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.
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