Real Estate Investors often feel frustrated by a lack of funding.
Which may be why private money investing scams are on the rise.
It can be easy to fake an identity, learn the lingo and scam someone online nowadays, so how do you avoid it?
It’s as easy to avoid scammers once you know the red flags.
Red Flag: Unknown Lender
You might get bombarded with emails and messages from potential ‘private money lenders’ who write essays saying why you should invest with them.
So how can you tell if a lender is legitimate? Well, the first thing you should do before pursuing any lender is check for their business name on Financial Industry Regulatory Authority site, or Better Business Bureau to make sure that the business is real and not a fake google listing. You can also use FINRA BrokerCheck, a free online tool to get information on brokers and investment advisers as well to check their history.
Once you check with FINRA, you can also look over reviews. You can check reviews from yelp, google, and facebook pages to see what other people’s experience with the lender was and see how they handle another loan. Keep your eyes peeled for spammy looking reviews that may have been copied and pasted by a scammer.
Some scammers may also say they work within a large company, so call their local office and see if they know of the person you are calling about. A lender that is legitimate should be able to easily contact you through multiple means, such as phone, email, and in-person meetings to discuss your loan needs.
By doing a bit of research you can ensure that it is a real legitimate business, and avoid a lot of headaches down the line!
Red Flag: An Offer Too Good To Be True
For any real estate investor, doing your research is necessary. Many can fall into private loan scams by making an offer that is just too good to be true. For the first time investors looking at the interest and term rates for hard money, and private money loans may be a bit shocking.
For legitimate lenders, the loan value is tied to the property or even the after repair value of your investment. Hard money lenders therefore while having faster processing times will have much higher loan rates than a traditional mortgage.
Scammers are quick to take advantage of first-time investors that don’t know the industry standards.
Is a lender offering you a 100% loan with only a 2% interest rate? They are most likely a scam. Scammers will say anything you want to hear to get you to say yes, so knowing industry best practices always helps.
Know that even for a private money lender in arizona loan amounts can fall anywhere between 50%-85% of a home’s value and usually have a 7%-15% interest rate. Other private lenders offering traditional mortgage terms for a asset-based loans may be a sign of a scam.
Large up-front fees
Another way that scammers try to take advantage? By offering large up-front fees.
This is where the scammer makes money. While documentation and administrative fees are common, if it is an insanely large one time fee, it may be a red flag of a scam.
While legitimate lenders will charge processing fees, none of that will be necessary until the closing day of your property. Until you have a closing date, and are working with a title agency, or they will walk you through the processing of your loan first.
Never pay large fees to a lender who has not looked over your property.
You can avoid this red flag by not give anybody money upfront, especially before the closing of a deal. You could also ask a lawyer to read the loan document.
Lawyers can tell if a loan deal is legitimate and will make sure that there are no hidden clauses that can harm you later on.
Red Flag: They Rush You For an Answer
Scammers will tell you that the offer is for a limited time only, or that you have to respond by a certain date. If a lender says that their investment opportunities are limited, consider it a red flag.
Some scammers try to use the market to their advantage, and while getting an investment swooped out under you can be disappointing, being scammed is far worse!
Real estate investors work very quickly, and even if offers are pending on a property is it worth waiting for a proper lender (or sorting out a great lender beforehand) to make sure you can make the right move on an investment.
While every investor wants a lender that can approval instantly, and that is responsive to their messages, a scammer is more likely to put the pressure on you to make the deal. A legitimate investor will still be there tomorrow.
Scammers use every trick in the book to make you feel guilty, so a barrage of messages, or texts non-stop may be a sign that this person is a scammer. Legitimate lenders offering private money loans can wait to close a deal.
Legitimate lenders will be quick to respond quickly and offer you clear channels to communicate with them, they also can work with you to set a proper deadline and closing date.
Watch out for private money scams:
Finding funding for your real estate investment should be easy, once you know how to avoid the scams. Hard Money loans are based on asset value, and the After Repair Value of properties, which makes it easy and fast to fund investments. You can easily avoid scams of fake lenders by doing your homework and working with the top lenders in your area.
For real estate investors looking for the best funding options keep your eyes peeled for these red flags.
- Unknown Lender
- Offer Too Good To be True
- They Rush You For An Answer.
Is there a red flag from scammers that we missed? Let us know!
Catherine Way is a marketer and content creator for hard money lenders, commercial Realtors, and more. She loves to find new ways to connect with people and provide valuable information about the ever-changing real estate markets. She currently writes and creates for Prime Plus Mortgages – Az hard money lenders
*David’s note* Thank you Kit, avoiding private money scams is a great skill to have!