The Top 4 Most Common Hard Money Loan Scams and How To Avoid Them

By Hard Money Russ

A shady character hiding in the shadows

In certain situations, a hard money loan can be highly advantageous to real estate investors. They can be closed quickly, have flexible terms, and an easy approval process.

Hard money loans are an excellent method to fund a real estate project quickly. However, they are less regulated than traditional loans, which can be a double edged sword.

Similar to all industries, there are always a few bad apples whom are unscrupulous operators trying to deceive you. Here are a few hard money loan scams to look out for.

The Bait and Switch

The bait and switch is one of the oldest tricks in the book. In this scam the lender will make big promises to start out and then after the loan has been closed (or right before) the terms are suddenly changed.

Red Flags:

  • Make sure to discuss the terms and read the fine print. If it's not so fine, then don't sign on the dotted line.
  • When the lender requires a deposit the borrower should be wary of moving forward.
  • Does the lender publish their lending guidelines on their website or is all this information hidden?

The Unicorn Deal Scam

$5 million dollars at 5% and no interest for one year, with a FREE toaster and 100% LTV Ratio

Now I'm no Einstein, but unless it's your mom giving you the above loan, I'd be deeply suspicious of terms. Be on the look out for loans that seem too good to be true.

Red Flags:

  • Hard money loans generally have higher interest rates starting from 8% and can go as high as 15%. If a lender is offering you a 5% or lower interest rate it could be too good to be true.
  • A hard money loan requires collateral. If there is no need for collateral to back the loan, this is a huge red flag.
  • Obvious misspellings and grammatical errors in the application or in the communications you receive.
  • Unclear instructions regarding what information is needed for the loan application.
  • Any request up for upfront fees or a payment of any sort.
  • The offer has an unreasonable request like asking you to sign over your property title.

Upfront Fees

There are scammers out there making money by charging upfront fees and never actually funding any loans.

It's one of the oldest scams on the internet, also known as the Nigerian Prince Scam, it works as follows:

I will send you 1 million dollars after you send to send me a 5 thousand upfront to start the application.

Red Flags:

  • Non-Standard fees that are unique to the scammer and not widely used.
  • Avoid lenders who ask for money before they do anything.
  • Hidden fees (make sure to read the contract and the fine print). Real lenders will always disclose their fees. They are usually rolled into the cost of the loan, and never paid for in advance.
    For a hard money loan, the fees will usually be the origination fee, points and possibly an appraisal. Any other type of fee would look suspicious.
  • If a hard money lender doesn’t clearly post their rates, RUN!

Fake Hard Money Lenders & Identity Theft

Identity theft and imposter scams were the most common scams in 2019 accounting for over 40% of FTC complaints.

When submitting documentation to a lender, be sure to verify you're dealing with a reputable business.

Remember, your personal information can be used for identity theft or stealing from your bank account.

Red Flags:

  • Never give out your social security number, date of birth, address or any banking information unless you are convinced you are dealing with a reputable lender.
  • If they promise you payments in connection with providing credit card numbers and other personal information it could be a hard money scam.

The Hard Money Lender Checklist

The best way to avoid scammers is to do business with people you trust. Many hard money lenders develop long term relationships with borrowers.

If you are looking to develop a relationship with a new lender, here is a checklist you can do to verify the veracity and quality of their existence:

  • Rates should be honest, fair and published on their website as well as on other communications.
  • You should be able to do a quick gut check by looking at their website and other social media profiles on sites like FaceBook or LinkedIn.
    Though obviously an online presence can be faked; you can generally get a good feel by looking around the internet at their marketing material.
  • Do an online background check. Search online “the company name” + “complaints” or “reviews”. You can also check for reports with the BBBand in Ripoff Report.
  • The lender's email address should match their domain. Be suspicious if they are using a free email address service, for example if their email address ends in @gmail.com or some other type of domain that is indicative of a free service.
  • Legitimate lenders will have pre-established requirements for approval. If they have no requirements for loan approval, this is a huge red flag.
  • Are they registered? States can have all sorts of requirements for lenders and mortgage brokers. You can find state by state licensing requirements here.
  • Do they approve loans WITHOUT evaluating the property? This would be another massive red flag as a real lender will want to do some due diligence.
    This generally includes a physical assessment of the property or an appraisal by a third party.
  • Like most investment deals, a legitimate lender will always require you to sign a contract.
    If an investment does not have documentation and paperwork involved it would be fraught with risk for both parties.
  • Ask for references. A reputable hard money lender will not be offended if you ask for references, they will understand it is only business.
    You can guarantee they are going to check you out, so why not check them out too? It's only fair.
  • Phone the lender and ask for a name of a title company the lender has worked with.

    Title companies are regulated by the state, if the lender won't provide a title company, find another lender.

Hard Money Russ's Bottom Line

In conclusion, there are many reputable lenders in the industry, however there are scammers that need to be avoided.

Hopefully our tips and tricks above will help you to better navigate your quest for a hard money loan.

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