Is It Ethical for a Commercial Mortgage Broker to Charge Upfront Fees?

Beware of the Commercial Mortgage Brokers That Charge Up Front Fees!

Beware of the Commercial Mortgage Brokers That Charge Up Front Fees!
By Brian W. Walker

In these times, often mortgage brokers are charging borrowers/developers upfront fees before they will accept their loan package. The brokers use various reasons for these fees, but, you, as a developer, should see it as nothing but a red flag.

Competent, seasoned mortgage brokers should be able to determine whether or not they can fund your project within about 30 minutes of reviewing your package. This, of course, assumes that you have all of the essentials necessary for the broker to make an intelligent, informed decision.

Your broker will need an executive summary, appraisal, feasibility study, business plan, use of funds, draw schedules, pro-forma and a list of how much cash you have injected into the project. That’s it. It’s that simple. Often they will have you complete a form that puts all this information into a universal information format that is commercial-friendly. It shouldn’t take you more than 10 minutes to complete.

If a broker has to charge an upfront fee, it’s probably because he or she is less-than-successful and this is the actual profit center for their business. That’s right, they run their business on collecting fees, not closing loans.

What is reasonable, is that you sign a non-circumvent and/or service agreement and give the broker 30-45 days to provide you with a bonafide letter of intent from a legitimate funder. What is extremely important is to ask the broker if he already has a funding source that he is direct to.

This funder must also be able to perform and fund the transaction, provided the information you have given him is accurate. The last thing you want is to give your precious project to a broker who then spends 30 days looking for a funder. If he doesn’t have one that can fund your project, he should not accept it. Unfortunately, this does happen.

To protect yourself from this and make sure the broker doesn’t refer it out to another broker, you should write into the contract that you’ll pay the broker a 10-25% referral fee for the connection. This prevents you from paying a chain of brokers.

Yes, its a jungle out there, hopefully this will save you both time and money.

-Brian Walker-
Walker Commercial Funding
(281) 964-8037

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Joker Brokers and The Upfront Fee Scam – Busted by Escrow Instruction Due Diligence

What a weasel! We were dealing with a joker broker that said he represented a well known, wealthy individual. There were red flags from the beginning, but I’ll share with you how we immediately knew this was fraud:

We received the escrow instructions and found three companies we had never heard of. We found that all three were either illegitimately doing business or were not real businesses at all. A simple search at the secretary of state in the respective states showed that they were not registered. Additionally, the physical address were either COMPLETELY fictitious or a mail drop. Would a $50M investor operate out of a mailbox? Not be registered in the state where the SBLC was located? C’mon, Mr. joker broker!

When confronted, the joker broker said, “I can take care of that, I’ll just take them out of the transaction.”

Yeah, right. That makes it all better.

Moral to the story: be sure to do background checks on all companies that are on the contract and escrow instructions. Clearly this was set up so that after the transaction fails, and the money in escrow is gone and the poor client doesn’t even have a door to knock on. It’s awful that weasels like this exist…but they do. Caveat Emptor!

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Is It Ethical for a Broker to Accept a Project….

….if he or she doesn’t have a funding source?

The short answer is “No, absolutely not.” This is the beginning of a) broker chains, b) frustrated clients, c) points being stacked into a deal that are not truly earned, and lastly, d) wasted time and the transaction being unnecessarily shopped and prostituted among brokers. If you are a broker and accept a project and have the client sign a service agreement with anything more than 1 point, you have committed a cardinal sin in your trade. As you will read below, it’s best not to have them sign a service agreement at all.

The proper protocol would be to turn down the file and tell the client you do not have a funding source. Chasing money would simply be time consuming and uncertain.  Taking a project and having the client sign a service agreement would be like offering to give piano lessons when you neither own a piano nor know where to find one to even give a lesson. If you refer the project to a broker who can perform, only the procuring broker (the broker who actually closes the loan) is entitled to a commission. The referring broker is entitled to a referral fee, not the 3% charged on the service agreement. That’s not Walker Commercial Funding speaking, that is the law.

What is the proper protocol? For starters, the broker should only accept the project if he already has a funding source and is familiar with the lender. Secondly, the service or fee agreement should only be sent to the client AFTER the project is submitted and the broker has received a term sheet or LOI (letter of intent) from the funding source.  The broker would then mirror the terms of the LOI, include his or her fees upon successful funding and send to the client to sign. After the client signs…the broker would then immediately send the funder’s LOI that is an exact reflection of the service agreement. No surprises. No weeks and months spent hunting for a funding source that the broker has no rapport with…it is a practice I encourage all brokers to adopt.

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New Faces in the Lending Arena

We have gotten quite a few requests from brokers and clients wanting to know if new lenders were actually closing deals or not. Unfortunately, with all of the chaos in the market, many new funders have surfaced and have no track record. We encourage you to stay in touch with us as time passes to see if these funders are the real deal. Communication is everything. As a rule, we do not publish our blacklist, but will confirm or deny their ability to perform and if they are scam artists.

Recently, we’ve gotten a flood of requests on funders we have never heard of. I think this is just old capital with a new name that is becoming active in the market again. Thanks for all of your positive feed back and thanks for making our list stronger that ultimately protects all of us.
Brian Walker

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What is a Helicopter Broker? – and how do they disrupt transactions?

I’ll have to put this term in the new urban dictionary: Helicopter Broker. This is the broker that hovers over every aspect of the transaction where his or her participation is not needed. Often, a broker will refer a transaction to us. If we accept the deal, we take over from there. We are perfectly capable of handling the file once it is handed off. The helicopter broker tends to hover over every aspect of the transaction and require instant, constant updates as to the progress of the file and questioning every decision and procedure along the way.
As a referring broker, the best posture to take is to sit back, relax and let things happen. Being a “Nervous Nellie” only irritates all of the parties involved and ultimately spooks the borrower into getting nervous over nothing.
We, as a procurring broker, with a direct relationship to the funder have ONE PERSON designated to speak with the funding source. This protocol keeps things simple. A funder does not want to answer to 6 different people or answer the same question 6 times. Not to mention…the number one cardinal sin of broker etiquette is to circumvent the procurring broker and contact the funder. That is bridge burner. It will also cost you your commission.
My advice to helicopter brokers is to spend their time looking for other deals, rather than focusing on a deal that is already in motion and in competent hands.

The Helicopter Broker.....

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There’s A New Sheriff in Town

This blog is dedicated to educating everyone in the commercial space as to what is ethical and what is not. We, at Walker Commercial Funding, have met “the bad guys” and keep our own internal list of “blacklisted” individuals and companies. They could be buyers, sellers, mandates, lenders or brokers. While this is an internal list and we will not publish or distribute it, we would love to help anyone out there that needs to do some due diligence on the parties involved in a commercial transaction.
You are welcome to call and see if we have anyone on our blacklisted database. We, do, however ask that you share your nightmare experiences with us. Unfortunately,no one polices this area. We are being proactive in sharing our list, but would like to hear who you have been burned by as well. Send your “bad guys” to And we will reciprocate by sharing, verbally only, the people we have blacklisted and stay away from. Presently, we have 2 “funding sources” that we have turned over to the FBI.
Let’s get the bad guys out of the business and work with those that deliver.

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The Basics. Broker Etiquette 101

I wrote this article for Scotsman Guide, a peer-reviewed commercial mortgage magazine, and much to my surprise, I  found mediators calling me for legal or industry opinions on broker behavior. They wanted to know what was fair, what was equitable, and what was standard. Most mediators introduced themselves as retired judges and had found my information on the internet and considered me to be an authority based on my experience and collective writings on the internet.

I suggest you read it, print it out and share it with your entire team. I welcome your feedback and questions you may have. I thought this would be a good starting point for a blog that should have been created years ago. Thanks, and I look forward to your feedback.

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