When are Hard Money Fees Paid?

Question

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?

Jon Holdman · Answer

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

Jon Holdman · Answer

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.

Brian Jobson · Answer

@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

Nick Wing · Answer

@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.

Wayne Brooks · Answer

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.

Brian Jobson · Answer

@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)

Teresa Keith · Answer

@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.

Teresa Keith · Answer

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.

Jon Holdman · Answer

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.

When are Hard Money Fees Paid?

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