Top 3 Scams in Hard Money Loans

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From a fall article in the Scotsman Guide, the popular topic of loans scams in hard money is a conflictive one, particular for those who have been the victim of one. Loan scams are a huge problem in hard money loans for many reasons, too many to outline here in this discussion. What are the top 3 scams found in the arena of bridge lending?

First of all, a hard money loan, is any non-bank loan, whether it be a private individual, an organized fund, a mortgage pool, mortgage broker, etc. Loans scams in this financing niche are a problem, as I said, and the top 3 scams found most prevalently include:

1.Fees paid prior to closing a loan: Also called upfront fees, there are a lot of fake lenders who pretend to be funding loans but instead are having borrowers pay upfront fees. Ever seen the movie, ‘American Hustle?’ This is an example of an upfront fee loan scam.

2.Identity theft: This is another common loan scam whereby a group or individual will gather personal identifying information from a borrower, in order to steal his or her identity.

3.Bait and Switch: In this scam a legitimate lender provides terms to a borrower but then changes the loan terms right before closing.

To learn how to avoid the most common scams in hard money lending, read the entire article on Scotsman Guide at the link below.

What other scams are you seeing in hard money these days? Please share your insights below and comment on this discussion.

(Article Source: http://www.scotsmanguide.com/Commercial/Articles/2014/09/Avoid-Bridge-Lending-Traps/)

Origination fees are legit but should be rolled into the loan after its approved and are paid at closing.

If the deal doesn't close no origination fees are due.

There are scammers in every industry.  It is always buyer beware.

Originally posted by @Mark Esposito :

Origination fees are legit but should be rolled into the loan after its approved and are paid at closing.

If the deal doesn't close no origination fees are due.

 That's right. Origination fees should be paid through escrow.

You should also always have a backup funding source to go to and word your contract paperwork you have with the seller so you (the buyer) can extend escrow if required, just in case the original HML does not come through with the agreed terms. You don't want to be left scrambling at the eleventh hour.

Please Beware of Scammers!

The article on Scotsman Guide is super informative in terms of what warning signs to look for, etc. It seems obvious to those who working mortgage lending and financial services, but for those with no experience, they may as well be in the shark tank. 

Corey,

Just got a chance to read the article .. Good read thanks

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This is a very good article. This is a big issue in the hard money world. I as a lender do require the borrower to put up 1/2% to 1% (of loan origination) in escrow with a third party attorney. The reason behind that is I have to have a serious borrower. I see a ton of loans daily. If I started to work on these loans and pay everyone in my office just to find out the borrower is not wanting to move forward I would be losing money hand over fist. Not to mention the broker who only gets paid if the loan closes. So it helps the broker as well and shows that the borrower is not shopping both of us while we are working diligently to close their loan. Although a big difference with me and other "lenders" that do the same practice is they do not go to commitment right away. I issue approvals not LOI's (which is another topic) and go right to commitment if we have what I call a meeting of the minds. In the commitment it states that the 1/2% or 1% is refundable if I fail to close the loan. We will send it back right away with a tracking number. We have never had an issue with lending this way. Although it is more difficult as a lender to explain to the borrower especially if they have been scammed why we require this.

My question is, if these scammers are so legit, then who can I give my details to without having my identity stolen from me? Thanks

@Zane Bradshaw your looking for cheapest money. this brings in the wanna be borrowers who are easily scammed.. just look at a HML that is local and has a presence like an office and good website those are real .. then you will see what the rates are for the area

HML are

2 to 5 points

10 to 15% interst

anything less than this is suspect for sure

@Jay Hinrichs Thanks again. The thing is I can't seem to find HML where I live. What are your recommendations on doing international HML?

@Zane Bradshaw  read the Scottsman guide all lenders there are REAL

No Jay, not true. Those lenders PAY to be listed there. Many of them are just brokers and not direct lenders. And there certainly are "fee collectors" who have paid to be listed in the Scotsman Guide. There are no FULL PROOF methods for finding legitimate lenders unfortunately. Any PAID listing for hard money lenders is certainly going to have fake lenders posing in there among the real ones. 

TRUE @Corey Dutton . And @Jay Hinrichs , are there international lenders listed in the Scottsman guide? I live in South Africa, so most lenders are not applicable outside of the US unfortunately 

Zane I don't think they have a special section for that in the magazine, but you can look at the company's websites and see where they lend, some do lend internationally. But you are a target for predators in the international lending arena unfortunately, since most of these fake lenders prey on those who seek funding outside of the U.S. 

I know this thread is old, but I never bought the, "You need to put up money to prove you are serious," excuse as an up-front fee. Even if escrowed, with proper instructions to return the money if the deal falls through, due to the lender's fault (and how do you establish that?), it's a lousy way to due business.

Obviously, all borrowers must vet their lenders initially, before they present a deal, and this has been widely discussed here. But lenders too, must develop processes to determine who is "serious" and who is not and it's not up to a potential borrower to do the lender's job or develop those processes for them.

Obviously, any deal can fall through, even when both sides have integrity. When both parties have gone in with eyes wide open, that is, with proper processes that allow initial screening, then the rest becomes a cost of doing business. Should property buyers now ask sellers to put up money to cover costs, in case something unfavorable is uncovered while in contract? Can you imagine?

No lender should expect a borrower to pay for their inability or unwillingness to vet them first, or before there has been any significant time or dollar investment in the deal from either party. If these costs become such a significant burden to a lender, it's their responsibility to develop processes that mitigate them.

Anyone can run their business as they wish. There are just too many lenders out there that don't do this to put up with it.

We do have borrowers pay for Broker's Price Opinions to determine value and Appraisals (as needed). If an inspection is required because of known issues in a particular area, we have the borrowers pay for those also. But this is only AFTER we have the borrowers sign the terms and they are unconditionally approved. We've only had borrowers back out after that point because "they" found something out that made "them" choose not to proceed. (e.g. ARV is not where they thought or someone just listed a property below what they had planned on relisting theirs for...) We've never backed out after issuing formal terms in writing. I think both reputation and borrower intuition are important. Is the lender reputable and do you get a good feeling based on any red flags that may have been thrown?

Corey, that's then just really unfortunate for me then.. I really would like to get straight to business, but funding my projects are a big part of it. I just really wish I could find someone in my country, that I can personally go and meet, who would be able to lend money.. Otherwise, maybe I should plan a trip to the US for 6 months, and maybe do a flip or something.. It's a tough thing to think about.

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I just want to find a trustworthy lender, and know that I can stick with them. 

I think every real estate investor feels this way until a reliable funding source is identified. The private money lending waters are shark infested waters, with lots of scam artists. Do you have any local classifieds in the areas where you are investing? What about real estate investing clubs and meetup groups? There's likely to be lenders hanging out in those places. 

There are local classifieds, however not for hard money lending.. They are more for general loans, that require a lot more aspects that a standard bank loan does.

Also I'm trying to locate a local investors club around me, but can't seem to find one. It seems to be very common in the US though..

Originally posted by @Corey Dutton :

No Jay, not true. Those lenders PAY to be listed there. Many of them are just brokers and not direct lenders. And there certainly are "fee collectors" who have paid to be listed in the Scotsman Guide. There are no FULL PROOF methods for finding legitimate lenders unfortunately. Any PAID listing for hard money lenders is certainly going to have fake lenders posing in there among the real ones. 

This information is incorrect.  In order to be listed as a lender in Scotsman Guide an advertiser must prove that they have funded three transactions in their name in the last six months.  This eliminates 95% of the brokers disguised as direct lenders being listed in the lenders matrixs.  

In fact, Scotsman's Guide is where brokers go to find lenders potentially interested in funding the borrowers they represent.

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