Investors, however, need to be careful when acquiring hard money loans since they are not regulated as strictly as conventional loan products. There is potential for fraudulent activity on the part of lenders who try to rip off their customers. Even the savviest real estate investors can fall victim to private lending scams. When the market demand is high for anything, there are always crooks in the marketplace trying to take advantage of unsuspecting customers. Here are the most popular scams in hard money lending and tips for steering clear of fake lenders.
Request for an upfront fee
If your hard money lender asks for a non-refundable upfront fee, you need to proceed with caution as something is just not right. Scammers will ask borrowers to pay a high upfront fee before funding the loan under the disguise of names like underwriting fees, administrative fees, travel fees or due diligence fees. Since hard money lenders do charge service fees, it can sometimes be a tricky scam to avoid.
How to avoid
- Beware of any lender who charges hefty upfront fees before the closing of a deal.
- Get professional advice from a real estate attorney if you feel like you don’t fully understand the fine print. A lawyer can tell if a loan deal is legitimate and will ensure that there are no hidden clauses that could cause harm later on.
The 100% financial scam
This is a common scam where a lender claims to offer 100 percent financing on a real estate property provided you buy a monthly membership, pay a “deal review” fee or some sort of substantial fee. A majority of hard money lenders will loan you up to 70% of what the home is worth in repaired condition. If you come across a rehab lender that is willing to offer more than 70% of ARV (after repair value), then it might be a sign that a lending scam is present.
How to avoid
- Do your due diligence on all lenders to make sure they have a legitimate reputation for closing loans.
- Consider the good and bad reviews and choose the most appropriate company based on its customer’s experience and feedback.
Bait and Switch Lending Scam
“Bait and Switch” is a technique where the lender offers low-interest rates and fees to “bait” the borrower. Right before funding the loan, the lender may switch to a less desirable deal, and since some real estate investors don’t want to risk losing a deal, they are forced to accept the new terms at the very last minute.
How to avoid
- Get at least three client references and make an effort of speaking to them to learn about their experience with the lender. A real lender will be happy to provide multiple references for loans they have closed.
- Research the lender by searching on popular scam reporting sites such as Ripoffreport.com, or other real estate forums and mortgage-related websites.
Offer is too good to be true
If an offer seems to be too good to be true, it probably is. Hard money loans come with high-interest rates usually between 10 percent and 15 percent. If a lender offers you a rate much lower than that, you may want to consider it as a red flag. Genuine individual lenders won’t give you such discounts unless they know you personally. They already are taking a significant risk working with a new investor for the first time.
If you’re having difficulty pinning down a lender, it might be a sign that the lender is not trustworthy.
How to avoid
- Conduct a thorough research and look for online reviews about the lender before making any commitment.
- Ensure the company has a verified telephone number and a legitimate physical address. It’s also a good idea to check court records for civil cases against the lender.
- Have a realistic expectation of what interest rate lenders are willing to give.
The bottom line is that private money lending involves building a relationship as you both need to establish trust between each other. By knowing how to identify potential scammers, you can easily avoid losing your time, energy and hard-earned cash.
Are you looking for hard money loans from smart, trusted and responsible lenders in Texas? Wildcat Lending specializes in customized hard money solutions that cater to every investor’s unique financial needs. We understand how fast an opportunity can pop up and how essential it is to have access to quick, hassle-free funding. Contact us today to learn more on how we can help.