By Hard Money Russ
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 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.
- 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?
$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.
- 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.
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.
- 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!
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.
- 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 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:
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.