Private Lending Fees and Costs
So, you’ve found a property you know is just right for your project. You have some money in the bank but you don’t want to use it all and over extend yourself. A private money loan will help you with not only this project, but should more opportunities pop up, you can leverage these loans to do multiple deals at once.
Private money loans will cost you more than borrowing money from a bank. Without question. Banks are very resistant to lending money on investment properties that need much work. This is where private lenders shine. Not only will they help you acquire the property, but could also help finance some or even all of the rehab costs, depending on the equity in the project.
The reason private money loans cost more than bank loans is simple. Investment rehab projects are risky. Private lenders are passing this risk via higher loan costs to you, the investor. The more loans you do with a lender, the more willing they are to work with you on fees and costs. An investor with a good track record of performing with private lenders can negotiate terms and costs much easier than a new investor.
If you understand the fees and costs on your loan it will help you negotiate the best terms you can get with your lender. The stronger the collateral, the better. Before I list all of the potential fees and costs lenders might charge you, let’s talk about why a private loan is very likely worth it in the end.
Before you start breathing into a brown paper bag over how expensive a private loan looks on paper, try looking at it from a different point of view. How much would it cost your business if you didn’t have the loan? Hear me out…
Let’s look at this example. You are an investor that:
Buy residential fix-and flip properties.
You only have enough cash to complete three to four homes per year.
Earn about $18,000 profit per home.
Your maximum profits are $72,000. Now, what if you were in a position to do eight deals a year? Your profit could double. Now you’re looking at $144,000. With access to private money loans this can easily happen and more. In simple terms, the opportunity cost of not getting a private money loan is $72,000. Now with private money loans would it cost you $72,000 in fees and costs, eating up all your profits? No. The cost will be much, much less, especially as you’re gaining experience do deals quickly.
Let’s talk about typical private money loan costs and fees and then we will discuss what we here at Geneva Lakes Funding will charge for a loan.
Advances: A lender may advance you money for a variety of reasons. If there are multiple lien-holders, it may be to get another part of the loan current or to be in first position. There might be unpaid taxes, legal fees or other encumbrances. You should expect the lender to add a fee to the balance of your loan for doing so, in addition to interest.
Default Interest: A defined interest rate that is higher than your regular loan interest rate. You will only pay this if you default on the loan or a loan covenant. Make sure your loan documents clearly define how much and when applicable. The loan servicer and lender will typically split this fee, the servicer because they incurred costs trying to collect payment. The lender because they didn’t get their money in time.
Foreclosure fees: You should only see these if the lender must foreclose on your property. Foreclosure fees encompass a variety of costs. This may include attorney, recording and statutory fees – anything the lender must pay for repossessing your property. These fees will be added to your loan balance. If your loan is full-recourse or has a personal guarantee, and the sale of the property is not enough to cover, you may still have to pay them.
Interest rate: Paid to the private investor on the loan as the cost of you continuing to use their money. The length of the loan could have a dramatic impact on the rate. To make a bridge loan worth the lender’s time, you could see a much higher rate than on a longer-term loan. Geneva Lakes Funding charges the same interest rate no matter how long the term of the loan.
Late fees: A flat fee will be charged if you don’t make your payment on time. This is typically split between the loan servicer and investor.
Legal and advisory fee: Some lenders will charge these fees to cover the lender’s cost in hiring an attorney to prepare or review parts of the loan. Geneva Lakes funding charges a flat fee that includes underwriting and document preparation. We do have an attorney on staff to help our borrowers with any issues that may arise, fees charged separately.
Loan servicing: Although typically a percentage of the balance, you will sometimes see loan servicing as a separate fee added to your payment. This is paid to the lender or a third party, whoever is servicing your loan. Geneva Lakes Funding services the loans we underwrite and do not charge a fee to the borrower for this service.
Points: a percentage of the total loan amount you are requesting, paid as a flat fee. You should expect it to be at least three points higher than a bank would charge. Points are typically split between the private lender and private investor, if any. They will vary according to the loan length and loan amount.
Processing fee: A flat fee for the loan processing, sometimes paid to the lender and sometimes paid to the third party that processed the loan file. Lakes Funding doesn’t charge processing fees.
Referral/Broker fees: Paid to the person who referred you to the lender. This should not appear as a fee to you. Broker fees are paid between the lender and the broker.
Renewal/Extension fees: Many private loans have short maturity dates, so make sure you are aware of your timelines. If you have reached your loan maturity date and still need more time, your lender may allow you to extend your loan’s maturity date if you are not yet ready to pay off you loan. These fees are typically split between the lender and servicer and may include either a flat fee or points.
Document preparation fee: This is a fee that the lender may charge to prepare your loan contract and documents. Sometimes this fee goes to the lender or a third party that created the documents, such as the lender’s attorney.
Underwriting fee: This is paid to the person or company that originates the loan. This may be the private lender or private investor. The fee is typically $750 to $2,500 depending on the loan’s complexity, and is sometimes incorporated into the points. At Geneva Lakes Funding, we charge a flat fee of $995 for document preparation and the underwriting fee.
Developing a good relationship with your private lender will not only save you time and headaches funding your next project, it will save you money by benefiting from this relationship. Geneva Lakes Funding rewards repeat borrowers with lower origination fees, back-end payment options and flexibility in loan structuring to truly be your lending partner. Give us a call at (262) 222-6400 or apply online at genevalakesfunding.com/apply