How To Avoid Hard Money Lender Scams: Top 5 Red Flags

If you’re a seasoned landlord or a newbie looking to break into the real estate scene, you already know that proper financing is crucial to securing a good investment. Several loans can help you fund your business, but investors looking for speed and flexibility often defer to hard money loans.

However, unlike a conventional house mortgage, hard money loans aren’t offered by mega financial institutions like banks. Since people have to rely on private lenders, investors are more likely to fall into traps without due diligence.

To help you avoid such a scenario, this article outlines the top 5 red flags you should look out for in your hunt for financing. Besides sharing tips on how to avoid the most common hard money lender scams, we’ll also share some hints on finding the best ones. Let’s get started:

How To Avoid Hard Money Lender Scams: Top 5 Red Flags

1. Asking For A Large Upfront Fee

One of the most common scams is when private lenders ask potential borrowers to cough up large sums of money as a collector’s fee, run background checks, or perform due diligence.

Often they will state that such payments do not guarantee the approval of your application to absolve themselves from liability, which is a huge red flag. Some of them might even insist on a fee for a consultation to answer any questions you may have, which is wrong.

If the lender you’re considering insists on collecting money before rendering services or asking for a hefty upfront fee, something is probably amiss.

2. Trying To Pull A Bait-And-Switch

A bait-and-switch scam is when the lender tries to alter the terms of a prior agreement at the last minute. This happens after they’ve made big promises about what they can deliver to lure you in.

Then, once borrowers are comfortable with the terms, these lenders will try to pull a bait-and-switch by changing the initial agreement or insisting on additional fees.

Instead of getting roped into doing business with these shady lenders, watch out for some of their tell-tale signs. Lenders are in the business of borrowing for profit, so anyone offering far below the standard interest rate is probably trying to pull a fast one. Another sign is if they don’t require collateral, a well-known feature of hard money loans.

3. Offering Full Funding

While finding a guarantor that can offer you 100% backing on your next investment would be a dream come true, it is often just that. Most private lenders are unwilling to take such high risks and would rather spread their assets across multiple pies.

Thus, you should reevaluate the terms if someone is willing to give you total funding upfront.

A good deal is often around 70% of the property’s total value, even with the house as collateral. Hence, it’s up to you to make the most of your approved capital to secure the property and pull a profit fast. If you’re looking for a reputable private lender, choose Maryland Hard Money Lenders to entrust your investment.

4. Skipping The Property Evaluation

Many investors lean towards hard money loans because their application process is much less thorough than traditional mortgages. However, reputable lenders still need to follow due process. Lenders will often bring in their appraisers to assess the potential property’s value and give recommendations. With that information, they can determine the loan amount, suitable collateral, and other terms before approval.

A private money lender with no interest in seeing the property or conducting a valuation is most likely trying to scam you. But, unfortunately, you’ll also find that these tricksters are often guilty of asking for hefty fees upfront.

5. Having A Shady Online Presence

The final red flag to look out for is private lenders with a shady online presence. With modern technology, it’s easy to set up a scam account that looks legitimate, but if you perform your due diligence, there are often signs when a business isn’t legit.

Poor grammar and incorrect spellings are often a dead giveaway, as no self-respecting company would put sloppy ads on their page.

Also, look for reports on reputable review sites like BBB, where other borrowers share their real experiences with businesses. Another giveaway could be using free email services like Gmail or yahoo.

It’s crucial to note this tip because lenders asking you to send personal information through such mediums could be involved in identity theft.

3 Tips To Find The Best Private Money Lender

1. Educate Yourself

You’re more likely to find a suitable private money lender if you have some background on the subject matter. Don’t be afraid to pick up a book, read an article, or watch informational YouTube videos on hard money lending.

You can also get the lender’s perspective, which could help create a compelling pitch when you settle on a reputable lender. Finally, remember that hard money loans leave plenty of room for negotiation.

2. Ask Within Your Local Network

Word of mouth is a popular business model, and there’s no reason not to use it to your advantage. Ask your friends, family, and colleagues for recommendations, particularly in the real estate industry.

Seeking information through your network could help you avoid scams and connect with the best local lender. You can also inquire from experienced professionals like insurance brokers, title agents, and property managers.

3. Verify Their Business

Try to steer clear of hard money lenders with no state licensing. As providers of financial services, private or not, they ought to register with the U.S. Securities and Exchange Commission. It would be best to immediately eliminate lenders without such verification from your shortlist.

Conclusion

So there you have it! With these top five red flags, you should be able to avoid hard money lender scams. Remember that lenders with a shady online presence and offering terms that are too good to be true are some tactics con artists use to trick people.

They can also try to play on people’s greed and impatience by offering full funding or waiving a property evaluation. Use our tips to find the best private money lender to give you fair rates and honest terms.

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