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

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?

last updated Wednesday, May 17, 2023
#Lending terms #Fee Scams

John Burson     Subscribe
How to Distinguish Between Legitimate Lender Fees and 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, which 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

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

First-time hard money borrowers might wonder why such costs must be included in the upfront fees instead of incorporated into the loan's closing costs. This is better understood from the private lender's point of view. The upfront fees assure that these costs will be catered for if the borrower fails to agree to the terms, finds 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 value at the last minute after the lender has spent lots of time and resources on the underwriting process.

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

  • Did the private hard money lender take considerable time evaluating the loan application before serving you 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 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 reputable lenders can get overloaded with several loan requests, it may be too risky for borrowers to view 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 intended to finance a large project.
  • Is the upfront fee covering tangible costs? The lender must be able to break down the upfront payment to cater to actual activities like environmental reports, appraisals, legal prices, 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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