While there are many good and honest private and hard money lenders, there are also a number of bad ones. Because these lenders are not regulated to the same degree as a traditional bank, private and hard money lenders are known to have within its ranks its own share of dishonest individuals. Below is a list of scams to be aware of when looking for a loan.
The Fee Collector
When a lender asks for an upfront fee (on residential property) of more than $1,000, this could likely signal a scam since residential appraisals average around $400. This assertion is made as there are a number of lenders who earn a living solely from charging upfront fees, and not by actually making loans. These same predatory lenders are often called, “fee collectors.” While, there are exceptions, scams in private and hard money lending are usually found when a lender is charging fees in excess of the cost of the appraisal in order to give you a loan.
In nearly every case, a lender will require an appraisal or site inspection as a final underwriting condition for providing the loan. However, in most cases, this type of upfront fee will usually not exceed $500 (for residential properties) and is typically paid to a third-party service. On the other hand, appraisals on commercial properties can cost upwards of $5,000 and the lender will ask that you cover this cost.
The Bait & Switch Lender
“Bait and Switch” Lender” is a lender who promises the borrower at the beginning of the loan process, a low-interest rate, and minimal fee loan, which often seems too good to be true. What makes this a “Bait and Switch” loan, is that right before funding, the lender changes the terms of the original offer, leaving the borrower with a “take it or leave it” loan offer with terms much different than originally promised.
Bait and Ditch” Lender
Similar to the actions of the “Fee Collector,” the lender promises the borrower a loan that also seems too good to be true and nearly every time asks for a steep upfront fee, typically over $1,000. On some commercial deals, I’ve heard a request for as much as $200,000. The borrower not knowing any better pays the upfront fee and shortly thereafter, the lender immediately ditches the borrower. This is demonstrated when the lender not only doesn’t fund the loan but oftentimes does not take or even return the borrower’s phone calls. This is called a “bait and ditch.”
The Too Good to Be True Lender
A “Too Good to Be True Lender” is a lender that hooks a borrower looking for a great deal with promises of a lower than usual interest rate and minimal fees. What makes this scenario different is in this case, the lender offers a number of reasons for continued delays. The loan committee hasn’t met, the person who makes the decision is out of the country, etc. The lender’s actions or nonaction prevents the actual funding of the loan through no fault of the borrower. The delay tactics perpetrated by the lender can drag on for months with promises that the loan will fund ‘next week.’ Often is the case where the borrower has provided the lender with a large upfront fee.
Protect Yourself
It can be time-consuming but well worth the effort to find a good lender, private or hard money. Lenders good and bad are always advertising, leaving the unsuspecting borrower with several choices. I recommend that would-be borrowers start by conducting lender related searches on the internet looking for any news, reviews, or scam reports. For example, your searches should include keywords such as reviews, scam, fraud, and even ripoff.
Check out lender websites for testimonials and listings of funded projects. This includes actual project names and locations. Questionable lenders tend to have vague listings, and won't be offering much in the way of detail. Remember, when speaking with a prospective lender, don’t be shy, ask for references, and contact information. If the lender has satisfied clients, why wouldn’t they want to share that information with you?
Inspiration for this piece came from an article titled “Top Four Scams in Hard Money to Watch out For” written by Ms. Corey Dutton, MBA of Private Money Utah. www.PrivateMoneyUtah.com
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