: breaks down all draw requests by project and type of cost over a specified period. Tracking this information goes a long way to prevent fraudulent activity by monitoring labor, supplies and material costs; cash flow; suspicious line items; and change orders. This report also provides proper checks and balances aligned with compliance requirements.
- Cash Equity Over Time Report: tracks the equity contributions and requirements per loan. Over time, of course, as the name implies.
- Lien Releases Report: used to track the status on conditional and unconditional lien releases for every invoice broken out by project over a specified timeframe. The report prevents a particular pain point for many construction loan administrators as monitoring lien activity is often managed manually by email and Excel spreadsheets.
- Retainage Report: tracks the retainage status and “withheld to date” for every line item broken out by project over a specified time.
5. Distributing Payments
At its essence, construction loan management software is designed to make draw processing a breeze by tracking finances on all fronts, including how much was spent, who was paid, who is still waiting to be paid, how much capital is needed and how much of it will be disbursed over time, etc. Bringing real-time information to the table with digital draw processing is the best way to manage construction loans from both risk mitigation and financial standpoints.
“With today’s improved technology and smartphone adoption, lenders are now disbursing payments to an account similar to an escrow account where developers and contractors can then initiate payments to the approved recipients. This level of control maintains the contractor’s payment leverage while preventing diversion of funds.”
Will Mitchell, Quoted in PaymentsSource
What does this mean for you? For one, you can avoid contractor’s liens and lien disputes due to missing or “lost” payments by simply tracking everything from a centralized location. Managing the draw payment process and payment disbursements have never been easier, and loan disbursement schedule can finally be organized and automated with ease.
Conclusion
Considering the volume of construction loans in the U.S. along with the fact that construction lending is a process that entails many cumbersome tasks involving paperwork, numerous relevant parties, and more, there is a need for lenders to incorporate construction loan software into their operations to automate, expedite, and simplify these processes.
While there are many uses for the software that benefit all relevant parties in a construction project, loan software programs can significantly cut down on manual labor and eliminate human error and reduce risk. With these top five uses in mind, you can effectively and efficiently increase your portfolio of construction loans and maximize your ROI.
