Hard money lenders can be an excellent source of capital for real estate investors, but it’s important to know how to tell if they’re legit. Claims like “we’ll lend on anything” or “we don’t require a down payment ” are major red flags that should make the investor think twice before using that lender. Below are a few guidelines to follow when looking for your next legitimate hard money lender.
Ways to Tell if a Hard Money Lender is a Scam
Do they claim to fund anything and everything?
If the lender in question is claiming to fund any project with little information, that should be a red flag for hidden fees and unreasonably high interest rates. Hard Money lenders typically fund 65-85% of a project’s value. If they’re claiming to fund more than that, get more information on their rates and their history as a company. If you’re still unsure about their credibility, research their reviews online. If they don’t have any, they might not be legitimate.
Are there too many upfront costs?
If your prospective hard money lender is asking for an unusually high contribution upfront so that they can fund your project, that’s a huge red flag. If they are asking for a large wire of money for the application and as down payment, be mindful of where you are sending the money (i.e. a bank account vs. Money Gram). You should double check with their credentials, see if they have a legitimate website, references, and recommendations on their site and if they are willing to meet in person before the deal is made.
Are they avoiding giving more information?
If this hard money lender is established they should be willing to give you their rates upfront, how many years of experience they have, how many loans they’ve closed in the past, and where their capital comes from. On top of that, if they are only communicating via email and aren’t willing to have a phone call, they could be a scam looking to receive a deposit and leave you hanging.
Ways to Tell if a Hard Money Lender is Legit
Are the average interest rates too low?
If your prospective hard money lender is offering you an interest rate that is below 10% it could be a scam! Hard money loans are known to be riskier than traditional loans since they put little emphasis on a borrower’s track record and credit history. If the interest rate is too low, this lender might be charging you the difference through hidden fees.
Can you find honest reviews and testimonials?
Make sure the reviews are relevant to their industry and what they offer. If they are extremely vague and do not mention any specific service or employee they might have been generated online. If a customer is happy enough with their experience to take the time to leave a review, it’s unlikely their post will be as vague as, “Great company, Good work.” Look for details like, ” Jane did an excellent job explaining the loan process I felt comfortable and well informed from underwriting to payoff.”
What is their experience in the industry?
If your prospective lender is newly entering a market and wants your project to be their first deal you should investigate their background and experience in other markets. If they have been successful in other markets, without a doubt they should be able to provide you with credible information on their history as a lender and a rundown of their past lending metrics and guidelines. If they are a brand-new lender, you should investigate the industry experience of their team and how they can guarantee your construction draw money will be available – through in-house funds or capital conduits. If a lender runs out of capital, your project could be left out to dry.
Do they ask for background checks?
Background checks can be a benefit and a drawback for some investors considering hard money lending. Initially, background checks can seem tedious, invasive and an overall turn-off for some investors because it parallels the regulations and assurances required by traditional banks. if you’re leaning towards a hard money loan, you’re trying to avoid the tedious, invasive, and the longer processes that the banks use to fund investment projects. On the other hand, a background check takes little time and confirms a lower risk to the lender. This simple information allows you to proceed with the fast closings and favorable terms of a hard money lender.
Looking for a trusted and secure hard money lender to fund your next deal?