Large up front Due diligence fee's payable to broker or Lender

11 Replies

American Greed had a segment on last night about Remington financial.

bottom line these guys were in business for over a decade made 27 million 10k at a time by charging 10k due diligence fee's  they had all sorts of fake tombstones dropped in papers and publications touting all the funding's and deals they did

One lady went on a mission Hooked up with another person Go a Retired FBI agent involved and after 3 long years of doing exhaustive back ground work calling all these folks who the company said they had placed loans for... Etc etc.

The feds indicted them... at trial is came out that they had successfully funded exactly 3 loans in all of those years...

I personally remember talking to them during the credit freeze looking for A an D financing for a housing sub I wanted to do... I can tell you they were very good at what they did and I got one of their preapprovals next step was there 10k fee... Well being a lender I just am so put off by up front fee's of any kind other than appraisal fee's that I just passed.

The head honcho got 18 YEARS in the big house.. Junior partner 16 YEARS.. and they play the Junior partners whining plea for lessor sentence.

This advance pay for DUE DILIGENCE game has been around for years and years..

Be careful out there... they prey on folks that have a great project or think they do but are in reality NOT bankable... so they lead those folks on and just steal the little money from them in the form of a turn down at the end of the transaction.

@Reed Starkey

  Nope typical crooks it all went up in the usual places.. big house... big lifestyle etc etc.

Plus they just took 10k at a time.. So really that's why it worked so long.. to small of money to really get anyone excited.. the FBI got a few complaints but they are not going to move on something were one person lost 10k.. this lady found 100's of people and put them all together to show this big pattern.. then the Feds moved in when they could see this was multi millions.

People that lost 10k don't do anything at the time.. cost you more in legal fee's to try to get the money back.. It took the lady going on a crusade and one other Man in Minneapolis along with the retired FBI agent... Without it I have no doubt they would still be out there promising big loans to folks that have NO hope of getting them.. but can cobble 10k together for their dream...

Much like people pony up 40k for a guru seminar... its the dream.. At least in the Guru seminar you get 40k worth of books tapes and all sorts of other information some germane and useful some not... All these folks got for their 10k was a worthless preapproval letter

I heard of a local real estate agent that was charging a buyer's broker RETAINER of $15,000.

Legal? I suppose so.  The parties signed the contract.

Ethical? Hardly.  This jerk was targeting recent Haitian immigrants who probably had no idea that this was virtually never done.

It really irks me that I spend 7 days a week working as an agent, and jerks like this are out there giving agents a bad name.

The bus can not hit him hard enough.

@Charlie MacPherson

  you will find in this business that many minority groups or sub groups that its people within their own community that prey on them the hardest.

We see it with some of the Hispanic Lender and Realtors on the west coast dealing with folks that don't speak English.. I have seen more than a few loose license and or even worse end up in Jail.

As we know buyer broker are certainly legal  but not if they are induced by fraud.

Right.  I routinely execute a buyer's broker agreement with clients and charge them nothing.  Our fees are always paid by the sellers.

Everything is explained in excruciatingly thorough detail and clients receive copies of every document.

I suppose it happens in every profession.  I just saw a news story about a dirtbag physician who gave patients unnecessary chemo.  But Realtors in particular don't need the bad press.

@Charlie MacPherson

  When I started selling Real Estate in 1975  we had a one line disclosure form.

it read  CAVEAT EMPTOR   LOL... and I think we have gone so over board as a industry trying to protect the poor buyer and seller that we loose track .. that people do need to take a little responsibility in what is usually the largest transaction they will do in a life time ( Monetarily speaking)

Just heinous. And you know, most of the people who run these scams are in no ways dumb. If they just worked a tiny bit harder in a real business they probably could have been doing quite well for themselves. 

But some of them -- I think they just prefer to scam. It gives them a sense of power. Sociopaths, really.

@Jean Bolger

   one word  GREED... and in this situation the borrowers generally were dreamers as well.

I have seen it happen many times... I had a client I lent hard money to up in British Columbia. we get to chatting and he did this not once but 3 times... he had a 60k sq ft building storage and wanted 5 million to move it and set it up.. NO bank in Canada would touch it so he got suckered into the fraudsters in the US.. sending 20 to 30k each time.. by the time he sold me the story he would out 75k I cash.. I advised him that NO lender in the US would touch that project.. at least any I Knew and your just feeding the sharks.

Let me start by stating that this type of behavior is NEVER ACCEPTABLE. These guys got what they deserved and there is never enough punishment to make up for this openly criminal behavior.

Unfortunately, upfront fees and due diligence cost are a reality and anyone pursuing a commercial loan needs to be aware that just because a lender or mortgage broker asks for an up front fee, does not mean that they are crooks. Indeed, HUD multifamily government loans can cost well in excess of $100,000s of thousands of dollars with no assurance that the loan will fund.

As for what is a large up front  fee? I think that the issue is where the money is going and the difference between fees and deposits. Below are some typical fees that most investors should expect to pay upfront.  In the commercial world, there is seldom a relationship between these cost and the loan amount hence the cost for a small loan can easily seam overwhelming.

1. Environmental - $1,500 to Open
2. Appraisal - $2,500 and up to $15,000
3. Due Diligence - $500 to Open - Most FHA HUD MAP lenders charge $2500 to $10000
4. Lender Legal fees - Open
5. Engineering Reviews PCNA's - $1,500 and Up
6. Title Review - $500 and up
7. Lender Application Fees. -Open
8. Market Studies - $1500 and up
9. Packaging and Preparation fees $500 and up

These are by no means all the legitimate upfront fees and they do not include your cost to prepare the documents you need for the lender which can be very costly. Again using the FHA HUD MAP program, they require full and complete architect plans. These can cost into the $100,000's. Nor does this include the actual funding cost such as success fees, commitments, closing, and legal fees.

Many lenders and mortgage brokers require a deposit. This is usually a good faith deposit and is applied to the costs as they are incurred. They do this in part to know that you are serious and not just shopping around. Additionally, many borrowers start to get cold feet when they realize that the underwriting may not yield the funds they expected and demand their money back. The problem is that the lender has already undertaken the commitment to third parties and as such the money is gone. Most lenders and mortgage brokers make little to no money in the loan application process and usually do not even cover their overhead associated with the application.

Let me state again that I am not defending these guys, but rather saying that just like residential loans, there is a cost to get a loan. due to the much more complicated nature of commercial loans, the due diligence and processing cost are significantly higher.

My advice is that anyone who tells you that you can get funded, without spending significant money, probably will not get you funded. For me, my radar starts flashing when a lender tells me that they can begin to fund the top tiers of the capital stack. As for the fees, the reason these guys got away with this for so long is that $10,000 is not out of line, in fact it is actually on the low end.

N.C. Has the due diligence fee in the purchase agreement contracts which can be set by the seller/agent. Usually its about $100, can be more though and it can also be waived by the seller too. My agent typically would typically set the fee at $100 on each property we sold. This last one was set at $250 and that was worked out with the buyers agent before hand. But a 10K due diligence fee, I couldn't even imagine losing that kind of money. 

@Nicolas Paez

  These are great points... And those sophisticated enough to realize this will expect these types of soft cost.

Its the same when I develop a subdivision  I don't even take it to the bank until I have pre approvals.. which in our state runs on the low end 75k to high end of 125k depending on Scope.. And in CA it can be astronomically more.. ON one project I worked on out of Sacramento we spent over 250k JUST on the EIR.

The only reason I even considered these guys in the first place was my local bank that funds 90% of my activities were not doing any A and D and in those days .. IE infrastructure loans.  AS it turns out neither was anyone else   ( in those days it was cash and carry).

Were I see the scam's or potential for scams is the Very undercapitalized investor ( kind of like a BP wholesaler) that wiggled into the middle of a transaction.. Has NO real ability to borrow from anyone.. But gets sucked into these deals thinking some lender is going to put up 5 to 50 million for their project.

I suspect if a person like this came to you .. the initial talk on the phone would preclude you from even taking an APP or starting the process with this type of investor.. These are the one's that are ripe for the Due Diligence crowd.  Your thoughts?