As more real estate investors opt for loans to fund their investments, many loan scams are being witnessed in the market. Hard money loans are common among investors who want quick financing to secure competitive deals. The nature of private money loans makes them popular not only among investors but also among scammers posing as legitimate lenders. Below, we have rounded up the common types of hard money lender scams and the things to look for in a legitimate lender.
Types of Hard Money Lender Scams
Hard money loan scams may manifest in different ways. Some lenders will walk away with your money or personal data, while others will make promises they cannot fulfill. Here are the three popular hard money lending scams you should know.
- Bait-and-switch scam. With this scam, the hard money lender promises low fees and interest rates during the application process. However, this suddenly changes during loan closing, and you end up paying higher rates and several hidden costs.
- Fee Collector Hard Money Lenders. These private money lenders charge very high upfront fees during the loan application and processing stages, only to disappear before closing the loan. Most of them will charge upfront fees, often above $1,000, with the promise of fast-tracking the loan application process.
- Fake Lenders and Identity Thieves. Some scammers pose as hard money lenders to collect crucial personal data from borrowers. Such lenders have no intention of giving out loans, but they promise attractive rates and payment terms. Some may even claim to give out loans without collateral. Unlike the other scammers, this type will launch their attack online by soliciting borrowers to enter sensitive information on their site or online database.
Lender Checklist: How to Spot Hard Money Lender Scams
Every investor wants to work with a lender who will customize their lending services to suit their needs. However, the most flexible lenders are, at times, scammers you should avoid by all means. Here are the key things that can help you spot a hard money lender scam.
If the rates are lower than 7%, the lender isn’t disclosing everything to you. Hard money loans have rates ranging from 7 to 15 percent. Anything in the 3% to 5% range is probably a scam.
Hard money lending is an asset-based loan, so the lender will always use the property as collateral. Any private money lender who doesn’t need collateral is a typical scammer. Some will only mention they need collateral but will not follow up to assess the asset or do the necessary background check and valuation. That would be a red flag, and you need to look elsewhere.
Any lender who charges high upfront or due diligence fees is probably taking advantage of unsuspecting borrowers. The best hard money lenders will disclose their fees, rates, payment terms, etc. before the application begins. That way, you can weigh your options and decide whether to proceed or not. If you spot unclear instructions or contradicting clauses during the application process, ask for more clarification. Similarly, ensure all the disclosures are brought to the table before closing.
Personal Documents Requested
Before submitting your personal information on a lender’s website, ensure you aren’t compromising your privacy. Legit lenders value your privacy and will not ask for any sensitive information they don’t intend to use. Some personal data and information such as your social security number, email, phone number, bank details, date of birth, passwords, etc., may be used against you. So always check to ensure the lender is reputable before submitting such information.
Finding a Legitimate Hard Money lender
Now that you know how to spot hard money loan scams, you also want to know how to find the best lenders in the market. More often, the best private money lenders have a reputation to keep. They are also popular among local real estate investors and professional house flippers. So one way to find them is through word of mouth. You want to ask around for the best lenders and pick some before proceeding with your research.
Besides reputation and years of industry experience, it’s also worth checking the lender’s licensing and certification. A legitimate company should be registered with the relevant regulatory body and recognized by local authorities. When doing your research, you also want to check the quality of services and customer satisfaction.
Going through customer reviews on reputed third-party sites says a lot about the lender. Just be sure to use the reviews as a base for your research instead of data points to base your judgment. Before making up your mind, you should schedule an appointment with the most promising lenders to learn more about their services. During the meeting, you want to check the quality of their communication and overall customer experience.
Get Started Today
Hard money loans could be your ultimate solution if you want to secure a quick, flexible, and convenient loan for real estate investments. However, not all lenders are legitimate, so you want to review your options keenly. The tips highlighted above will help you pick the best lender to suit your investing needs.