After thoroughly combing through over 30 articles, videos, and forums (links below) on the subject, I’ve come up with a meta-analysis, if you will, of the common scams and red flags you may see in a private or hard money lender. This is not legal advice, so seek legal counsel if you’re concerned prior to moving forward with a lender you think is suspect. Speaking of, let’s start with the first scam:
The “Catfish” Scam
If you aren’t aware of the hit MTV show “Catfish”, or Big Ed from 90 Day Fiance, then you’re missing out on some amazing trash television. If you get catfished in private lending, however, it could cost you more than productivity, time, and brain cells. Let’s talk about some ways you can get hosed by Catfish private & hard money lenders: If it’s a scam, they’re going to be after your money, so let’s start there with Escrow Wire Fraud: Never trust email or text links for wiring instructions, or send money online (no western union, venmo, zoom etc). Verify wiring instructions with a live person on the phone from a phone number that didn’t come from the lender. Consider any email or text suspect that’s requesting a change to wiring instructions you already have. Do not send money to anyone other than a title company. Verify the title company yourself. Check their reviews on Google (more than just the 1st page), the BBB (Better Business Bureau) and in Ripoff Report. Check wiring instructions - do account names match? Does the title company look legit.. Look at their office on Google street view and their website. Does it look like a Nigerian prince learned how to html code or is it too generic?
That’s how to avoid sending money to the wrong place, but what about the actual lender in general? Usually where there’s smoke, there’s fire, so consider the following as massive red flags:
-No connections or friends to show on online profile
-Contact info is a “whatsapp” number
-No professional website
-Stolen photos (do a reverse image lookup)
-Can’t find lender online anywhere besides where they contacted you
-No references, or none of the references are reachable
Watch for identity theft on your loan applications, don’t give sensitive info out before verifying who this person is and if they’re legit. 33% of US adults have experienced identity theft, which is more than twice the global average. Obviously we have some suckers in our midst, don’t be one. Identity theft was mentioned in many of the sources I analyzed for this piece. Onto the next scam:
The Upfront Fee Scam (The Fee-collector lender)
If there’s one scam that almost all the source material pointed to unanimously, it’s this one. If your private lender asks for a fee in advance of giving a loan, sometimes disguised as “Application Fee, Origination Fee, Legal Fee, Administrative fee, Environmental Fee, Due Diligence Fee, Documentation Fee, Underwriting Fee, Appraisal Fee, Inspection Fee, Life insurance fee (they want you to buy a life insurance policy that would pay your loan off in the event of you dying), Title fee, Trust fee, Loan Insurance fee (There is no such thing as "loan insurance" for any unregulated lender), Transaction Fee, Closing Fee, Point fees, and last but not least, Financial guarantee surety bond certificate fee.” It’s a catastroph-fee! Rule of thumb: Lender fees are handled at closing, and the majority of these won’t be charged at all, certainly not up front. If they must have upfront fees, escrow them with your title company and have all funds held in escrow instead, if that doesn’t satisfy them, run. Watch out for prepayment penalty fees, usually these aren’t upfront but just throwing that out there. Onto the next scam.
The “Terms Too Good” Scam
The following terms are generally too good to be true: Anyone offering/guaranteeing full-funding (100%) without taking additional collateral or skin in the game (Most private or hard money lenders will fund a max loan equivalent of 60-70% of the appraised value of the property in its current state.) No Doc loans missing a mortgage, deed of trust, or promissory note depending on state (those could warrant an entire article on their own) are a no-go. Low interest rates (anything well under 10% should raise red flags, the majority of private lenders start at 12-15% on the low side, and that’s before fees/costs.) Lenders offfering an ultra-fast closing or approval is generally a bad sign. Long loan lengths should be a massive red flag, most private lenders are not going to give out a long term loan, if you see anything over 30 years, run. If they don’t investigate your deal very much prior to approval, that’s sketch, however, that doesn’t mean you should pay them for an appraisal up front. If they are serious lenders they should handle the cost of doing a BPO (Broker Price Opinion) on a property themselves.
“Bait & Switch” almost got it’s own scam category, but I’m putting it under this one because it’s literally a private lender offering some combination of the unicorn terms detailed above, knowing you’re under contract on the property, and then switching on you at the last possible second when it’s too late to switch lenders and they’ve got you by the nuts and you’re in contract to close. At this point, they update terms to be more favorable for them assuming you’ll be cornered into accepting them. Here’s some additional takeaways and random tidbits:
A lot of these articles reference generic email addresses as a red flag and while I agree with this sometimes, I freaking love my Gmail. So if everything else is legit and they have a free email address, I think it’s fine.
Even though I don’t charge them, I do see a lot of lenders charging points on the loans which is basically a % of the total loan amount being paid upfront. I hate this because it just complicates everything and makes it more difficult at tax time. Typically the smaller the loan, the higher the points charged. You don’t get these back, this is just another way for lenders to nickel and dime you. We could get into annualized vs non-annualized or using the settlement statement to cut out the middleman and go direct to the actual private lender for next time, find out how much the broker made, or negatively amortizing loans or lending laws but I just don’t think that’s in the scope of common scams, so you can look all that up on your own or maybe I’ll make additional content. Thanks for reading.
Places you can report scammers to: Attorney General, your state Division of Finance, State Banking Authority or Supervision, CFPB, the F.B.I is usually interested in these types, Fair Trade Commission, Postal Inspector if the mail was used, don't forget you local DA. HUD has a direct fraud line too. Don't forget small claims court with "individuals" lending.
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