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   HARD MONEY LENDING

Fee Scams vs. Legitimate Lender Fees: What’s the Difference?


paperfree Aditi Bansal 29:14
Published on Thursday, May 18, 2017

Commercial hard money lending has been on the rise as the banks continue to tighten their lending regimes. However, some scammers have infiltrated the bridge-lending market through upfront fee scams. But how do you distinguish between legitimate hard money upfront fees and scams?

tags  #Hard money upfront fees  #Lending terms #Fee Scams

 

As a borrower, it’s critical to understand the genuine fees that reputable hard money lenders charge to avoid getting scammed. Of course, legitimate bridge lenders charge some fees as part of their lending terms and this should not mean they’re con artists.

Here are the four steps involved in commercial hard money lending:

  1. Preliminary underwriting
  2. Letter of Intent or Term Sheet
  3. Letter of Commitment
  4. Closing

Now, the letter of intent is the preliminary offer of financing, but not the final loan commitment. It’s sometimes known as the term sheet and indicates the final items that the borrower should provide before the loan can be approved. This is the point where the lender incurs the actual costs of carrying out site visits, environmental reports, appraisals, and other activities geared towards gathering information.

Fist time hard money borrowers might be wondering why such costs must be included in the upfront fees instead of incorporating them in the closing costs of the loan. This is better understood from the private lender's point of view. The upfront fees serve as an assurance that these costs will be catered for in case the borrower fails to agree to the terms or find a better lending alternative and walks away before the deal is closed. It’s a way of discouraging the borrower from backing out of the deal at the last minute after the lender has spent lots of time and resources towards the underwriting process.

So, if both scammers and legitimate hard money lenders are charging fees, how can borrowers distinguish between the two? Ask the following four questions to get a hint on who you’re dealing with:

  • Did the private hard money lender take considerable time evaluating the loan application before serving you with a term sheet? A genuine lender will always carry out some pre-underwriting on the loan requests before providing you with a letter of intent and terms of the lending. If the lender is less interested in the application materials but instead rushes to give the term sheet, that should raise a red flag.
  • Is the lender seemingly too busy to consider your loan request comprehensively? Although even reputable lender can get overloaded with several loan requests, it may be too risky for borrowers to consider such offers.
  • Is the upfront fee too high? Any reputable hard money lender will charge reasonable upfront fees ranging from $2,500 to about $15,000. Since these charges are meant for underwriting expenses like site visits and property valuation, anything in the range of $25,000 should raise a red flag, unless the hard money loan is meant to finance a huge project.
  • Is the upfront fee covering tangible costs? The lender must be able to break down the upfront fee to cater for tangible activities like environmental reports, appraisals, legal fees, and broker fees.

After asking these questions, see if the answers you receive raise any concerns. If yes, move to another lender before you commit any upfront fee. Remember that commercial hard money loans should be transacted within the shortest time possible to pull through those short term real estate investments for quicker returns. Consider timeliness when choosing a commercial hard money lender. Also ask for references in your local community before settling on a lender.



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