I see a lot of closing statements, aka HUDs, from a lot of different Title Companies. I’ve noticed a trend that I consider annoying or even disturbing. Several title companies include additional fees for endorsements that I didn’t request, and the borrower didn’t ask for.

When I’m lending money to a real estate investor, I send the Title Company very detailed and specific lender requirements. Basically, I require a Lender’s Title Insurance policy from a well rated company and in most cases, no additional Insurance endorsements. If the borrower is getting an Owner’s Title Insurance policy, it’s only an extra $100 (Ohio pricing) for the Lender’s insurance.

Today, this is the one of three similar ones I received with “extras”.

Initial total cost to Borrower $1,135.

• Services Borrower Did Shop For $1,135.00
• Binder Fee to Unnamed Title & Escrow Services, LLC $50.00
• Closing Protection Fee to Anonymous National Title Insurance $40.00
• Closing/Settlement Fee to Unnamed Title & Escrow Services, LLC $295.00
• Courier/Shipping & Handling to Unnamed Title & Escrow Services, $25.00
• Lender’s Title Insurance (REISSUE RATE) to Unnamed Title & Escrow $125.00
• OH ALTA Endorsement (Survey) to Unnamed Title & Escrow Services $100.00
• OH ALTA Endorsement (Environmental Protection Lien) to Unnamed $50.00
• OH ALTA Endorsement (Restrictions, Mineral) to Unnamed Title $150.00
• OH-112: Delete Exception for Mechanics’ Lien to Unnamed Title $150.00
• Search & Exam to Unnamed Title & Escrow Services, LLC $100.00
• Wire Fee to Unnamed Title & Escrow Services, LLC $50.00

I sent back corrections, (three times for one company to get it right, geesh)

Final total cost to Borrower $645.

That’s five items with $490 in additional fees that were included but weren’t requested by the borrower or lender. I’m sure those Endorsements are good to have at the right time. Some lenders DO require them, so the charges MAY be valid for specific lenders. Ask your lender what they require.

So why are some Title Companies automatically charging for them when nobody asked for them? Imagine this. “Hi, thanks for coming in for the $12 carwash. We also waxed it for you. Your total bill is $20.” Who would put up with that?

I’ve asked several Title Companies, why the extra endorsements and the associated fees show up on the closing statement when they aren’t requested. The universal response is “Our template puts them in there automatically”. Well, guess what, YOUR company built the template, and you chose to use that template, despite the instructions being different.

I have all these questions running through my head:

• How many people don’t catch this?
• Is the borrower assuming the lender requires it?
• Does the lender notice?
• If the lender notices, do they care enough to have it changed?
• Or does the lender not bother, because the borrower is paying for it?
• Is this “stuffing” the bill to create additional profit for the Title Company?
• Does the Title Company assume the borrower won’t ask the lender?
• Does the Title Company assume the Lender won’t ask the borrower?
• How much additional profit does this practice get the Title Company?
• Am I just overly sensitive to unnecessary fees?

Ok, the last one is true. But since I’m also an investor, I always watch all sides of the transaction.

When I see these charges, I have them removed every time. Today, I saved three borrowers almost $1500 in unnecessary fees for services that were not requested. The borrowers will probably never know. But as I type this, I’m starting to think, maybe I should tell them. Not to pat myself on the back, but to let them know the Title Company they chose has a business practice of padding the bill.

• What do you think?
• Have you noticed this?
• Do I tell the borrowers or not?

Personally, I refuse to use any title company that has this practice. If you want to offer me an additional coverage, that’s great. Tell me about it, let me choose. BUT you need to ask my permission first. Don’t just put it on there and I hope I don’t catch it.

Seasoning your Real Estate

Seasoning has nothing to do with salt and pepper, in real estate, seasoning is the lenders term for how long you have owned your property.

When you want to refinance a property, the lender considers seasoning to decide which value to use for your property. There are 3 numbers that matter:

1. Purchase Price
2. Rehab cost
3. Current value or ARV

Seasoning no longer matters when you have owned the property for one year. You always use the current value for those fully seasoned properties.

If you have owned it less than one year, the lender may decide the purchase price represents the current value, and base a loan on what you paid for the house. (Or the current value, if that number is lower.) Some of the more investor friendly lenders will add the rehab cost to the purchase price and use that total instead. Obviously, that’s better for you as the borrower.

It’s gets more fun, because there is an exception to every rule. When you have finished the property and rented it, we can request an exception to rule. Since we only work with investor friendly lenders, here’s a general guide.

Seasoning Guideline

Owned 12 months+: use current value.

Owned less than 6 months: use purchase price plus rehab (your personal labor doesn’t count). It’s rare, but it is sometimes possible to use current value. Just don’t count on it.

Owned over 6 months, but less than 12 months. The closer you get to the 12 month mark, the more likely we will succeed in getting an exception to use the current value. The property cash flow, borrower strength, and investor experience  will greatly impact whether the lender will approve an exception. For good borrowers and good cash flowing real estate, we often get them approved around the 8 month point.

I know the waiting is killing you. As investors, we’re an impatient bunch. However, consider the lender’s perspective. They want to make good loans that will perform well. They will be cautious refinancing any real estate with under one year seasoning for more than what you paid. You have to show that you have truly increased the property value since your purchase.

Refinance your property here.

Contact Us here to discuss your options.

HARD MONEY LOAN TERMS

The number one Hard Money question we get asked, is “How much do you charge?”

As with all good questions, the answer is “It depends.” There are multiple items we consider for every loan. Every deal, every property, and every person is different. Even though we have a “typical” loan, exceptions are frequently made when and where they make sense.

LOAN TO VALUE and DOWN PAYMENT

A typical Hard Money Loan funds 80% of the purchase, and 100% of the rehab, with you putting in a down payment of 20% of the purchase, plus closing costs. If you get a great deal, we may require less down.

Your property must meet the 70% Loan-to-Value (LTV) requirement twice.

1. First, when you buy the property, before rehab;
2. Second, based on the After Repaired Value (ARV) after rehab.

BOTH numbers must be 70% LTV or less.

INTEREST RATE

I don’t know you or your deal, so assume the rate will be 12%. If the LTV is lower, or you have a lot of rehab experience, it could less. In some circumstances, it could more. It really depends you as a borrower and your deal.

POINTS

Assume 4 Points on every loan. Repeat borrowers will see that number go down gradually. Officially, there is a $4,000 minimum, but we frequently reduce it on loans under $100,000.

FEES

We include as much as we can in the points above. However, plan on $400-$995 in other fees that will go with getting the loan done. This varies primarily with the source of funds. We always use the lowest cost source that will do your deal.
You will always pay for the Appraisal and title company closing costs.

LENGTH

A typical loan is 12 months.

EXCEPTIONS

Call and ask. We’re real estate investors too. We will consider a lot of deals that don’t necessarily fit what’s typical. They do have to make sense though.

APPLY FOR A HARD MONEY LOAN

100% Hard Money Financing

I know, all over the Internet it says you can get 100% hard money loans for your deals. And you can, IF you have a true private lender or friend financing you. You may even find a reputable person to partner on a deal with you, and bring in funds.

Beware of websites promising 100% Hard Money Loans. Most of them exist to take your “membership fee” or other large upfront fees totaling thousands of dollars. DON’T do it.

They make most their money from charging up front fees, NOT lending money. Although a few of them may actually do a loan for a slam dunk killer deal, if they do, they’ll end with most of the potential profit too.

Real Hard Money Financing

In my world, we require you to have some money invested in the deal. In short, if you’re not willing to put your money in the deal, why should I?

For budgeting purposes, plan on 20% of the purchase and rehab funds from your own money, plus closing costs. Most loans we do end up at 15% from you, but you should plan appropriately. On the low side, you may need as little as 10% of the purchase price, and get all the rehab funded for you. It really depends on the specifics of the deal, and your experience.

Upfront fees? Not normally. Every now and then for an unusual deal, there will be an upfront fee. Even where there is, you only pay it AFTER we approve you AND we approve your deal. We don’t have a fee to join some “special club” to get access to overpriced financing.

When we ask for one it’s to cover some of our up front expenses and to weed out people who aren’t really serious. If for some reason, we can’t do your deal after we’ve approved it we will refund it to you. (Assuming you provided good information.)

Ok, Ok, I hear you. You want a website with answers to your hard money questions, forms, and more.

You want one source for all your financing needs.

I give up. I’ll do it.

No, I’m still not getting an office. No need for the overhead. I’d just have to charge you more to pay for it. Neither of us wants that.

Small Loan Scenario

Have you wondered why it’s so hard to get a small loan for real estate?

Honestly, a small loan for real estate just isn’t very profitable. Just as you are borrowing money to make a profit, the lender wants to make a profit too. The interest received on a small loan isn’t very profitable. The risk of losing money is much greater with a small loan than large one. I know, it doesn’t seem to make sense at first, but read on.

First, the lender has to cover the overhead of setting up and approving the loan. Some lenders will charge points and fees to cover some or all of this cost. They still have to pay the overhead for every loan that gets rejected too. Compare this: A lender charges $2,500 up front for a $25,000 small loan. Does that seem steep? The same lender charges $2,500 for a $150,000 not so small loan. It doesn’t seem as bad now does it? The fee didn’t change, but our perception of it did. It’s the ratio that changes.

Once a lender makes a loan, every month the lender has the expense of servicing the loan. That includes: sending statements, processing payments, tracking balances, end of year reporting, sending a 1098, government compliance, etc all those costs have to be covered, and they cost the same to the lender whether it’s a small loan or a large loan.

If a small loan goes unpaid, just like the expenses of setting up the loan, proportionally there is a large cost with the attempt to collect on the debt. So, even if you find a lender that will do a small loan, they typically want better credit to reduce the chance of the loan going bad.

Cheap houses purchased with a small loan are typically in areas that have more foreclosures, and more damage to the property when it is foreclosed. This increases the chance of loss to the lender even after they foreclose on a property.

Is it any wonder lenders are reluctant to do a small loan? It’s easier to get a loan completed for $100,000 than $25,000. Admittedly, we do get some small ones done, but with the challenges listed above, it’s not nearly as often as we’d like.

What is a Commercial Mortgage Broker?

A commercial mortgage broker is your central point for funding your real estate investments. A broker has existing relationships with wholesale and retail lenders. Since a broker works with multiple lenders, they’re not limited to the funding programs available from a single lender.  They use those relationships to match their clients with the right loan at the right price.

A great broker takes the time to look at your financial goals, how this loan will impact them, and how to position yourself for the future. A great broker is going to help you expand your business. A bad broker will be a dreaded middle man just trying to take your money. Choosing the right broker is critical to your success.

A good broker understands that every real estate transaction is unique. Brokers are flexible enough to make sure financing is not an unexpected obstacle when you pursue a real estate deal.

Consider a commercial mortgage broker a networking resource. They can help connect you with other people in the real estate industry. People who can help you do even better.

Can I get a Real Estate Loan with No Money Down?

Q.  I don’t have any money or equity, and my credit sucks. Can you give a rehab or rental loan.

A. No.

Q. But it’s a great deal!

A. Still no.

Q. But….

A. No.

Really, this conversation comes up way to often. You need to have skin in the game. Cash is preferred, but sometimes equity can work. If you are short cash, work on strategies that will allow you to grow some capital for investing. Preferably, you can do this through a real estate related activity, but even a part-time job can get you the capital needed to jump start your real estate investing.

All that said, there actually is 100% financing available for real estate investors. However, the cost of the loan is so high, you are almost always better off selling the deal to someone else, or putting together some other creative solution.

What is Hard Money?

A hard money loan is an asset based loan secured by real estate, and usually used for properties that don’t qualify for traditional financing. Interest rates are higher than conventional real estate loans because of the higher risk and short duration. Most hard money loans are used for rehab projects lasting 6 to 9 months

Typically, loan would be up to 65% or 70% of the After Repaired Value of the property.  For example, If the property is worth $100,000, a lender would lend $65,000 – $70,000 against it.

The lender will also want to see the borrower putting their own funds into the project. 20% of the purchase price and estimated renovations is common.

The asset is the primary qualifying criteria for a hard money loan. Credit scores, income and other criteria can also be factors.  Experience with similar projects, and cash reserves are frequently considered before approving a loan.

In commercial properties a bridge loan is similar to a hard money loan.

A Hard Money Loan has two distinct advantages over a traditonal mortgage.

• The loan amount is based on the improved value of the property.
• To a large degree, the condition of the property doesn’t matter.

The real estate investor is able to get funds to purchase and renovate the property. The community gets an improved property. Someone will get to live in a greatly improved home.