What is the Difference between a Hard Money Lender and a Fee Collector?
As with any type of business, there are good companies and there are bad companies. It is the same thing with private money lenders. The “bad” lenders are commonly called, “fee collectors,” and in fact aren’t really lenders at all. These are lenders that may give a loan here and there but will make most of their money from collecting upfront fees from their borrowers with no real intent to make a loan to them. (It is usually when you’ve been turned down by everyone else for a loan and a private lender suddenly comes forth with a very fast answer of ‘yes.’ If it seems too good to be true, it probably is!). These upfront fees could be called application fees, review fees, analysis fees, evaluation fees, preliminary underwriting fee, and commitment fees.
Then there are the “good” lenders that make money by giving loans, and not by collecting upfront fees from clients. A good private money lender may provide you with a Letter of Intent that sets forth the terms of the loan. If you agree to the terms set forth in the Letter of Intent provided by the lender, then you may have to pay for a small site inspection fee or appraisal fee etc., but typically no more than $500.
If you search online, you can sometimes find out if a lender is a fee collector by simply typing in the lender’s name and then the word “scam” or “Rip off.” However, make sure you look beyond the first page of a google search to find dirt on a bad lender. Some lenders will use a trick of trying to cover up bad online press with stories or other articles that will serve to bury the bad press on the 3rd or 4th page of a google search. Most people don’t bother to read the search results founds on the 3rd or 4th page of a google search so make sure you do your homework.
A lender may provide references from past clients they have closed loans with. However, beware of this too because the lender need only make one loan every six months. In this way, the lender can say they are still giving loans. In the meantime, they may take upfront fees from 500 clients over six months who were charged $2,500 apiece. You do the math. Not a bad business of fee collecting or posing as a lender!