Hard money lending is a boon tomany investors who look for quick and efficient ways of funding deals or whenthey need creative financing solutions in place. When banks and othertraditional lending institutions turn their backs on borrowers, private lendingcan often be a useful tool.
Hard money lending has helpedmany investors make a fortune, and it is here to stay for years to come.
However, hard money lending isnot free of lender scams. Although many reputable hard money lenders in thereal estate industry have years of experience and the charts reputation,unfortunately, many malicious private money lenders offer lucrative deals onthe 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 maketheir money by charging upfront fees for loan processing and not fund anyloans. These are the “Fee Collector” lenders, who are interested inwhat you say only to the point until you pay them loan processing “upfrontcosts.” Note here that they’re charging you upfront costs without evenletting you know if your loan will be processed.
In most cases, they turn theirbacks onto their borrowers, saying – “We’re sorry to inform you that wecannot fund your loan….” And even worse, some lenders ghost theirborrowers. These lenders typically ask for a large upfront fee, which isusually more than $1000. Most borrowers who fall into the bait pay their fees,and shortly after that, they realize that the lender disappears soon aftercollecting 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 largeupfront 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 andconditions sheet. Generally, the most common fees to look for are loanorigination fees, points and appraisal fees, and inspection fees. If there areany other fees outside the ambit of normal fees, you should be alarmed aboutthe private lender’s authenticity.
- Stay away from the lenders who force you to payhuge upfront costs without even guaranteeing you about the loan process andother relevant details. As a general rule, you know that you should stay awayfrom sales lenders.
Number 2 – The Bait-and-Alter Hard Money Lender
The next common type of scamsprivate money lenders are the “Bait-and-Alter” hard money lenders.These lenders are those who make big promises about their low processing feesand 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 privatemoney lenders is those who guarantee full funding, which is 100% of theproperty cost in exchange for higher fees. They do not require you to put downany amount of the loan and tell you that the property’s full cost can be fundedif you agree to pay a higher upfront fee.
Remember that most hard moneylenders will only think of funding a loan amount, which is equivalent to 60 to70 percent of the appraised property value. Thus, if a lender is willing tofund your property without any collateral against the loan, the good chancesare that you are falling into the wrong hands.
Number 4 – No need for Property Evaluation
If your lender promises to fundyour loan without the need to conduct a thorough property valuation of yourproperty, this could mean that he is not a genuine lender. Remember that theentire premise of a hard money loan is that the commercial property you plan tobuy with the loan will serve as collateral for the loan amount.
Thus, the loan amount in itselfwould be based on the property value, which leads many private money lenders toconduct a thorough property evaluation before they fund your loan.
Hence, you should immediately besuspicious of a private money lender who offers loan approval withoutevaluating your property. If you think that your lender would be happy by justreviewing a property appraisal made by an expert, you might be wrong.
Most legitimate lenders will wantto physically visit the property premises and perform a detailed assessment ofthe property. In any case, if you feel that you can get approval over a phonecall, then you can be sure that the lender is not in good faith. It is best toavoid such lenders.
These are the four typical typesof scams hard money lenders you should stay away from. Further on, here aresome handy tips on how to find the best lender and what to look for in yourprivate money lender:
- Word of mouth reference works like magic in thecommercial real estate lending market. Thus, before you shop around for thebest private lenders in the market, use word-of-mouth references, and shortlistsome lenders before you perform some reference checks on them. Remember that alegitimate lender will have a good reputation and will also be willing to sharereferences of their previous customers with their potential borrowers.
- Research the shortlisted private lending companyby taking a look at their website and various social media profiles. In mostcases, you can get a good feel of the borrower by doing some simple internetresearch. A genuine lender will have authentic customer reviews andtestimonials put up on their website, which can be verified by you.
- Authentic private lenders will have pre-definedloan approval requirements, and they will be happy to readily provide thesedetails 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 theirtraditional lending competitors. If the loan rates offered by a private moneylender dip well below 10 percent, then that could be a sign that something isfishy. It is best to stay away from such lenders.
- Have an open conversation with your privatelender about the depth of experience in dealing with various types ofcommercial real estate loans. Genuine and authentic private lenders would beable to give you a clear picture of what they have done so far and explain toyou the depth of their experience without any glitch. If you find that yourprivate lender is running short of words to explain the same to you, he isprobably not a genuine one.
- Call up the lender and ask them to explain thelending process to you end-to-end. If your private lender can provide you apretty convincing explanation, you can be assured that he is a genuine lenderwith relevant work experience. If you feel that your lender cannot genuinelypaint a good picture of the entire process, it could be a scam.
- Ask your lender about the name of a titlecompany that they have worked with before. Title companies are those which areregulated 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 hardmoney lenders out there provide good loan rates, it is important to stay awayfrom the hard money lender scams and avoid the risk posed by them.
Sometimes, it is not aboutgetting a bad deal or wasting your time, as some fake lenders can also leakyour private information. Thus, it is better to stay away from such lendersright from the get-go. We hope that the tips we’ve put together in this blogwill be useful.
