Upfront Fees: The Real Dangers

  • Investors
Upfront Fees: The Real Dangers

The Dangers

There are lots and lots of horror stories about property investors losing eye-watering amounts of cash through upfront fees to unscrupulous and/or inexperienced sourcing agents.

As an investor you have to take at least some responsibility for handing over cash to any sourcing agent, it’s no good complaining when things go wrong – understand how to reduce the risk.

It is completely legal for any sourcing agent to have a policy of taking an upfront fee, however, there is a huge variety of the sizes of these fees. These range from no fee at all to the full sourcing fee running to thousands of pounds.

The problem has been that sourcers come into the sector with little or no cash reserves, so when a fee is taken up front it is often spent and so when things go wrong, and an investor asks for a refund – there is no cash left!

That’s when investors complain, but there are things that can be done to protect your cash.

Understanding Upfront Fees

To significantly reduce the risk of losing your cash, you have to ensure that you fully understand how any sourcer wants to work:

  • What fees are payable?
  • When are they payable?
  • Are they refundable?
  • Are they deductible?
  • Are they safe?

Don’t be afraid to ask any or all of these questions, most importantly ask for written confirmation.

What upfront fees are payable?

There are three different sets of fees that could be asked for:

  1. Registration Fee – Fee taken to register with the sourcing agent to use their services, not all sourcing agents take a registration fee.  They are usually either ‘deductible’ (from full sourcing fee) or ‘non-refundable’.
  1. Reservation/Deposit Fee – Fee taken to reserve a deal or a deposit for a deal.  They are usually either ‘deductible’ (from full sourcing fee) or ‘non-refundable’.
  1. Sourcing Fee – The fee that is payable for the deal sourcing service, usually upon completion of the purchase of any deal sourced.

Are your fees safe?

You MUST understand the type of fee(s) your sourcing agent will take, ensure that you have that information confirmed in writing.

  • Non-Refundable Fees:  Simple to understand, no matter what happens this fee will not be returned to you.
  • Deductible Fees:  These are ‘deducted’ from the overall sourcing fee which would be paid upon completion of purchase.
  • Refundable Fees:  These would be returned to you, usually only under certain circumstances.  It is very important that you get clarity (in writing) as to what circumstances this fee would be sent back to you.

Refundable fees MUST be held in a ‘Client’ Account with adequate protection

A ‘Client’ account is a business account separate from the general/trading business account of the sourcing business, preferably with adequate insurance cover or an Escrow type account which has insurance built into it.

Most sourcing agents do not have a ‘Client’ account and put fees into their general account from where they spend it!

To reduce the risk of losing your cash from upfront fees you absolutely MUST understand how the sourcing agent will work, what fees they expect you to pay, when you have to pay the fee(s) and if those fees are refundable or not.

Don’t just think that you will get a refund, the issues around fees not being returned is one of, if not the most complained about issue in the sourcer/investor relationship.

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