Are upfront fees necessary? Hmmm, interesting question because many private and/or hard money lenders require upfront fees from borrowers to start a transaction. However, there is a difference between fees and good faith deposits. A fee is a cost incurred for services rendered. Rendered being the operative word, but there are global conventionall banks (we all know their names from television ads) that will charge an application fee from $500. to $1500. that is non-refundable.
The size of upfront fees and the reasons for them vary widely. The legitimacy of these fees also differs. The industry consensus is that most simple, local private-money transactions shouldn’t require an upfront fee. However, local or not, to remove the guesswork from the transaction, borrowers can determine the exact purpose for the fee and establish the parameters under which the fee will be refundable or non-refundable. Most fees are associated with a specific expense item and will be non-refundable regardless of whether or not the lender determines it can fund the deal. So find out what that expense is or will be before loosing your purse strings.
On the other hand, a deposit is a gesture of good faith indicating that the lender will incur costs on the borrower’s behalf, such as title; and good faith deposits typically are refundable at closing, whereas fees usually are not. A deposit should be refundable as long as the borrower doesn’t decide to cancel the loan before it closes. At that point, it’s likely that expenses have been incurred. And yes, it can happen!
As an example, a New York borrower who resided in the Bronx, began a project of creating a new second three-family from the ground up on her property. She completed one-third of the project using her own money, and needed $450,000. to complete the project. To make a long story short, everything seemed fine so we proceeded. A deed and other documents were produced. A commitment was arranged, signed and closing seemed imminent. Then title was pulled! She hadn’t apportioned the property and the existing three-family already had a mortgagee! Okay, so get it apportioned. We knew there might be trouble with the existing mortgagee, but we’ll wait. And we waited. And we worked with her contractor. And we waited… We waited six months and still nothing. Her inability to fulfill her part of the bargain was, in effect, a cancellation. Her Good Faith Deposit was forfeited. It was just enough to pay for title!
The good part for her was that she had already passed up on a lender that wanted a $2500. fee before she came to us. She had insisted on placing the deposit in a title company of her choice. The lender refused. Insisting that the deposit be placed in escrow with a title company of your choice is non-productive, so scrutinize the lender’s requirements and make sure that the loan actually fits the lender’s guidelines; and whether you are borrower or broker, be absolutely positive that you are able to meet the stipulations in the Letter of Interest or Letter of Commitment.
Lastly, search the internet for information about lenders that purport to do your type of project and have collected upfront fees on deals that reportedly never materialized into loans, because the fact is that without government regulation, the question ‘ Are Upfront Fees Necessary? ‘ will never be definitively answered, at least not for hard money commercial mortgage loans. And why ‘revisited‘ you ask?
