Hard money lender wants a $2k DD fee & $5k appraisal

[Natalie Brown]

My client is looking for hard money. I am not very familiar with their processes. They want him to pay a $2k due diligence fee up front and pay for an appraisal of $5 up front with no guarantee of funding. Keep in mind he has already paid for an appraisal with another company and they didn't fund because he was 25k short of liquid funds. He has 2 other properties that is paid for.

My question is...is this normal dealing with hard money lenders? Wanting so much up front and not guaranteeing funding.

[Syed H.]

Originally posted by @Natalie Brown:

@John Thedford the loan amount is $488k...100k down

 That’s insane. I would never pay a $5k appraisal and $2k DD fee on a $500k property.

Appraisal should be max $2k. DD Max $750-$1000

[Charles Kao]

@Natalie Brown

If this was a massive deal then yes but for that size of deal no. I would be concerned if they are legit. I would expect the appraisal

to be more like 2000-3500 tops.

[Natalie Brown]

@Caleb Heimsoth yes he is

[William C.]

Buyers are actually paying $7k UP FRONT for appraisals, on a $500k deal, that may or may NOT fund?

I am not in the business of scamming people, but that seems like the greatest business model of all time. Just tell every unsuspecting “investor” you’ll find they’re fix and flip or any deal for that matter. Take an application. Collect $5k. Profit. Oh and maybe lend some money out here and there to the slam dunk deals will all the upside in the world.

[Natalie Brown]

@Derek Guivehchi thank you. I live here in Memphis so I would be glad to meet with you and my client.

[Jay Hinrichs]

Originally posted by @William C.:

Buyers are actually paying $7k UP FRONT for appraisals, on a $500k deal, that may or may NOT fund?

I am not in the business of scamming people, but that seems like the greatest business model of all time. Just tell every unsuspecting “investor” you’ll find they’re fix and flip or any deal for that matter. Take an application. Collect $5k. Profit. Oh and maybe lend some money out here and there to the slam dunk deals will all the upside in the world.

this is what do hard money does advertises no money down but you need to pay 3k for their how to flip materials.. thats is a great model put some information together and sell it for 3k.. you make money without funding.. although i know they fund some deals but i suspect and I dont know but I suspect based on posts on BP they keep a lot of those 3 k buy our training materials. that you create one time and sell again and again.. LOL.. genius model

[Nasir El Ameer]

@Natalie Brown

It doesnt sound to right considering the deal and strategy.

But for multifamily and commercial rehab loans can have higher costs for due diligence and appraisal.

How much leverage are they using on the deal?

[Natalie Brown]

@Nasir El Ameer They were doing a percentage of the renovations and a percentage of the acquisition. My client was going to bring 100k liquidity to the table.

[Eric M.]

Originally posted by @Kim Tucker:

is this for a big commercial loan?

 That was what I was thinking.  Maybe this is reasonable on a 5,000,000 shopping center. But kind of extreme for residential flip situation

[Nasir El Ameer]

@Natalie Brown interesting

Is it vacant? 

Whats their exit do they want to keep it and refi to a perm loan or sale it?

[Syed H.]

Originally posted by @Derek Guivehchi:

@Natalie Brown fees seem about right. I don’t see what the issue with a Dec appraisal is though. If your needing another lender PM me I would be interested in looking at funding the deal. I’ll actually be in Memphis later next week.

 These fees do not seem about right. They are astronomical for the size of the deal. 

[James Galla]

Up front appraisal is always normal. Having worked at an appraisal management company and overseen thousands of assignments, the $5k price undoubtedly reflects a commercial, complex, or unique assignment, however, it seems high. Simply saying it's a 10-Unit doesn't adequately describe the property as to justify the price. For instance, I've seen a residential SFR assignment go for $2k. No other appraiser was willing to touch it because of extreme rurality, uniqueness, and it was the height of the busy season. So, it really depends on the facts and circumstances, but this is something you may want to double-check.

The issue with getting your own appraisal is that a lender may not trust that it wasn't done independently or jointly. So, them asking for their own appraisal is fair game. You also ought to see what the itemized bill is, so you know the appraisal secretly doesn't cost $2k and the HML is charging a $3k management fee. You ought to contact different appraisers to get quotes.

Since you've already got $5k in sunk costs in an appraisal, perhaps you should check into different lenders.

[Karen Margrave]

@Natalie Brown NO! Rip off. Over the years I've borrowed MILLIONS of dollars in HML, and never once did I pay money up front. A reasonable appraisal fee is understandable, but the question of who is paying for and ordering the appraisal is important. You state that it's for "your client" Are you a real estate agent or broker? Since the housing crash there are new laws concerning who can order appraisals, etc. so that there's some separation between brokers, lenders and appraisers, and you need to get familiar with those laws, in many states Brokers/agents are banned from ordreing appraisals. Are you a licensed loan broker? If so, you need to do your research on these topics so that you're an expert before you put together any loans for any clients as there is a huge liability in brokering loans.

[Dan Wallace]

To clarify a few things.

A good faith deposit is very customary in commercial lending. The good faith deposit may be refundable if they are not able to secure you with the terms they represent but a good faith deposit like anything else is negotiable, possibly less a nominal processing fee. It is also very customary to request a deposit for an appraisal and/or any third party reports. What did your client pay for the last appraisal? Appraisal costs vary per market but I do not understand why your prior appraisal would not suffice. Something you can also negotiate is the use of an existing, current appraisal. In any event, the cost of an appraisal should be a pass-thru expense. Make sure the $5K is not for other third-party fees such as any environmental, title or credit check expense.

As for who can order an appraisal, I would defer to an actual appraiser but my understanding and experience is that appraisal regulations only impact regulated groups such as banks and therefore hard money lenders can effectively make up their own rules regarding appraisals since they are not regulated like banks and are lending their own funds.

Finally, banks do not have the "right" to redline. Redlining has been illegal for over 50 years and the USDOJ will sue if banks have been found to be redlining. Redlining in its true definition is very discriminatory and illegal.

[Natalie Brown]

@Karen Margrave I am a licensed agent. I ended up telling my client to not do it with the responses I've seen on here. 

@Dan Wallace It was a nonrefundable fee and not guarantee on funding. The last appraisal was $5k. I didn't order the appraisal that was the HML.

[Karen Margrave]

@Natalie Brown wise move.

[Jay Hinrichs]

Originally posted by @Dan Wallace:

To clarify a few things.

A good faith deposit is very customary in commercial lending. The good faith deposit may be refundable if they are not able to secure you with the terms they represent but a good faith deposit like anything else is negotiable, possibly less a nominal processing fee. It is also very customary to request a deposit for an appraisal and/or any third party reports. What did your client pay for the last appraisal? Appraisal costs vary per market but I do not understand why your prior appraisal would not suffice. Something you can also negotiate is the use of an existing, current appraisal. In any event, the cost of an appraisal should be a pass-thru expense. Make sure the $5K is not for other third-party fees such as any environmental, title or credit check expense.

As for who can order an appraisal, I would defer to an actual appraiser but my understanding and experience is that appraisal regulations only impact regulated groups such as banks and therefore hard money lenders can effectively make up their own rules regarding appraisals since they are not regulated like banks and are lending their own funds.

Finally, banks do not have the "right" to redline. Redlining has been illegal for over 50 years and the USDOJ will sue if banks have been found to be redlining. Redlining in its true definition is very discriminatory and illegal.

 Dan that is completely   IN ACCURATE  small commercial banks that only do commercial and not owner occ .. can pick and choose what they want to lend on..  banks that have govmit back loans of course are forced to lend in the hood..