The truth in borrowing from a lenders point of view.
Today's websites and Blog's can publish whatever they want, factual or not.
In the view of the many "scam list" websites, any fee automatically qualifies the deal as a scam, a very self-defeating view and quite erroneous. This is not to say that there are not many fee scams around, just as there are stock scams, real estate scams, used car scams, roofing scams...well, you get the idea.
Let's begin here with some definitions.
Up Front Fees:
Usually charged by a broker or firm for the purpose of introducing you to a lender, investor or other financial entity who might be willing to put money into your project. Most consider this a "scam". On the other hand, the broker has expenses to maintain - his office, phone, cell phone, website, etc.
Due Diligence Fees:
These are the fees charged by either the investor, correspondent lender, bank or lender…whichever you are involved with.
Lenders might be looking at anywhere from 20 to 100 loans and projects at any one time. They virtually always charge due diligence fees. They have to check credit ratings of all principles, their backgrounds, tax records, criminal records, business records and possible bankruptcies and they often will run parallel ProForma to yours to see if their numbers match up to yours. All that takes money and a lender could easily go broke paying for the stream of possible loans they might do.
When the sponsor/Borrower provide historical and current financial information to the appraiser and to the lender to qualify for the loan, it better match what they have also reported to the IRS or they risk the possibility of opening themselves up to the IRS for investigation.
The Facts of Life
This is a Financial Funding LLC blog, so I am going to do my best to just hit the main points.
I am very intrigued by how many borrowers and brokers there are who think that there are lenders out there who do not charge due diligence fees. When I tell them about due diligence fees on our loan programs, they say things like:
"Reputable lenders don't charge up-front fees" or "No up-front fees is how it is done in the financial world" or even "Upon approval of the loan or letter of commitment, then my client will pay all the fees". I have been in this business for quite a long time and I have heard this, countless times before.
It appears that there is a 'myth' out there. I'm talking about the 'Mythical Lender'. You know who they are. They are the lender that does not charge the borrower one dime in up-front fees to close their loan. I have asked borrowers and brokers countless times, who is this lender who does not charge up-front fees? ... and no one has ever given me an answer. The truth is, that they do not exist. But, maybe you would like to be the one to prove me wrong!
What is actually happening here is quite simple: There are a lot of borrowers with no money for fees or borrowers who are trying to perpetuate misleading information because they want lenders to give them a free ride. Lenders have costs to underwrite a loan, do a site inspection, and order their own appraisals (not yours) and a lot of other due diligence that is required. There is also considerable cost in blocking or setting aside the money to fund your project.
Should the lender bear all of these costs? Term Sheets and Commitments have conditions that have to be meet. These conditions are disclosed 'UPFRONT" and accepted before any Due Diligence funds are paid. But yet if the borrower/sponsors failed to provide these conditions to prove they could re-pay the loan these borrowers/Sponsors want to then point the finger at the lender. I hear all the time "my building appraised so now I get the loan". No, what about the 17 conditions on your signed Term Sheet these conditions prove you can re-pay the loan.
So there you have it. You are going to take some risks to get into business. If you're asking a stranger to risk hundreds of thousands - or even millions - of dollars in your venture, why should they also take the risk of paying for your due diligence? Ensure you work with professionals that understand the complex world of Commercial Financing. You can reach Financial Funding at 800-743-8895 or visit our website at www.financialfundingllc.com.