Real estate investing involves finding deals—properties or notes—at a discount big enough to make money. And in this current hot market, you need to find the deal that no one else has found. But how can you tell if it’s a deal or a scam?
Not every property fits into the cookie cutter mold that a traditional lender will loan on—they have people to answer to as well. How do you know the lender you’ve found isn’t going to run off with your money?
Here are 10 common tip-offs that maybe your red-hot deal isn’t such a hot idea after all.
There are legitimate ways to finance the purchase of a property and fund any renovations outside your traditional institution-based lenders. They will typically have higher rates and charge you points (a point is equal to 1 percent of the loan) and will want you to have “skin in the game.”
Unless you have worked with the lender multiple times before or are close, personal friends with them, be very wary of any of these circumstances.
1. 100% Financing
One hundred percent financing does exist but not for your first loan or first deal. A lender wants his money back—and giving you 100 percent of the purchase price, even with a first-position lien on the property, doesn’t do much to stop you from walking away if you find something unexpected and un-budgeted.
If you don’t have any money to put down on the property, then start looking for a partner who can help fund the down payment, or start looking for another investor to sell the deal to. If it’s a good deal, you won’t have a hard time selling it. If you have a hard time selling it, it wasn’t a good deal.
2. Upfront Fees
Just about any fee or charge will be collected at the closing table, with the possible exception of an appraisal fee. The lender will give the loan based on the appraised value of the property, and if the appraisal comes in low, you may decide to cancel the loan. The lender doesn’t want to try to collect the fee after the fact—especially if you aren’t getting a loan through them.
But there is no such thing as insurance on a loan. Title insurance is a real thing, but that isn’t insuring the loan, it’s insuring the chain of title to the property in question. Like I said above, most fees are paid at closing, when it’s a sure thing that the loan is being funded. Be very wary about any fees the lender is requesting before you are sitting at the closing table.
3. Changing Interest Rates
Once your rate is locked in, it’s locked in. It doesn’t change unless there are some pretty outstanding circumstances. If your rate is changing, take a deeper look at the lender.
4. Extremely LOW Rates
The least expensive way to fund a property is a traditional mortgage. Those rates hover around 4 percent.
A hard money lender isn’t going to give you a loan for 4 percent – he doesn’t make any money at that rate. He also isn’t going to loan for 2, 3, or even 8 percent.
Hard money loans are usually around 12 to 15 percent PLUS two or more points. Hard money costs a lot. It’s meant to be a quick fix, not a long-term solution.
5. Extremely Bad English/Spelling
Another tell-tale sign that your lender isn’t the real deal is if all communications come through email, and they use atrocious spelling or have horrible English. I’m not talking about an occasional misspelled word; I’m talking about sentences that don’t make any sense. Look out for emails that are really hard to read, leaving you trying to decipher what they’re talking about.
If someone legitimately has money to lend you, they’ll also have a legitimate grasp on the English language.
6. Generic Email Account
A professional lender will usually have a web presence, which includes email addresses affiliated with the website. This isn’t always the case, so think of this one as more of a pink flag. But if your lender is using an email like [email protected], you should tread very lightly. It should be more like [email protected]
7. Google Doesn’t Know Them
Google knows everyone and everything. If you do a search on Google—and you SHOULD research them on Google—and Google comes back with nothing, run.
8. They Mention Western Union
Western Union is a great way to wire money. They are a recognized company, but a legitimate lender doesn’t use them. If your lender says anything about Western Union, RUN, don’t walk, in the opposite direction. This isn’t a red flag, it’s a purple flag with flashing lights and sirens!
Finding the Actual Deal
Once you think you have found a deal worth pursuing, your Red-Flag-O-Meter should be tuned to high alert. A great deal will pass all the tests, so you should be looking for ways to make the deal fail, not ways to overlook problems.
9. Seller Won’t/Can’t Let You Inside
Just like the rental scams on Craigslist, where someone will list a home they don’t own as a property for rent but can’t let you inside for any number of reasons, this scam also rears its ugly head in purchases—especially when the deal is too good to be true.
There are exceptions to this red flag. When a landlord has renters that he doesn’t want to inconvenience with multiple showings, he or she may wish to hold off showing the inside until they have the property under contract. If this is the case, make the contract contingent upon seeing the condition of the interior, or write a letter of intent with a price range rather than a firm price, again contingent upon seeing the inside.
But if the seller can’t let you view the property at all and gives vague or ridiculous reasons for this, it’s a good chance they don’t own the property or have the right to sell it.
10. The Numbers Are AMAZING
Finding a good deal is difficult, and finding a great deal is even harder. When a seemingly AMAZING deal pops into view, you should immediately be on high alert. While it IS possible that you will find a smoking deal from someone who just wants to be rid of it, it isn’t probable.
George C. Parker sold the Brooklyn Bridge multiple times to unsuspecting immigrants who literally just got “off the boat” at Ellis Island. He would bribe the men working on the boats to direct people to him who seemed to have a lot of money with them. Parker would sell it for just about any amount—from $75 to $5,000, whatever they had on them.
How did he persuade them to give him giant wads of cash? He portrayed himself as an exhausted bridge owner who just wanted out of it—and convinced them they could earn millions by erecting a tollbooth on the bridge. In fact, only when police arrived to dismantle the tollbooths did the “owners” learn they had been scammed.
If your “seller” claims to be an exhausted owner who just wants out of it at a price that seems unreal, it probably is. Proceed with caution.
4 Ways to Avoid Being Scammed
So what can you do to avoid being scammed? Two words: due diligence. The first stop for any too-good-to-be-true deal should be the public records department of the county in which the property is located. The first stop for any too-good-to-be-true lender is Google.
1. Don’t Feel Pressured
Any legitimate deal needs time to be vetted, inspected, and researched. If someone wants an answer right then and there, just say no. You are presumably giving them thousands of dollars for the ownership of a property or receiving thousands of dollars to purchase a property. They can give you a little time to do your research.
Pressure to commit PLUS pressure for money up front should be glaring red flags. It is far better to miss out on a deal than to lose money because you felt pressured to get in too fast.
2. Reasonable Deposits
Earnest money is a real thing and is typically 1 percent of the purchase price of the property. Earnest money should be held by someone other than the seller—either a title company or at the very least, a real estate agent. Make sure you get a receipt for any money given. Your canceled check is NOT enough of a receipt.
3. Do Your OWN Research
Sellers will give you information about the property according to their records. That’s great, but make sure you do your own research, too. Some items are easy to verify, like property taxes and any HOA dues.
But other items may not be so easy to confirm, like utility bills, actual tenant rent, or the current state of the home. Ask for copies of bills, and get tenant estoppel statements that give true rent amounts signed by the tenants themselves. Get your own home inspection, rather than relying on the report from a “pre-inspected” home.
4. Vet Lenders
Legitimate hard money lenders will have an online presence. They will have a website that gives information about their company, multiple ways to contact them, and information about their process. It should be a professionally designed site, too. If it seems less than professional, it probably is.
Private lenders are people you know or acquaintances of people you know. Private lenders don’t go advertising for borrowers.
Finding a good deal can take a long time, and it’s natural to be excited when you think you’ve found something before anyone else has.
Finding someone to fund your deal when you’ve heard “no” multiple times can be exciting, too.
Make sure to cover your financial interests. It’s far better to have lost a deal than to have lost all your money.
Have you found a scam? What tipped you off?
Please share your red flags below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.