With the rise in upfront-fee scams in the bridge-lending market, it has become difficult for borrowers to distinguish between legitimate, reputable lenders and the bad apples, and the borrowers who do get scammed become wary of other bridge lenders in the future.

As a borrower, the best way to avoid getting scammed is to understand the legitimate fees that reputable lenders charge and to know that legitimate bridge lenders will charge some fees for their lending services—this does not make them scam artists.

There are typically four steps in the bridge-loan process:

1. Preliminary underwriting
2. Term Sheet / Letter of Intent
3. Commitment Letter
4. Closing

Step two, the letter of intent, serves as a preliminary offer of financing, but should not be confused with the final loan commitment. This is also referred to as the term sheet and it stipulates the final items that the borrower must provide to the lender before the loan can be finalized. It is also at this point of the underwriting process that the lender incurs actual costs—for site visits, appraisals, environmental reports, or other information-gathering activities.

Borrowers might wonder why such costs need to be covered by upfront fees rather than closing costs for the loans; however, from the private lender’s perspective, the upfront fees provide assurance that these costs will be covered if the borrower decides to take another loan offer from another lender. They also discourage borrowers from backing out of loans at the last minute.

So if both legitimate bridge lenders and those running scams charge fees, how can a borrower distinguish between the two? Here are four questions that should help:

1. Did the lender take the time to evaluate the loan request before providing a term sheet with a large upfront fee? A reputable lender will conduct some pre-underwriting on the loan application before providing the letter of intent and terms for the loan. If the lender doesn’t ask questions about the application materials or request more information, this can be a red flag.
2. Does the lender seem too busy to fully consider your loan request? Even a reputable lender can get overloaded with loan requests. When that happens, a lender might start charging more for the initial assessment, which works out well for the lender but can be risky for the borrower.
3. Does the upfront fee seem excessive? A reasonable fee will range from $2,500 to $15,000. Fees of $25,000 or more should raise immediate red flags unless the loan is to fund a very sizable loan amount.
4. Do the upfront fees cover tangible costs? Once you have the term sheet in hand, you can ask what costs the fee is covering. This could include anything from environmental reports to appraisals, broker’s price opinions to legal-document preparation, or travel expenses for the site visit. If the fee seems overly large to cover the expenses, you can request an itemized list of expenses or that any unused portion be refunded when the loan decision is made.

If the answers to any of these questions raise red flags, then take your deal to another lender before paying the upfront fees. Remember that time in business is an important factor to consider when selecting a hard money lender. A reputable company is more often than not local, will be able to provide references, and will have a longstanding history in the community.