Why minimum of 75k loan?

Question

So I’m under contract for a property that I’m getting for 40k. I’m waiting on an estimate now from the GC. The estimate could come back below 75k. The problem is I’m only seeing hard money lenders offering no less than 75k. Are there hard money lenders out there that would offer less or is there another Avenue I could take if I don’t need a loan that hits at least 75k?

Goal is to Brrrr the property

Robin Simon · Answer

Generally lenders will have a minimum such as $75k for the economics on the lending side.  The costs for lenders to process/underwrite/etc and do everything in terms of originating a loan are typically going to be around the same whether its $75k or $750k, whereas the revenue is likely to be tied to the size of the loan.  Thus, lenders will likely lose money or just not make enough typically for it to be worth it to do tiny loans.  Low loan sizes / low property values also don't have a lot of cushion in terms of if something goes wrong, much easier to go underwater if market turns or if the valuation/analysis is off

Bob Stevens · Answer

Because its just as much work doing a 70k loan as 500k, but at the end of day there is no real money for the lender,

Mike Klarman · Answer

Lenders only want to be involved if there is something in it for them.  Making $700 in origination on a loan isn't going to cut it.  Most have a minimum they will charge. Remember, every loan has a loan officer, loan processor, loan underwriter, loan closer.  Then there are the suits of the company.  They all have to divvy up 1,000? They look at it as not worth their time.

There are lenders who will do the small ones but you won't like the terms too much.

Chris Seveney · Answer

@Jarret Durst

Fees. It’s not worth it for a lender to get $1500 in fees and $10k in interest over a years time

It costs the same to originate a $500k loan that they can get 2-3 points as a 75k loan.

Erik Estrada · Answer

It really boils down to profitability. The same amount of work for a $75k loan amount is the the same for a $7.5 mil loan amount. You are better off working with a local Hard Money lender that only lends in that area. The nationwide hard money lenders won't really help you.

Rob Beeman · Answer

@Jarret Durst I agree with the post from Robin, however the ARV comes in to play as well, especially since you mentioned using the BRRRR method as the exit strategy from the rehab loan, as sometimes the rental loans have a min. loan amount or asset value. I might be able to help and will send you a PM.

Ken Vesely · Answer

As a direct lender, I can break it down simply

Here is an example

100k turnkey purchase

75k loan amount

lets say your in a judicial foreclosure state (not a deed of trust state), so in some places like NY and NJ you as the lender are looking at 3-5 YEARS to foreclose

Now lets assume $750 a month all in (inc taxes and insurance)

15k for a foreclosure attorney + court costs

4 years (48 months) @ $750 a month unpaid interest = $36,000 in arrears

$36,000 in arrears + $15k for an attorney

$75k loan + $50k in unpaid interest/foreclosure costs + the unknown of any deferred maintenance on that property

If you were a lender, how attractive does this look now?

Jason Wray · Answer

The real reason is because it will viloate something called the "High Cost" rule which is 3% of the loan.  Banks, Lenders, and Brokers have "margin" built into each loan.  Which has to include their hard costs like processing and underwriting fee's.  On a $75K loan 3% is $2,250.00 so that bank/lender has to fit their hard costs and the margin built into their rate which falls under their Loan officer compensation plan, or branch bucket.

DSCR loan are usually a go to for lower loan amount since they are a Non-QM loan and High cost is not part of their rules.

Mike Klarman · Answer

Are you saying that you are lending $50k out?  And you are asking what kind of structure the borrower will expect?

If that’s what you are saying you can do it two ways.  You can go a straight 10% let’s say.  They owe you 55k over x amount of time.  Let’s say a year.  They pay you like $4,500/month.

Or you can do a 12%, two point type loan 12 month interest only with no PPP and roll all the points and fees you charge into loan.  So they get 50k but the loan amount is 52k let’s say.  Now their interest for the year at 12% is $6,240 for the year.  Divide by 12 and that is 520/month they pay you until the balloon payment of 52k is due at years end.

Why minimum of 75k loan?

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