Total Cost of Hard Money Loans

We often receive inquiries from new investors focusing only on our rate and points. Pricing is usually the first thing these clients want to discuss. It is how an investor with limited experience initially sizes up capital providers. It makes sense, but that is never the conversation when we get a call from an experienced real estate investor.

An investor with a few deals under their belt understands the factors that affect the total cost of a hard money loan. Experienced investors know that costs outside of simply rate and points can be the difference between profit and loss.

We wanted to share some insight into additional costs to consider when evaluating a lender for your next project.

Additional Fees

In addition to origination, most lenders will have additional fees to be paid at closing. Processing, administration, or funding fees are not uncommon but should be disclosed upfront. These fees should also be reasonable. Compare fees across lenders and make sure to check your closing statement for surprises. Many lenders do not disclose their fees online, so be sure to get documentation of what they intend to charge you.

Draw Process

Lenders with poor draw processes can cost an investor time and money. Expensive draw fees are unnecessary and are usually not discussed during the origination of the loan. Paying hundreds of dollars per draw can eat away at the profit of a deal and should be clearly understood before closing the loan. Investors should also know how long the process takes. Waiting weeks for funds to be dispersed creates cash flow issues for borrowers and contractors. Three to five business days should be ample time for a lender to process a draw and send funds. Finally, hard money lenders with limited capital are a huge burden for investors. These lenders are often forced to delay draw reimbursement for weeks causing carrying costs to soar.

Advance Rate

Although this is technically not a cost, the advance rate being offered can definitely affect the amount of money required to close a transaction. The advance rate is the percentage of cost or after repair value (ARV) that a lender will finance. The higher the amount advanced, the lower the borrower’s out of pocket. A lender offering a product financing a percentage of ARV is typically a much simpler structure. The borrower can also expect to have less out of pocket at closing, depending on the numbers. A lender offering a product that finances a percentage of cost is essentially capping their contribution in the deal and requiring the investor to make up the difference out of pocket. More money out of pocket means less funding available for another deal or contingencies.

Basic Customer Service

Often overlooked, it is estimated that poor customer service costs US businesses over $80 billion dollars each year. When utilizing any lender, quick response to calls and emails is a must. Investors are busy managing existing projects and sourcing new opportunities. Non-response is a massive indirect cost. A hard money lender must be able to efficiently handle the basics.

When it comes to evaluating hard money loans, the total cost of the loan can often be significantly different between lenders. Dig deeper than rate and points to uncover how other costs may affect your next deal.