10 Glaring Red Flags That Indicate Your “Great Deal” May Be a Costly Scam

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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.

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Financing

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% 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.

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% 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 downpayment, 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.

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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.

Related: The Real Truth About How Title Insurance Works

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.

Extremely LOW Rates

The least expensive way to fund a property is a traditional mortgage. Those rates currently (as of March 1, 2016) hover around 4%.

A hard money lender isn’t going to give you a loan for 4% — he doesn’t make any money at that rate. He also isn’t going to loan for 2%, 3% or even 8%.

Hard money loans right now are around 12%-15% PLUS 2 or more points. Hard money costs a lot. It’s meant to be a quick fix, not a long term solution.

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.

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]

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.

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!

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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.

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.

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.

Related: 4 Types of All-Too-Common Real Estate Scams Making Headlines

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.

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Remedies

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.

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 upfront 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.

Reasonable Deposits

Earnest money is a real thing and is typically 1% 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.

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.

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.

Related: It CAN Happen to You: How to Guard Against Dangerous Real Estate Scams & Squatters

Protect Yourself

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.

About Author

Mindy Jensen

Mindy has flipped numerous homes in the past 10 years, one at a time and doing much of the work with her husband. She lives in Longmont, CO, and is always looking for an ugly duckling to turn into a swan.

14 Comments

  1. Ronald Perich

    Especially today, it is critical to research the backgrounds of those you are about to do business with. There are posts here on BP all the time about people looking for a JV partner. “Hey, give me a call and we can partner on this deal!”

    I saw one that didn’t seem right (they were brand new to BP) and asking for a JV partner on a 2%-rule deal? A quick Google search showed this poster to probably have had a checkered past. So I asked how they were going to screen their potential partner to make sure they weren’t going to get scammed (a reverse psychology thing). Crickets.

    Not saying a person cannot change their ways or find a right path. But don’t fall for something that sounds too good to be true just because someone here on BP puts it out there. Con artists and scammers know exactly what buttons to push and will take advantage of naivete or emotional excitement to make one act in ways contrary to their own best interests.

  2. Luc Boiron

    Great article, lots of useful tips to make sure you are dealing with a legitimate lender.
    Is there really no insurance for loans though?
    Here in Canada, any mortgage over 80% LTV (High ratio) needs to be insured. The borrower gets the insurance premium added to the mortgage balance, and the insurance protects the lender in case of the borrower’s default. The higher the LTV, the larger % the insurance premium. 5% down is much more expensive than 15% down.

    • Mindy Jensen

      Hi Luc.

      Thanks for the opportunity to clarify my statement. YES, Private Mortgage Insurance is a thing here in the US, too. BUT it isn’t charged upfront. I’ve seen people posting that they were required to pay $600 upfront for insurance on the loan. PMI will be charged for almost any loan with a higher than 80% LTV, but it happens at the closing table.

      Any upfront fees other than Appraisal Fees should get extra scrutiny.

      Thanks for reading!

    • Mindy Jensen

      To be fair, I am talking about GLARINGLY bad English and spelling. Some people are bad at spelling, and misspell a word here and there. Some people may use the wrong verb tense from time to time. What I mean is English that is so bad, you have a hard time deciphering what they are even trying to say.
      Thanks for reading, Timothy!

  3. kara haney

    this may be the wrong place but it refers to condos and coops – only

    I just passed up two “fabulous deals” one was a coop where the sponsor still had a lot of apartments –

    1st. the maintenance was really cheap but the sponsor was refinancing the mortgage to get operating funds to keep maintenance low by not paying for all services – therefore the ROI was better, but principal was never paid down and if there ever is a problem rolling the mortgage – there will be big problems.

    2nd, condo really nice unit low fees and taxes – but I saw some first floor units too – one was water and mold damaged – did some google searches and found it was built on a wetlands and the town was thinking of revoking the CofO – but didnt because it didnt know where to put all those renters. it may be very profitable for a while but at some point if the town pulls 1/3 the C of Os or someone goes to the health dept and it gets condemned – your fees will go up by 33% – and it isnt a nice thing to contemplate it is so unhealthy – so forget it. RE agents like to say – what do you care – you only own your unit – it is a great deal – but agents focus on the closing – when they get paid….well yes and no – in coops/condos you own and are liable for the whole bundle with everyone else – so if the roof flys away the whole thing will be paid by you (pl.), and if there are only 3 owners left out of 100 – well you have a pretty big problem.

    Squatters are a very big problem for some areas – and specific localities deal with it differently maybe very “permissively” in some – also in certain European localities – so be aware of what can happen…we are always told we dont have to worry about these things in TX and maybe we dont – I only know that in the NE you do!

  4. Bill Sawyer

    I was recently lied to by a seller/agent about the amount of the HOA fee on a four unit property. He said it was $1600 a year when it was actually $8000 a year. I had already paid for a home inspection it cost $850. I realize that I didn’t do my due diligence and check with the homeowners association about the HOA fees. However after some negotiation I convince the seller to reimburse me for the cost of the home inspection. I will gladly take any advice on what else I can do in this matter .

    • Mindy Jensen

      Hmmm. The way you wrote seller/agent makes me think the agent owned the property himself. If this is the case, and he grossly misrepresented the HOA dues on purpose, you could file a complaint with you state’s real estate licensing board.

      If this isn’t the case, and the agent was just going by what the seller told him, I think you have done all you can.

      Either way, learn from this and always check for yourself.

  5. Carlos Rodrigues

    Thank you for this great article, Mindy.

    As a new investor, these are all great tips for me. Especially, about being aware of extra charges and “can’t get inside scams”. I will reaffirm your point about doing your own research. In the short time that I have been doing this, I quickly learnt the importance of knowing the numbers and of being prepared.

  6. Bart H.

    I almost went with a deal near Hilton Heal Island that was too good to be true Turn out to be a scam on Craigslist. Moving right along to the next deal I thought was a winner. Seller was trying to get out of inherited property by selling two – 3br/2b homes for one price. Cash on cash return was over 50%. Hmm, after checking things out back in forth via email, it was time for me and my contractor to physically do an inspection. To my surprise, both places needed significant work, thus lowering my Cash on cash return. In the end, I had to turn down the deal.

  7. Danielle Watson on

    Also, one that wasn’t talked about is a “Flip House.” When a flipped home is sold in less than 6 months of its original purchase, (at least in Nevada) two property appraisals are needed. So, when the first one comes in right where you need it for your loan, and you think you are set and ready to go, and the second one doesn’t come in at the needed evaluation (and you have to pay for two appraisals by the way), guess what, the “good faith” money is kept by the seller because you didn’t make it in the time needed, and lose your deposit. Not only did my daughter pay for both appraisals which was over $1,000, she also lost the other $1,000. To me, this is all a scam. Buyer beware for sure, and especially on Flip Homes!

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