Jack Miller gives a explanation on what an exit fee is.
“Hello, this is Jack Miller at Gelt Financial. Hope you’re having a fantastic day. We get a question a lot, and it’s out there, so I wanted to take the time – it’s a holiday weekend – to answer the question: What is an exit fee?
You commonly see exit fees in commercial transactions. So, they’re called different things, but effectively, an exit fee is a fee that a borrower has to pay when the deal is— at the end of the deal. When the loan is paid off, and I’m talking about it in the context of commercial mortgages. So, keep that in mind. So, give an example. Let’s say you borrow $100,000, and the lender says, “Hey, we want a 1% exit fee.” That exit fee has to be paid – that 1% of $100,000, or $1,000 – has to be paid when the loan is paid off. Sometimes it’s when the property is sold, but you have to look at the agreement.
Why do lenders charge it? Look, lenders charge fees for two reasons. Lenders, as brokers, charge fees for two reasons. One is the cost to originate the loan – you know, to have someone work on it, the underwriting, the loan officer, all of their overhead costs. They have overhead costs just like everyone else. The cost to service the loan. But as well, it’s the opportunity cost because if they’re not lending you the money, they’re lending somebody else the money. So, they have to really– the lenders are always saying, “Hey, what’s better for me?” And remember, everybody else have self-interest– you have self-interest, lenders have self-interest, I have self-interest, everybody has self-interest. And the lender— it’s another fee that a lender charges to increase the yield that sometimes is more palatable for a borrower to pay because it’s being paid at the end of a transaction. So, an exit fee is a fee that is being paid at the end of a transaction.
So, it’s just another fee – not in a good way, not a bad way. I realize that sounds bad. No one likes the pay fees, but it’s inevitable that it’s paid at the end of a transaction, and you can negotiate. I know with Gelt Financial, sometimes if we charge 3 points up front, the borrower doesn’t have the money, or sometimes we’ll charge them as an exit fee. Sometimes it’s more comfortable or more palatable for a borrower to pay. It is an exit fee. So, the short version is an exit fee is something that’s paid at the end of a transaction.
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Category: Education
Tag: exit fee
