When are Hard Money Fees Paid?

14 Replies

So I emailed about 7 lenders yesterday and got replies back from all of them. After reading 2 of the emails I began wondering about these fees and when they are due. This is an excerpt of 1 of the emails I received:

-Interest Rate 11.00-12.00%
-Min and Max loan amount Min. - $80,000 Max. - $2,000,000
-LTV on the After Repair Value Up to 65% of the ARV
-Funding timeline Less than 30 days
-Interest only payments or principal & int or balloon Interest Only
-Loan term 6 Month Balloon
-Fees

  • Processing $575
  • Underwriting $995
  • Doc Prep $750

The above fees are in addition to other normal and customary fees such as appraisal, tax, title, recordation, etc....

So my question here is 1) Are those Processing, Underwriting, and Doc Prep fees normal? 2) What is the Tax, Title, and Recordation fees all about? That's not part of the "Processing"? 3) Normally when are all these fees, origination fees, and points due?

Detail are going to vary for different lenders. Most of the fees listed in 1) would be due at closing. Those seem high to me. Tax, title and recording fees apply to any transaction and are also due at closing. Tax may mean taxes to the county or might be a transfer tax. Many HMLs also have points that are charged up front, too. Some want monthly interest payments, some will let you pay the interest when you pay off the loan.

@Jon Holdman So since these fees are due at closing that would mean that I have to come up with thousands of dollars before I even take ownership of the property? Let's say that amount is $5k. I don't see why a lender won't allow a borrower to postpone those fees until the subject property's repairs are completed and said property is sold to an end buyer. I have to pay the lender other fees and interest on the back end anyway so why not just add it up and collect at one time?

Not to mention the down payment that some lenders require you to have and now you're putting up that down payment plus all those junk fees before you even take posession of the property!

Due up front always, just like any other loan, and the points get deducted from your loan proceeds at funding/closing. Those fees do seem high.

Where are you located? 1) Those fees are a little bit high... What are the points? 2) Title/escrow/recording are closing costs and what it cost to record the Deed of trust, or whatever security instrument is used in the state. 3) all the fees and closing costs should come out of the loan amount, which would mean that whatever you are putting down needs to be enough to cover these costs of the loan doesn't cover them + the purchase price...

If you can get a good enough deal then a lender might let you cover some of those fees with the loan proceeds. But it requires a truly exceptional deal. Even if you get a conventional loan you will pay many of these same fees when you get the loan.

Fix and flipping is a capital intensive business. You need some serious capital of your own, even if you're using hard money to fund the bulk of the purchase and rehab.

Another thing to be aware of is that the rehab money isn't usually given out up front. The lender will hold that in escrow until you do the work and they inspect it. Then you will "draw" the money from the rehab escrow. So you will also need cash to pay for labor and materials pending getting the draw. Once you have a track record and a relationship with the lender you might be able to get some portion of the rehab funds up front.

Great discussion for newbies like me. I would like to chime in and ask if anyone is familiar with any of the hard money lenders listed here on BP under "resources"? Do any of them on that list let one wait until the home sells before you have to pay all those fees. I am also concerned about the closing costs up front. Also, if anyone has experience from any of those lenders on that list; does any of them provide you with the money to go ahead and do the work without holding partial in escrow? Thanks.

@Teresa Keith I have experience with a few of them. I am actually one of them! Lol Lenders want developers/flippers to have money invested in the project you might hear it referred to as "skin in the game." Lenders USUALLY give 65% of the after rehab Value of the house or 90% of the purchase price whichever is LOWER. Thus, unless you have a great relationship with the lender and a proven track record, you will have to bring in a decent amount of money. If the lender decides to do a holdback you will need to bring even more money down because the loan money will be released through draws as stated above. However If you have a killer deal where the purchase price is so low below the market value(let's say 50%, rare), a lender may loan more than the purchase price because it is still a safe investment for them if you default.

@Nick Wing:

But, when are the fees due? I see from your company's website that there is a 10-15% down payment due up-front and 4-10 points + fees just to open the loan; so that's a lot of money right there (if the loan is over 50k). Then you all are charging a $150 fee per inspection. I do not live in CA, but just for the sake of knowing: when do you expect all these fees to be paid? Thanks.

The required skin....down pmt

Points being charged, appraisal, title search/ins, and whatever other fees the HML is charging you.

You'll have to do the math for yourself.

@Nick Wing @Jon Holdman @Wayne Brooks
So on a loan of about $100k what would be the amount of money I would have to come up with out of pocket before I aquire the property? (ball park figures)

Impossible to say without more info. So, lets do an example. Say the ARV is $150,000 and the lender will give you 70% of ARV. And that they charge 15% plus four points and have $1000 in fees. And that you're paying $75,000 for the property and you have a rehab budget of $25,000. Here's what this would look like:

  • Loan amount: $105,000 (70% of $150,000)
  • Points: $4,200
  • Rehab escrow: $25,000
  • Origination fees: $1,000
  • Other closing costs and title company fees: $2,000 (can vary quite a bit)
  • Purchase price: $75,000
  • Total: $107,200
  • Less loan amount: $105,000
  • Cash needed to close: $2,200

In addition, you will have some other up front costs such as: insurance, inspections, termite certificates, utility turn-costs, partial month interest, etc. You might also get some credits from the seller, in particular for the partial year property taxes.

After closing you would start making monthly interest only payments of $1312.50. And you would need to pay for labor and materials then get draws from the rehab escrow to reimburse you. You would get the last increment of the rehab escrow when all work is complete. If you need more cash to complete the work that's going to have to come out of your pocket.

Now, that's a very, very good deal with a good lender. Purchase plus rehab is only 67% of ARV. More typically a reasonable deal might be 75% of ARV. So, assume a purchase of $85K and a rehab budget of $27,500. Otherwise the same.

  • Loan amount: $105,000 (70% of $150,000)
  • Points: $4,200
  • Rehab escrow: $27,500
  • Origination fees: $1,000
  • Other closing costs and title company fees: $2,000 (can vary quite a bit)
  • Purchase price: $85,000
  • Total: $119,700
  • Less loan amount: $105,000
  • Cash needed to close: $14,700

Many lenders will only lend a percentage of purchase and rehab, even if you're below their overall LTV limit. Say this lender will give you 90% of purchase and 90% of rehab. 70% of ARV is still $105K, but 90% of purchase plus rehab ($112,500) is $101,250. So now this looks like:

  • Loan amount: $101,250
  • Points: $4,050
  • Rehab escrow: $27,500
  • Origination fees: $1,000
  • Other closing costs and title company fees: $2,000 (can vary quite a bit)
  • Purchase price: $85,000
  • Total: $119,550
  • Less loan amount: $101,250
  • Cash needed to close: $18,300

@brianJobson Jon has done a great job at explaining as close to a real scenario as possible. The Last one in particular, as most lenders will only loan 70% of ARV or 90% of purhcase price, whichever is lower. Also some lenders will not finance the rehab like in the examples above.

@Jon Holdman Wow, those were some great examples. I appreciate your help. At first, after reading the first example I thought to myself "OK $2,200 is not bad. I can do that." Then as I read on to the examples that out of pocket number grew quickly.

So basically, what I have determined here is that rehabbing is not for me at this moment in time (unless I find a private lender with better terms compared to hard money.) Looks like I'll be wholesaling to build up capital.

Thanks guys

Fix and flipping is a capital intensive business. Even with a lender for a big chunk of what you need you still need some of your own cash. My rule of thumb would be that if your purchase price plus rehab is 70% of ARV and a HML will loan you that amount (70% of ARV) then you need about 15% of ARV of your own cash.

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