Hard Money Lending, Conventional Lending, Private Lending – What are the Junk Fees You are Paying?
As 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:
Lender Inception Fee $5,000
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
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,