Some hard money lenders charge huge upfront fees, don’t they?  What’s up with that? 

Ok, you are a real estate investor and you found a killer deal.  It needs work, but it’s a diamond in the rough.  In order to get this deal, you have to close in 8 days.   You don’t have the cash to buy it outright yet, so you decide you have to use hard money.  Besides, it needs major rehab and no bank will touch it.

You call a hard money lender, he likes your deal, and then he tells you the terms.  After you recover from sticker shock, you decide it’s still worth it.  You can afford to pay the hard money because you’re going to make good money on this property after it is fixed up and resold, even with the hard money terms.  You agree to do the deal with the lender, because he can get it done in time.

Since time is short, here is what the hard money guy was doing:

1.  Sent someone out to inspect the property and compare the construction budget to the actual building to make sure that this isn’t a lipstick rehab.  The guy knows construction and property values in the area, and doesn’t work for free.  KaChing.

2.  Put some other deals on the back burner to focus on yours because you have to close quickly.  That maybe cost him a deal.  KaChing.

3.  Called his own attorney and asked him to order a title abstract (KaChing on the abstracter and KaChing on  the attorney’s time.)  Attorney reviews the title.  KaChing again.

A couple days later, you are talking with your Dad, and tell him about this killer deal.  You tell him about the rates the hard money guy is charging, but that he can get it done in time and it’s worth it.  Dad likes the deal too.  So much so that he offers to lend you the money at less than the hard money guy was going to charge.  Cool!!  You can save some bucks and Dad makes some money too.  Dad knows an attorney golf buddy who can handle the closing too.  The golf buddy specializes in personal injury law, but what the heck, any attorney can do a closing.

You remember to call the hard money guy and say, “gee, sorry, I found the money elsewhere, thanks, I’ll call you next time.”  The hard money lender is out 5 KaChings and decides he’s not going to front the  costs anymore without an upfront deposit.  He still has to pay the property inspection guy, the attorney, the title search, etc.  And it’s out of his pocket.  Yes, I’m sure you’re going to say he makes enough money elsewhere to make up for it.  But why should he pay for your costs?  And this happens over and over again. 

So here are some of the fees you may run into with hard money:

Initial inspection fee, due diligence fee (title work, attorney and appraisal), application fee, construction draw inspections.   And there are others.  Are they all legit?  Maybe, maybe not.  I’m not planning on dissecting them all.

The point is, ask what the fees are, be sure you understand what they cover, how they will be applied, and whether they are refundable and under what circumstances.  Legitimate fees to cover costs are simply part of doing business.  When you do a commercial loan, the lender makes you pay for the appraisal and the environmental assessment yourself, and you have to pay your own inspector.  It’s not that different. 
The more informed you are, the better business decisions you make.  And is there more to this story?  Stay tuned to find out if Dad can fund the deal on time, and if Golf Buddy Attorney can close on time……

Your partner in profitable investing,

Ann Bellamy
Buy Now, LLC

Quick Tip
In speaking to investors, many are getting no activity on their listings
Others are getting them under contract right away.  The homebuyer tax credit is gone, and it provided the impetus for a large wave of buying.  Now you have to price aggressively to move your properties.  Is it cheaper to hold a property through the winter and pay interest, taxes, insurance, snow removal, HEAT, electricity, homeowner association or condo fees, etc, or to take the hit now, drop the price below your competition, and be the best priced home out there for the few buyers who are left?
It’s the pay me now, or pay me later question again….