Commercial Loan Processing Fees
November 2, 2007
One of the biggest hurdles we face when assisting borrowers for a commercial loan is not finding the money, it is getting them to pay a “processing fee” or “due diligence fee” to the lender after receipt of the Letter of Intent to Fund (LOI).
Virtually every lender we have worked with over the last 16 years charges a processing fee. This fee ranges from $2,500 to $10,000. The fee is used by the lender to order third party reports — appraisal, environmental review, survey, etc., as well as to cover other due diligence costs.
We realize the fee seems steep and, relative to residential loans, it is. It has been our experience, however, working with many private funds for both conventional and hard money commercial loans the average fee ranges between $5,000 and $10,000, depending on the type of loan (hard money or conventional) and the type of property being funded.
Some lenders we are aware of regularly charge even higher due diligence fees of $15,000, $25,000, $50,000, or an up front fee of 1% to 2% of the loan amount being requested. That means for a $3 million loan a 1% processing fee would require the applicant to pay $30,000 before due diligence is completed and in most cases the fee is non-refundable. (Note: we don’t work with these types of lenders, such fees are excessive and in too many cases the lenders don’t perform, leaving the loan applicant high and dry).
Nevertheless, a processing fee does cover legitimate costs of the lender and should be expected by commercial loan applicants for private funding. As mentioned earlier, private money lenders for commercial loans charge between $2,500 and $10,000 for due diligence. The range of the fee is dependent on whether or not the lender will use an existing appraisal and other third party reports rather than have their own appraiser or expert conduct a new report; or, in some cases the lender may not even require an appraisal or other third party reports, but will still charge a fee for other due diligence costs.
Generally speaking, hard money lenders charge higher due diligence fees than conventional private lenders. The primary reason private hard money lenders charge higher due diligence fees is that their costs are higher for conducting due diligence, since every third party document has to be ordered on an expedited basis. For example, to complete an expedited appraisal (2 to 5 days from the date it is ordered vs.14 days to 30 days for a standard appraisal order) the appraiser charges a higher fee $5,500 to $7,500 or more for a commercial property appraisal.
Also, as the loan amounts get larger, the risk for the private hard money lender rises, too, since they don’t do as much due diligence as conventional lenders, so their fees are higher to cover the additional risk.
The reason these lenders charge due diligence fees, too, is sometimes the lender will complete all of the due diligence, open escrow; and, all the while the borrower has been shopping their loan with some else, then at the last moment refuses to sign the loan documents to close the loan for any reason. The lender then has to eat the cost of the due diligence.