The real money for most Direct Lenders is made by CLOSING loans and thereafter collecting the points and interest. 

 

Be wary of lenders who charge significant advance fees, especially if the first fee is a "smaller" amount of say $10,000 to prepare the formal commitment letter.

 

"Advance fee lenders" scam artists have  been around probably as long aslending has, but never as much as today.  With so few deals being done, but  unfortunately so many "deals" being  shopped, so many have no prayer of ever being funded.  However, thethese "lenders" are ever more present today as capital for hard money originations is still so very scarce. 

 

Although the lender might actually be “legit”, the commitment letter could legally bind you to pay fees even if you cannot receive the loan amount you have requested.  Since valuation is a very subjective concept, they could "commit" to lend you 60% of their determination of the fair market value (“FMV”) and you could end up legally owing them fees, while still not getting the loan amount you require.

 

For example, say you’re purchasing a property for $5 million, and you need a loan of $3 million together with your down payment of $2 million to close.  And you enter into a agreement to pay the lender points because they have "committed" to lending 60% of the FMV. 

 

If they determine that their FMV of the property is $4 million, the loan size they are only required to lend will be $2.4 million.  However, that will be $600,000 short of the amount you need so you’ll have to find another lender, but you could still legally owe fees to the first potential lender, and you likely wont get your original deposit back.

 

At PAF, we don’t ask for advance fees.  We’ll review the information you send us and do our due diligence at no charge.  If we like the deal, we’ll do an internal preliminary approval subject to a site visit and a range of the valuation we will need.

 

We’ll then ask for a travel deposit and any other third party costs we may incur and then go out to see your deal.

 

Thereafter, we’ll issue a formal term sheet outlining the basic terms of the loan.  If the borrower finds our proposal acceptable, then we ask for a legal deposit and the name of your lawyer to start the loan documents.

 

Again, we don’t seek to make money unless it’s a viable deal.  We only ask that you cover any reasonable expenses we incur, and you always can say no.