Beware: How to Avoid Hard Money Lender Scams

hard money loan scams done through a computer

For many real estate investors, private lending can be a very useful tool. Hard money lending makes it possible for investors to quickly and efficiently fund deals when they need creative financing solutions or conventional lending is not an option.

While there are many reputable hard money lenders in the industry with years of experience and excellent reputations, unfortunately, there are also malicious players offering deals in the space. If you’re in the market for a hard money lender, it’s important to know how to differentiate legitimate lenders from scams. Below are a few standard hard money loan scams—and tips on how to avoid them.

The Bait-and-Switch Hard Money Lender

The bait-and-switch lender will make big promises about low-interest rates and fees, and then right before the loan closes the terms will suddenly change to be much less favorable. Red flags to look for:

  • Hard money loans typically have interest rates ranging from 7 to 15 percent. If the lender you’re working with has a rate at or below 5 percent, it could be a scam.
  • Hard money lenders require collateral. If the lender is not asking for any collateral, it’s a big red flag.
  • Unclear instructions, misspellings, and grammatical errors in the lender’s loan application should give you pause.

“Fee Collector” Hard Money Lender

Some “lenders” make their money by charging upfront fees and not actually funding any loans. This type of fake lender typically asks for a large upfront fee, usually more than $1,000. You, as the borrower, pay the fee—and shortly after, the lender disappears and never funds the loan. What to look for:

  • Avoid lenders who require large upfront application or due diligence fees.
  • Hidden fees. Most lenders will disclose their fees in the term sheet. Normal fees to look for are origination fees, points, appraisals, environmental, and inspections.

Fake Hard Money Lender and Identify Theft

When you fill out any loan application, you are asked to provide personal information that you expect will be kept private. Unfortunately, this information can potentially be used to commit fraud. Fake hard money lenders set up a legitimate-looking website with an application form that fools people into entering their information. Typically, applicants fill out the fake form and then never hear from the lender. Generally, those who filled out the fake form may not realize until much later that their identities were stolen. How to avoid this scam:

  • Never submit a form without first verifying that the lender is legitimate.
  • Never give out sensitive information online. This includes your social security number, date of birth, or banking information unless you know it’s a safe and secure site.
  • If the hard money lender promises payment in connection with providing your credit card information, it could be a scam.

lending protection

 Additional ways to avoid hard money loan scams and what to look for in a lender

The best way to avoid scams is to find a great lender, build a relationship, and use the same lender for multiple projects. Some tips:

  • Use word of mouth to find lenders and perform reference checks. A legitimate lender will have a good reputation and will be willing to share references with potential borrowers.
  • Research the company by looking at their website and social media profiles. Generally, you can get a good feel for the standing of the company with some simple internet research.
  • Legitimate lenders will have pre-established requirements for approval, which they will readily provide before initiating the financing process.
  • Call the lender and ask for the name of a title company they have worked with. Title companies are regulated by the state. If they don’t provide you with a title company, find a different lender.

In conclusion, hard money lenders can provide great benefits to real estate investors and developers, but it’s important to avoid the risks posed by fake lenders. Hopefully, the tips we’ve provided will help you avoid scams and better navigate your search for a reputable lender.

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

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