What Are the Junk Fees with Borrowing Money?

Hard Money Lending, Conventional Lending, Private Lending – What are the Junk Fees You are Paying?

hard money lendingAs they say, “One man’s trash is another man’s treasure”. In the case of borrowing money from conventional lenders (banks, savings and loans, credit unions, etc.) or especially hard money lending, so called junk fees are treasure for these lenders.  Lenders have a right to make money when they make their loans as they always take a risk of default by a borrower.  However, the fees need to be reasonable for the investor.

Following is a list of fees recently charged to an end-buyer that we sold a property to.  We have seen other names for these types of charges but I will let you decide which are reasonable fees and which are just designated as usual and customary.

Here are the fees on just the closing I discussed above:

 

     Designation                                                         Amount

Lender Inception Fee                                                   $5,000

Points                                                                              $2,000

Lender Inspection Fee                                                 $350

Tax Service Fee                                                             $250

Wire Fee                                                                         $100

Courier Fee                                                                    $35

Administrative Fee                                                      $250

Underwriting Fee                                                        $350

Mortgage Doc Prep Fee                                             $750

Assignment Doc Prep & Record                              $125

Courier                                                                          $25

TOTAL Fees                                                               $9,235

 

In addition to the above fees, the borrower was charged points on the loan.  Points are charged on the original closing or when the loan is paid off and can range from one point to as many as 10 points.  A single point is one percent of the amount borrowed.  If the loan is $100,000 and the borrower is charged 2 points, his cost will be $2,000.

The hard money lender advertised his loan at 2 points and 8% which is actually a very good rate in the real estate lending arena.  However, the actual cost to the investor-borrower was actually $9,235 or over 9 points!  Since the average hard money loan lasts about 5 months, a lender can lend his money at least twice a year.  His return on his $100,000 loan with just two loan “cycles” would be 9 points + 9 points = $18,000 plus 8% for the entire time it is loaned (10 months) or $6,667.  His total income would be almost 25% for the year.

So what is a junk fee versus a reasonable expense you should be paying?  The answer is actually what you are willing to pay because all of the above fees are either exaggerated or shouldn’t even be charged.   I suggest you interview hard money lenders well before you need them.  Especially request how much their “fees” are in addition to their usual points and interest rate.

Despite the relative high cost of borrowing money from hard money lenders, if you have no other source of funds your other option is to find a private lender for your loans.  Usually the private lender will ask to split the profit on your deal with you.  Try to offer him 5% or 8% if paid monthly and 10% if you pay them all the interest at closing.  The best insight I can give you is it will always be less expensive to borrow hard money than to split your profit on your deal with a private lender.

I wish you limitless success,

Dave Dinkel

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About Dave Dinkel 27 Articles
Dave Dinkel graduated from the University of Florida in 1968 with a BS in Chemical Engineering. He initially worked for a petrochemical research and development company in Illinois. Later he entered the financial arena as a stock and commodity broker with Merrill Lynch.While a stock broker he became a Certified Financial Planner and later started his own brokerage firms and stayed in the financial services industry for 22 years before retiring to pursue his love of real estate investing. After retirement, and because of his interest in business start-ups, he worked with a small company for a few years while driving their sales from under $12,000,000 to over $150,000,000 annually before going back to full-time real estate investing.Dave Dinkel has been a national platform speaker, contributor to local real estate clubs, mentor and consultant to numerous real estate investors and all the while running his own real estate business. Mr. Dinkel received the following degrees or designations: BSChE, FINOP, CFP, MSRP, RSP, RR, ROP, SROP, MGA, GA, Certified Estate Planner, Licensed Mortgage Broker, and Licensed Insurance Agent. He is often referred to as the “Teacher of Teachers” and his Mentoring continues to produce Students who go on to be national real estate "Gurus". .He has been a real estate investor since 1975 and recently received the first-ever Lifetime Achievement Award for Contribution to the Real Estate Investing Community. While being active in real estate investing for over 40 years, he and his wife Nancy have been married for over 52 years. He is most well known for the development of his Mentoring Program that has been called, "The Best Mentoring Program in the Country" which he continues today.In addition to his Mentoring Program, he started a full-service transactional funding Program so that new investors had the ability to do deals with no money of their own. He challenged the funding industry by making borrowing money very simple with his "One Point Funding Program" which has revolutionized the transactional funding industry and made millions of dollars available to investors who otherwise could not have afforded it. Currently his transactional funding is only available in Florida.Get more information about his real estate investing mentor program at http://www.DaveDinkel.com