3 Hard Money Lending Scams to Avoid

When dealing with private lenders, it can be a challenge to distinguish the real deals from the fakes. These are three of the most popular scams that borrowers should be on the lookout for.

1. (A) Upfront fee scam. This usually involves the fake lender approving a loan and then requiring the borrower to pay a substantial fee prior to closing. This is particularly true when the borrower is working with an out of state lender instead of a local lender. . Remember, you should always ask a private lender for references from other loans that they have closed. An ethical private capital lender will be happy to provide this information to you. We strongly also advise Googling the lender to see if there are negative comments attaching to their name.  Many of the largest national hard money lenders have sites underneath their main site named “Borrowers who are suing XYX Lender” or other similar titles.  Needless to say, this is not a good sign.
2. (B) 100% financing scam. Some faux lenders will promise 100% financing (often based on the after repair value) on a property in exchange for the borrower purchasing a monthly membership or paying a fee to have their deal reviewed. Savvy borrowers should know that the majority of real hard money lenders will only make loans for 60% to 65% of the secured asset’s value. Lenders offering higher LTV ratios should set off a borrower’s warning bells.
3. (C) Bait and switch scam. With this common scam, the bait is absurdly low interest rates and fees. These are switched for much higher terms immediately before closing. The borrower is then left to choose between the possibility of losing the deal or accepting the new, unfavorable terms.  Again, doing your homework in advance and making efforts to find a local lender will help mitigate against this risk factor.

As a general rule of thumb, borrowers should keep in mind that if it sounds too good to be true, it probably is. As mentioned before, borrowers can and should check up on potential lenders by doing searches on scam reporting sites and checking for bad reviews on real estate and mortgage forums and websites. There are lots of good hard money lenders out there, so borrowers need to remember to research and perform due diligence of their own just as the lenders are doing on their end. If you have any more questions about hard money loans, contact Montegra today!

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.