Typical Hard Money Fees (by category, not amount)

Rehabbing & House Flipping
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Typical Hard Money Fees (by category, not amount)

Karin Crompton
Rehabber · Niantic, CT · Member since 2012 · 443 posts · 150 votes

I'm looking for some info on what's considered typical vs what fees would be indicative of a bad lender - not the dollar amounts, just the categories, though if there are standard $$ ranges to be aware of, please say so. I'm looking to compile a checklist of sorts for myself to better facilitate the process (until I meet more private lenders and break up w/these HML's!).

I understand the basics: varying amounts of points, high interest rates, we have to put some of our own money down, the lender may or may not fund rehab costs.

We're talking to some HML's for an upcoming closing on a single-family rehab project to compare rates, terms, etc. The first one we spoke to sounded interested on the phone and wants to come to the house to "inspect" it. He's charging $425 for this.

What else should I be aware of? I've heard HML's sometimes find "problems" with the house so they can send people out for one inspection after another, charging each time. How many other fees and inspections are there going to be in addition to the regular terms?

Thanks for any input!

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Ann Bellamy
Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
13y

Karin DiMauro, it is very common for HML's who operate locally to do their own evaluation of the property and not rely on appraisals, which can be manipulated. They do sometimes charge for this, so that they are not driving all over the place doing initial inspections, only to have the borrower go elsewhere. National companies must rely on appraisals, because they don't know the market. I don't agree with Sonja Tani that appraisals are necessary. Few true local HML's require them.

Be sure to ask around at CTREIA about the reputation of the lender you are considering, if he's local, he's probably well known.

Some other questions to ask:
1. Ask about what happens if you don't have the property sold when the balloon is due? Is there an extension process and/or fee?
2. Ask if there are any back end fees. Reputable lenders will disclose all fees upfront, but unfortunately, it is not uncommon in our industry for borrowers to find out that there are fees due at payoff that are not disclosed until the borrower is sitting at the closing table.
3. Ask if there are fees to do draw inspections. Frequently a lender will employ an inspection service, and there are fees for each inspection.

I'm not saying the above are always the case, just something to ask about. Don Konipol is correct about the code of ethics of AAPL. I'm also a member of American Assn of Private Lenders, but since the organization is fairly young, there are plenty of hard money lenders who are not members yet, so just because a lender is not a member, doesn't mean they aren't on the up and up.

Ask around.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    13y

    The only fee I would ever pay upfront would be appraisal, and I would expect a copy of the appraisal to come with that fee. Other than that, I would expect to pay points (origination fee) and perhaps a minimal loan prep fee (no more than $200) at closing.

    Any other fees and I'd negotiate them away...

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    1Reply
  • Karin Crompton
    OP
    Rehabber · Niantic, CT · Member since 2012 · 443 posts · 150 votes
    13y

    Thank you, @J_Scott. This better be an appraisal when he comes to the house! I just asked my partner to confirm that that's what he's doing. Otherwise I can't imagine what he'd want $425 for.

    Just trying to anticipate here, but what if he or anyone else says they want something inspected? Obviously that's on us to pay for it, but how often does it happen?

    0Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    13y

    Karin DiMauro Any reputable lender isn't going to try to soak you with inspections for stuff that doesn't exist, and if they want to do that, stay away!

    The question is, where exactly in the process are you? Have you made an offer and have the house in escrow? Has the lender already checked all the stuff on you that he wants to check? (references, credit, etc.) Has he agreed to make the loan contingent upon the house passing inspection? If he's not funding improvements, where is that money coming from for that? What are his terms? I'm sorry, but this doesn't sound like a legitimate lender. The 'inspection' doesn't sound to me like an appraisal, but a way to seperate you from some of your money, I'd be very cautious.

    My advice to you would be for you and your partner to get up to speed on the entire process. Talk to various lenders and ask them what is customary in your area for borrowers to have to pay, etc.

    Also, talk to other investors in your area, and get as much info as you can. It's good you've posted on here, but search out the threads that will answer the questions you need answered.

    0Reply
  • Karin Crompton
    OP
    Rehabber · Niantic, CT · Member since 2012 · 443 posts · 150 votes
    13y

    Thank you all for the thorough replies. My partner did double-check and the lender we're speaking about told her it's an inspection fee and takes the place of an appraisal; they do those in-house and there will not be an additional appraisal fee. And I want to be clear that he has NOT added extra inspections and the like - I came here to confirm what I might expect as normal, and what would be bologna, should the situation arise.

    Karen M., as far as where we are in the process: we have a contract in place to purchase a bank-owned property, closing is scheduled for the 24th; and we've contacted our local hard-money guys, some of whom we've met and spoken with before to discuss the process (they come to our REIA meetings), and a couple who we recently discovered but have not talked to before. We've also contacted some people regarding private money ... cross your fingers, we hope to have a combination of funds and mitigate the hard-money fees. (We are aware of some of the logistics of first/second place on mortgages and have placed a call to our attorney regarding potential issues in using more than one private money source.)

    This particular HML I mentioned seems legit, though expensive. He also runs a traditional mortgage company that's been in business for years, and he was referred to us by a Realtor in our REIA. I just hadn't heard of a $425 inspection fee, though it makes more sense if that's his appraisal. Terms are 6 points, 12% interest, 1- or 2-year loan, interest-only payments w/a balloon at the end. He wants a hefty amount of our own money (like 30%) but will fully fund the rehab costs. He's running a credit check and coming to see the property. My partner has had the bulk of the conversations w/him, so I'm not sure whether he's formally made the loan contingent upon the house passing inspection ... and whose inspection, btw? His?

    Thank you again for the input!

    0Reply
  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    13y

    Trying to close by the 24th by anyone other than a HML that has their stuff together will be virtually impossible.

    0Reply
  • Karin Crompton
    OP
    Rehabber · Niantic, CT · Member since 2012 · 443 posts · 150 votes
    13y

    Hi Joe - agreed. We put a 3-week closing on the contract and the bank wants to close their books on it by year's end, so I don't see many options other than the hard-money guys on this one. Fortunately, we do have a few good ones in CT who are able to work quickly if they like the numbers.

    Still, it's all a good kick in the pants for me to network harder and find more private money! We have a potential short sale right behind this (awaiting the bank's approval/rejection of the purchase price) and I have my eye on a property going to auction and a couple of HUD properties. It really kills me to know I can't do all of them at once at this point in my career (patience isn't exactly my strong suit).

    0Reply
  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    13y
    Originally posted by Karin DiMauro:
    Hi Joe - agreed. We put a 3-week closing on the contract and the bank wants to close their books on it by year's end, so I don't see many options other than the hard-money guys on this one. Fortunately, we do have a few good ones in CT who are able to work quickly if they like the numbers.

    Still, it's all a good kick in the pants for me to network harder and find more private money! We have a potential short sale right behind this (awaiting the bank's approval/rejection of the purchase price) and I have my eye on a property going to auction and a couple of HUD properties. It really kills me to know I can't do all of them at once at this point in my career (patience isn't exactly my strong suit).

    I hear you!! Had three deals under contract at this point last year, had to back off one because the seller wasn't willing to wait for me to try and close all three at once. The deal I ended up passing on ended up being an example deal by a HML of what investors should be doing. I just couldn't make it happen quickly enough.

    Oh well. I was mad I missed it but it reinforced that I know what I'm doing.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    13y

    The American Association of Private Lenders is separating it's membership from the unprofessional, seedier aspects of the industry. Here are the code of ethics it's membership must agree to

    1. Members will adhere to the laws regarding The Fair Housing Act, Equal Credit Opportunity Act, S.A.F.E. Act, Predatory Lending Laws and Predatory Servicing Laws.

    2. Members will not discriminate against potential or actual borrowers based on their sex, age, race, sexual orientation or religion.

    3. Members will be honest and forthright in all their dealings with their borrowers, investors, financiers and the association.

    4. Member’s loan offering terms will not be changed from the original proposed terms without just cause. Member’s lending practices reflect their integrity and no “Bait & Switch” lending practices are tolerated.

    5. When originating a loan, it is our Members' desire to see the loan succeed and perform in accordance to the agreed upon terms. At no time will our Members originate a loan only to seek the property back through unscrupulous lending practices.

    6 Members will try to work with their borrowers in an effort to exhaust all reasonable options prior to foreclosing on a mortgage.
    Members will conduct themselves in a professional manner at all times.

    7. All members agree to adhere to the AAPL’s Code of Ethics to ensure long-term viability and success of the industry. Corporate, Industry Leader, and Industry Partner members in good standing may display the AAPL Logo on their web site and marketing materials to proudly show their voluntary adherence to the AAPL Code of Ethics.

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    WebsiteView Page
    3Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    13y

    Karin DiMauro, it is very common for HML's who operate locally to do their own evaluation of the property and not rely on appraisals, which can be manipulated. They do sometimes charge for this, so that they are not driving all over the place doing initial inspections, only to have the borrower go elsewhere. National companies must rely on appraisals, because they don't know the market. I don't agree with Sonja Tani that appraisals are necessary. Few true local HML's require them.

    Be sure to ask around at CTREIA about the reputation of the lender you are considering, if he's local, he's probably well known.

    Some other questions to ask:
    1. Ask about what happens if you don't have the property sold when the balloon is due? Is there an extension process and/or fee?
    2. Ask if there are any back end fees. Reputable lenders will disclose all fees upfront, but unfortunately, it is not uncommon in our industry for borrowers to find out that there are fees due at payoff that are not disclosed until the borrower is sitting at the closing table.
    3. Ask if there are fees to do draw inspections. Frequently a lender will employ an inspection service, and there are fees for each inspection.

    I'm not saying the above are always the case, just something to ask about. Don Konipol is correct about the code of ethics of AAPL. I'm also a member of American Assn of Private Lenders, but since the organization is fairly young, there are plenty of hard money lenders who are not members yet, so just because a lender is not a member, doesn't mean they aren't on the up and up.

    Ask around.

    4Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    13y

    Ann Bellamy Don Konipol One of the issues Karin DiMauro mentioned was the possibility of having multiple financial contributors and checking on how to structure the trust deed, etc. Though we've used hard/private money many times over the years, we've never done that.

    If a person had a deal and there were several lenders wanting to lend incremental portions, what would be the best way to do that? A partnership or syndication? A deed with divided interest or ?

    Also, it seems like 6 points is high, but we've always done much larger loans, enabling us to get lower points, etc, what do you think on the points she's paying?

    @Karin DiMauro what is your purchase price? and what do you anticipate for ARV?

    0Reply
  • Karin Crompton
    OP
    Rehabber · Niantic, CT · Member since 2012 · 443 posts · 150 votes
    13y

    Thank you all for the replies and for the detailed info on the Private Lenders association. That's great to know and good info to have.

    Karen M., someone else had mentioned joint venture as a way to proceed w/multiple funding sources, so I'm checking on that (though I imagine I don't have time to pull it together for this one, I'll learn about it for the future). That's about the extent of what I know for now, other than knowing that's a scenario in which we'd proceed with caution.

    Our purchase price is 115k, rehab of 60k, and ARV of 250k. Rehab numbers come from my contractor, with whom I did a couple of walk-throughs; and ARV is from myself and my partner. We each hold r.e. licenses and my partner is a long-time broker, trained in appraisal.

    0Reply
  • Steve Wilcox
    Investor · Cranford, NJ · Member since 2012 · 303 posts · 153 votes
    13y

    Negotiating terms with HML myself, and the lender in question (recomended and used by members of local REIA) is asking me to pay
    5 points (as loan value is very close to his minimum)
    $350 Appraisal
    $750 commitment fee (this seems a bit fishy to me)
    $1500 for his attorney fees

    Not sure if I should expect to pay his attorney fees, or a commitment fee

    0Reply
  • Account Closed
    Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes
    13y

    Steve Wilcox - no way!!! That's just ridiculous. I promise that has to be a scam. Who is the lender?

    0Reply
  • Steve Wilcox
    Investor · Cranford, NJ · Member since 2012 · 303 posts · 153 votes
    13y

    I dont want to share his company info in case I do decide to do business with him, however he does have references from investors that I know.
    I asked him specifically what the fees (besides appraisal) were going towards and am anxiously awaiting his response. Just wanted to hear from some of the more experienced with HML's, as this will be my first transaction with Hard money. I have been using cash but because my supply of cash is limited I feel that using HM would allow me to do more rehabs in the same amount of time, and although there are steep fees associated, I would net more at the end of the year. However it seems like everyone I talk to just wants more and more $ for what seems to be BS.
    A true hard money lender seems to be hard to find

    0Reply
  • Account Closed
    Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes
    13y

    One of our investors who does hard money loans for us has done over 400 flips. He swears the only way he was able to do it was by doing 4 at a time. He has always used hard money lenders on all of his flips, which has allowed him to spread out his own cash across 4 deals at a time. He's made millions and swears that hard money loans enabled him to do so.

    Yes that seems like a lot of upfront money for a small hard money loan. These guys just love to collect "junk" fees. That's how they make their money. What State are you working in?

    0Reply
  • Steve Wilcox
    Investor · Cranford, NJ · Member since 2012 · 303 posts · 153 votes
    13y

    I am in NJ, the loan amount is for 130k, I am putting 40k down,

    1500 legal fee is for his attorney to prepare the legal docs, examine my LLC, and he claims it to be a standard legal fee that will be on my HUD1

    the 750 commitment fee came with a much longer explanation, essentially saying that the commitment was to ensure that once he allocates the capital to go into the loan that the borrower will close with him, not go elsewhere or let the deal sit. I am going to try to have him waive this fee, or allow me to put it in my attorneys escrow account, and then count towards my down-payment to be released to him at closing.

    I think I would rather buy the property all cash, then refinance to pull my cash back out so I can bu another property an refi in the same manor. This gives me a stronger negotiating point being a cash buyer, and hopefully will help wipe out some of the junk fees

    0Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    13y

    Hard money will certainly allow you to leverage yourself and do more deals Steve Wilcox. I too know several rehabbers whose business has grown dramatically because they leverage themselves wisely. It’s been very gratifying to watch. Everyone is different, but the more aggressive flippers we know will borrow the purchase money and use their own funds for the rehab. After a while, when their cash runs dry, they’ll borrow the rehab money.

    Unless these are truly the prevailing charges in NJ, I have a feeling you just don’t know enough lenders. (On the other hand, with these terms, you convinced me to move to New Jersey!!) As you grow, you’ll meet more and more private individuals willing to give you a much better deal.

    You didn’t mention the interest rate.

    Don’t forget to ask what he charges to prepare payoff documents when you sell the property. He can kill you there too.

    There is no such thing as a "standard fee." When people talk to me like that I believe they think I’m either naïve or desperate.

    I guess the most egregious charge, and one I find offensive, is the commitment fee. What happens if he pulls out at the last minute after you’ve allocated your capital? Happens all the time. This is nothing more than a junk fee from which you receive no value. I’d refuse it or at least figure out some way to pay him a nominal amount only if you pull out. He could of course, tell you to pound sand but then it's your call.

    In the end, you can’t make a profit off a deal you don’t buy, so it’s best to be pragmatic. I can see why you’d hate many of these charges but, in total, do they still allow you to make an acceptable profit on the property? If yes, you might hold your nose and pay them, while diligently searching for better money on your next flip.

    Jeff

    0Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    13y

    The commitment fee is a junk fee, period.
    The appraisal fee is also a junk fee because he's going to the property and assess the value anyway. On the other hand, sometimes hml's charge it because they pay someone else knowledgeable in the area to evaluate the property. In that case it makes sense. You'd pay for an appraisal with a conventional loan anyway.
    The attorney fee is whatever it is. In our area hard money closings range from $950to $1500 on average for attorney fee including loan docs and closing, not including title abstract or insurance. Attorneys doing hard money deals have increased E&O insurance exposure. Massachusetts requires an attorney for all closings.

    2Reply
  • Steve Wilcox
    Investor · Cranford, NJ · Member since 2012 · 303 posts · 153 votes
    13y

    Interest rate is 14%, with 5 points. @Jeff s you are right I don't know enough lenders, I have been using all cash and conventional financing when we can.
    My reason for.using this.Guy is that he actually has references whom I know, and.with so many horror stories out there, and fake lenders who c.an't ever close.a.loan
    Commitment fee will not.be paid. Is it normal to pay for his attorney to draw up docs?

    0Reply
  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    13y

    I agree that you’re wise to use someone from a referral, Steve Wilcox, even if the cost is a bit high. Over time, you'll develop the relationships and form a stable of lenders to choose from.

    “Is it normal to pay for his attorney to draw up docs?”
    Our attorney has reviewed our documents but we don’t use him to fill them out. California is an escrow state. We don’t use attorneys to close so yours is a regional question. I don’t know what’s normal in New Jersey but I’d defer to what Ann Bellamy wrote above. She’s closer to you and works in an attorney state.

    0Reply
  • Steve Wilcox
    Investor · Cranford, NJ · Member since 2012 · 303 posts · 153 votes
    13y

    From talking with other local investors HML around here make you pay the 1500-2k in lawyer fees. The appraisal also makes sense to me, and I am just trying to negotiate the commitment fee away, and the points down as far as possible to make it affordable. I want to ensure that I will actually make more money after 2 projects completed I make more return on my cash than if I had just completed 1 all cash and left the HML out of the equation.

    I dont want to pay someone for the right to do twice as much work for the same profit

    0Reply
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