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

Russell Barneson

4 Common Hard Money Loan Scams

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

They are an excellent way to swiftly fund a real estate project. However, it's important to note that they are less regulated than traditional loans, which can be a double-edged sword.

Like any industry, there are always a few bad apples—unscrupulous operators who may try to deceive you.

Here are the top 4 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 hard money 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?

Crescent Lenders

At Crescent Lenders we always publish our lending guidelines and never require a deposit.

That's why we are California's top hard money lender.

Reach out to us @ 213-474-3131 if you require funding or have any questions.

The Unicorn Deal

$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 like these.

Be on the lookout for hard money 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 a sign of a scam.
  • A hard money loan requires collateral, so it should raise a huge red flag if there is no requirement for collateral to secure the loan.
  • Look out for obvious misspellings and grammatical errors in the application or in the communications you receive.
  • Beware of unclear instructions regarding the information needed for the loan application.
  • Be cautious of any request for upfront fees or payment of any sort.
  • If the offer includes an unreasonable request, such as asking you to sign over your property title, proceed with extreme caution.

Upfront Fees

There are hard money 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 me a $5 thousand dollar upfront application fee.

Red Flags

  • Non-standard fees that are unique to the scammer and not widely used through the hard money lending industry.
  • Avoid hard money 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 before loan fulfillment.
  • 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 lending guidelines, RUN!

Fake Hard Money Lenders & Identity Theft

Identity theft and imposter scams are some of the most common scams; and account for over 40% of FTC complaints in 2019.

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.

How To Avoid Common Hard Money Scams

The best way to avoid hard money 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 use to verify if they are a trust worthy lender.

  • 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 for “the company name” + “complaints” or “reviews.” You can also check for reports with the BBB and in Ripoff Report.
  • The hard money 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? All real lenders will do their due diligence. This generally includes a physical assessment of the property or an appraisal by a third party.
  • Like most investment deals, a legitimate hard money 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.
  • Request references. A reputable hard money lender will not take offense if you ask for references; in fact, they will understand since they may require the same from you.
  • 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.

The Bottom Line

In conclusion, there are many reputable hard money lenders in the industry, however like any industry there can also be scammers.

Be smart and research the background of the lender you are doing business with.

If something seems too good to be true, it probably is. If you are not sure whether a hard money lender has integrity, find another one.

Use the checklist above for help in finding a reputable hard money lender who will give you honest advice and won’t run off with your money.

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

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Los Angeles, California


Disclaimer: Crescent Lenders, DBA CrescentLenders.com ("CL") is a California licensed broker under California Bureau of Real Estate License No. #01792267. Regardless of this license, CL considers itself a “finder” for purposes of applicable laws and regulations (California Business & Professions Code § 10130, et. seq.).