HML Commitment Fees

[Givonna Wiley]

I've found a home that I want to be my first investment in a suburb of Cleveland, Ohio. It's $225,000 with $150,000 in repairs with an ARV of $600,000. I though that I had found a Hard Money Lender that would finance me with an unfavorable credit score and no money down, just pay closing costs. He told me to find a property that the cost + repairs were less than 65% of the ARV. When I called him ready to make an offer he told me that he needed a $2500 commitment fee? Are commitment fees typical of Hard Money Lenders? This lender is not local so I'm wondering if this is a scam.

[Jon Holdman]

Upfront fees are a very good sign you're being scammed.

Sorry, but doing a BIG fix and flip like this with no cash of your own is going to be VERY, VERY difficult. I work with a very liberal HML who will loan 70% of ARV (based on his appraiser's value). Your deal is a 62.5%. So he would potentially loan you $420K. That would be about $395K after the points and other closing costs. Most of the rehab budget would be held back and only distributed as the work is completed and inspected. So you would get about $20K plus whatever lump of the rehab budget was agreed upon as the first draw. So you need cash to cover labor and materials prior to getting future draws on the rehab budget. And you will need to make monthly payments $5250.

If you hold for six months you would make payments totalling $31,500.  Assuming you stick to your rehab budget (very unlikely for your first fix and flip) you would need $11,500 of your own cash to cover the payments.  

You don't want to be down to your last penny, either. My rules of thumb is that for a 70% loan and a 70% purchase plus rehab deal you will need 15% of ARV of your own cash. This deal is better than 70% (assuming these numbers hold). So you would need more like 8% of ARV or about $50K.

Assuming these numbers are correct this is a good deal and will make some serious money.  You just won't get there without some of your own cash.

Many HMLs are less liberal than the guy I'm thinking of (who does not lend in Ohio.)   Many require a minimum down payment regardless of the numbers for your deal.