Hard money lending is a boon to many investors who look for quick and efficient ways of funding deals or when they need creative financing solutions in place. When banks and other traditional lending institutions turn their backs on borrowers, private lending can often be a useful tool.
Hard money lending has helped many investors make a fortune, and it is here to stay for years to come.
However, hard money lending is not free of lender scams. Although many reputable hard money lenders in the real estate industry have years of experience and the charts reputation, unfortunately, many malicious private money lenders offer lucrative deals on the outlook, with scam baits.
Suppose you are looking out for a mortgage from a private lender or want to refinance your existing loan with one. In that case, it is important to know how to differentiate between legitimate hard money lenders from malicious ones. Here are some of the famous types of scam private money lenders and how you can stay away from them.
Number 1 – The “Fee Collector” Hard Money Lender
Some scams private lenders make their money by charging upfront fees for loan processing and not fund any loans. These are the “Fee Collector” lenders, who are interested in what you say only to the point until you pay them loan processing “upfront costs.” Note here that they’re charging you upfront costs without even letting you know if your loan will be processed.
In most cases, they turn their backs onto their borrowers, saying – “We’re sorry to inform you that we cannot fund your loan….” And even worse, some lenders ghost their borrowers. These lenders typically ask for a large upfront fee, which is usually more than $1000. Most borrowers who fall into the bait pay their fees, and shortly after that, they realize that the lender disappears soon after collecting their “fees” and will never get back to them.
Here are some red flags you can look for to stay away from the “fee collector” hard money lender:
- Stay away from those lenders who require large upfront processing fees for “due diligence” fees.
- Stay away from lenders who have hidden fees. Know that most genuine lenders will disclose their fees in their terms and conditions sheet. Generally, the most common fees to look for are loan origination fees, points and appraisal fees, and inspection fees. If there are any other fees outside the ambit of normal fees, you should be alarmed about the private lender’s authenticity.
- Stay away from the lenders who force you to pay huge upfront costs without even guaranteeing you about the loan process and other relevant details. As a general rule, you know that you should stay away from sales lenders.
Number 2 – The Bait-and-Alter Hard Money Lender
The next common type of scams private money lenders are the “Bait-and-Alter” hard money lenders. These lenders are those who make big promises about their low processing fees and lowest interest rates.
Then right before the loan approaches the closing date – they will suddenly change their terms into much less favorable conditions. Here are some of the red flags to look for in “Bait-and-Alter” hard money lenders:
- Hard money loans that carry interest rates ranging from 7% to 15%. Remember that if your lender is giving you a below 5% rate, more chances are that it could be a scam.
- Hard money lenders do not require any collateral. Remember that genuine hard money lenders often require collaterals, and if your lender is not keen about any sort of collateral, then that is a major red flag.
- Lenders’ loan application with grammatical errors & unclear instructions. Remember that an authentic private money lender would have loan applications with crystal clear instructions and a clear uniform format throughout the application. If the private lender is a genuine one, the chances are that he has many years of experience in the field, and thus, they would not have any vague directions.
Number 3 – The “Full Funding Guarantor” lender
Another type of fake private money lenders is those who guarantee full funding, which is 100% of the property cost in exchange for higher fees. They do not require you to put down any amount of the loan and tell you that the property’s full cost can be funded if you agree to pay a higher upfront fee.
Remember that most hard money lenders will only think of funding a loan amount, which is equivalent to 60 to 70 percent of the appraised property value. Thus, if a lender is willing to fund your property without any collateral against the loan, the good chances are that you are falling into the wrong hands.
Number 4 – No need for Property Evaluation
If your lender promises to fund your loan without the need to conduct a thorough property valuation of your property, this could mean that he is not a genuine lender. Remember that the entire premise of a hard money loan is that the commercial property you plan to buy with the loan will serve as collateral for the loan amount.
Thus, the loan amount in itself would be based on the property value, which leads many private money lenders to conduct a thorough property evaluation before they fund your loan.
Hence, you should immediately be suspicious of a private money lender who offers loan approval without evaluating your property. If you think that your lender would be happy by just reviewing a property appraisal made by an expert, you might be wrong.
Most legitimate lenders will want to physically visit the property premises and perform a detailed assessment of the property. In any case, if you feel that you can get approval over a phone call, then you can be sure that the lender is not in good faith. It is best to avoid such lenders.
These are the four typical types of scams hard money lenders you should stay away from. Further on, here are some handy tips on how to find the best lender and what to look for in your private money lender:
- Word of mouth reference works like magic in the commercial real estate lending market. Thus, before you shop around for the best private lenders in the market, use word-of-mouth references, and shortlist some lenders before you perform some reference checks on them. Remember that a legitimate lender will have a good reputation and will also be willing to share references of their previous customers with their potential borrowers.
- Research the shortlisted private lending company by taking a look at their website and various social media profiles. In most cases, you can get a good feel of the borrower by doing some simple internet research. A genuine lender will have authentic customer reviews and testimonials put up on their website, which can be verified by you.
- Authentic private lenders will have pre-defined loan approval requirements, and they will be happy to readily provide these details to you, even before initiating the loan approval process.
- Look for realistic and practical interest rates. As a general rule of thumb, private money lenders charge more rates than their traditional lending competitors. If the loan rates offered by a private money lender dip well below 10 percent, then that could be a sign that something is fishy. It is best to stay away from such lenders.
- Have an open conversation with your private lender about the depth of experience in dealing with various types of commercial real estate loans. Genuine and authentic private lenders would be able to give you a clear picture of what they have done so far and explain to you the depth of their experience without any glitch. If you find that your private lender is running short of words to explain the same to you, he is probably not a genuine one.
- Call up the lender and ask them to explain the lending process to you end-to-end. If your private lender can provide you a pretty convincing explanation, you can be assured that he is a genuine lender with relevant work experience. If you feel that your lender cannot genuinely paint a good picture of the entire process, it could be a scam.
- Ask your lender about the name of a title company that they have worked with before. Title companies are those which are regulated by the state. If your lender cannot provide you with a title company, it is best to find a different lender.
In conclusion, while many hard money lenders out there provide good loan rates, it is important to stay away from the hard money lender scams and avoid the risk posed by them.
Sometimes, it is not about getting a bad deal or wasting your time, as some fake lenders can also leak your private information. Thus, it is better to stay away from such lenders right from the get-go. We hope that the tips we’ve put together in this blog will be useful.