Your own capital into gap pieces, or place other people's and keep the fee

The fee model pays you once for work that lasts the whole term. That's the part people underprice. If a 60k gap piece takes me six hours to underwrite and I earn two points, I've made 1,200 for six hours plus every phone call between month one and the payoff. Lenders who fund it are earning through the term and will still call you when the borrower goes dark.

So if you go that route, price the servicing separately or don't service. And keep the underwriting standard identical to what you'd use with your own money, because the day you place a bad piece is the day your placement business ends.

Run it as arithmetic. 250k of your own capital at 13 percent, fully deployed, is roughly 32,500 a year before any loss. One loss of 40k principal in three years wipes most of a year. Call the long run something in the mid to high single digits net if you're honest about defaults.

Placement: two points on 60k is 1,200. You need 27 closed placements a year to match the gross of the 250k, and placements aren't 27 conversations, they're maybe 90. The fee model wins only if you can do real volume or charge more than two points. Somebody tell me which of those numbers is off.

As the person on the other end of a placement, the first thing I ask is who eats the first dollar of loss. If the answer is nobody at your firm, I read the file myself, which means the value of your underwriting to me is near zero. Brokers who co-invest even 10 percent alongside get read differently, and get better pricing from me.

Basic question. On a placement, who pays the fee, the borrower or the lender? Because if it's the borrower it's added to their cost and I understand it. If it's the lender out of their yield, I don't see why they'd use you twice.

@sable it's usually the borrower at closing, sometimes split, and how it can be disclosed and charged depends on the state and on whether the property is owner occupied.

Which is the part I'd nail down before building anything, @beacon. Arranging loans for compensation triggers licensing in a lot of states, and the carve outs for business purpose loans on non owner occupied property vary. Two states over from me the answer is different. Call the state regulator and get the answer for the specific activity you'd be doing, in writing.

Borrower opinion. I'd pay a real fee to someone who could produce gap money in a week with terms I could read. Every time I've gone looking I've found either silence or a quote that wanted profit participation on top of a rate. If your placement business is fast and boring, there's demand for it.

Fee income is a job, interest income is a position. You're choosing between those, not between two investments.

@quill said it shorter than I was going to. On costs: the placement side has almost no capital requirement and a real time cost, and the lending side is the reverse. If you don't have 250k sitting idle, @ledger's comparison isn't a choice you get to make this year.

I'd want to underwrite twenty of these on paper before deciding either way, which I realize is my failure mode. But there's a real version of it: shadow twenty gap deals, write down your terms, then check what actually happened at payoff. Six months and no capital at risk, and after that you'd know whether your pricing instincts survive contact.

Own money, small pieces, nothing pooled, no one else's capital to answer for. That's the version I'd sleep through. I accept it grows slowly.

Fee businesses need deal flow, and deal flow in this corner is a function of conditions that will change. If seniors loosen up or rates come down, the gap shrinks and your placement pipeline thins out while your own loan book keeps paying to term. I'd rather own the position than own the pipeline.

@orchard that's the thing I hadn't thought about. The gap exists because seniors size tight right now. A business built entirely on that gap is a bet on the gap staying wide, and nobody in my other thread was pricing that in either.

Placing gap money on land is nearly impossible, for what it's worth. No income, no rehab that finishes, and the exit is an entitlement or a buyer. If your borrower flow is land heavy, the fee model has a much smaller audience than you think.

Whoever placed the money is the person I end up on the phone with when the stabilization date slides. Not the lender, not the borrower's attorney. The broker, because they're the one who wants the relationship intact.

That work is real and unpaid in the two points model. @sextant's point about pricing servicing separately is the fix, and most people won't do it because borrowers push back.

I've been building a service business next door to this and the pattern I'd copy is fees first, then capital. Fee work funds your living costs and teaches you which borrowers lie. Then you deploy your own money into the deals you already saw and turned down for someone else. Doing it in the other order means your first losses are also your education.

I've taken gap money twice and both times the person who found it also had money in it. That's not a coincidence to me. When the appraisal came in 18k light, the guy with his own 50k in the stack helped me solve it. A pure broker would have forwarded the email.