Top four scams in hard money to watch out for
There are a lot of bad hard money lenders in the private money lending space. Because it is not regulated as much as the banking industry, hard money lending has its share of scam artists. Below is a top 4 list of scams to watch out for when looking for a good hard money lender.
The Fee Collector
When a lender asks for an upfront fee for a sum of more than $1,000 this is probably a scam. There are a lot of hard money lenders who make money from charging upfront fees, and not by actually making loans. These hard money lenders are often called, “fee collectors.” Although there are exceptions, scams in hard money are usually found when a lender is charging $1,000 or more to give you a loan.
Sometimes a lender will require an appraisal or site inspection as a final underwriting condition for giving you the loan. However, in most cases, this type of upfront fee will not be more than $500 and will typically be paid for a third party service.
The Bait & Switch Lender
“Bait and Switch” Lender: The lender promises the borrower a low interest rate and a low fee loan that seems too good to be true. Right before funding the loan, the lender may give the borrower a less desirable loan term, at a higher interest rate. This is called “bait and switch.”
Bait and Ditch” Lender
The lender promises the borrower a loan that may seem too good to be true and then asks for a steep upfront fee, typically over $1,000. The borrower pays the upfront fee. Shortly thereafter, the lender immediately ditches the borrower hoping to get a loan, never funding the loan. This is called a “bait and ditch.”
The Too Good To Be True Lender
Too Good to Be True Lender: Lender promises the borrower low interest rate and low fee loan that seems too good to be true. But constant delays prevent an actual funding of the loan that are not the fault of the borrower. The process can drag on for months with promises that the loan will fund ‘next week.’ In some cases, the borrower may also have given a large upfront fee to the lender.
It is tough to find the good hard money lenders and avoid scams in hard money. So do your homework and look further than the first page of a Google search when searching for bad press on private money lender. Get testimonials from past clients and do your own research.
Be sure to read our next post and watch the video > 5 Red Flags to Spot a Hard Money Loan Scam