3% commission on hard money loan?

[Dan Barman]

Am considering going in as a first time investor / hard money lender (limited partner) on a large (150+ unit), ground-up multi-family.

The opportunity came to us by way of one of the managers of the deal, who is a friendly acquaintance of my wife. As we understand, she helped to find, vet and secure the land the property will be built on, put the numbers together for the project, etc.

She’s partnered with a builder / property management company to do the buildout and manage the property until it sells.

She’s charging a 3% commission / finders fee for anyone who comes in to the deal through her. Is this standard / normal? This 3% comes out of our stake in the deal, e.g. if we invest $100K, she keeps $3K and we’re invested for 97.

As it happens, I ran this opportunity by a good friend who is a RE investor that knows the neighborhood very well. Turns out he’s already in on the same investment but came in through the partner / builder side and was not charged a fee.

Would love some advice on this 3%. Is this normal / cost of doing business for these types of deals or is something fishy going on?

Thanks so much!

[Christine Bellish]

Quote from @Dan Barman:

Am considering going in as a first time investor / hard money lender (limited partner) on a large (150+ unit), ground-up multi-family.

The opportunity came to us by way of one of the managers of the deal, who is a friendly acquaintance of my wife. As we understand, she helped to find, vet and secure the land the property will be built on, put the numbers together for the project, etc.

She’s partnered with a builder / property management company to do the buildout and manage the property until it sells.

She’s charging a 3% commission / finders fee for anyone who comes in to the deal through her. Is this standard / normal? This 3% comes out of our stake in the deal, e.g. if we invest $100K, she keeps $3K and we’re invested for 97.

As it happens, I ran this opportunity by a good friend who is a RE investor that knows the neighborhood very well. Turns out he’s already in on the same investment but came in through the partner / builder side and was not charged a fee.

Would love some advice on this 3%. Is this normal / cost of doing business for these types of deals or is something fishy going on?

Thanks so much!

 Have not personally seen a deal structured this way, but there are usually some sort of fees associated with these types of opportunities. Acquisition fee, loan guarantee fee, asset management fee, refinance fee, dispossession fee, etc.

What fees are “acceptable” is really a personal preference - some passive investors don’t like feeling as if the sponsors (the people putting the deal together) are greedy by charging a bunch of fees, but if you are still happy with the returns despite the fees it doesn’t matter so much. Personally, I care more about my returns, than how the sponsors are making money on the deal via fees, but that being said, I would not be ok with excessive fees. 

I suspect this person who brought you the deal is not part of the general partnership team? Because if they are, but they are just charging another fee on top of that, I wouldn’t personally feel good about that.
You should check to see whether this person is getting a piece of the pie already and if they are maybe just honestly ask them about the fee, because they may be double dipping.

Meaning: if the group that’s building and managing the project gets a certain percentage of the profits - is she a part of that group? If not, this might be the way she is making her money on the deal, in which case, charging a fee might not be so unreasonable. She should be compensated somehow for helping to bring the deal together, but if she is being compensated already and just charging this on top, I think it’s reasonable for you to ask more about it.