When you have a fix-and-flip real estate business, hard money loans are some of the better loan options available to you. Hard money loans minimize the amount of money a flipper has to use personally to fix up the property. However, you never want to enter a deal with an unreputable lender, so it may help to familiarize yourself with some hard money lending red flags.
Up-Front Fees
Hard money loans come with some fees, but you should never have to pay any fees up front until you sign the loan documents. If a lender asks for an application fee or a due diligence fee, they’re probably a fake lender, and they’ll disappear once you hand them the money. Standard fees you can expect to see from these companies are origination fees, inspection fees, discount point fees, and appraisal fees—all of which shouldn’t be due until you officially sign the documents.
Terms That Seem Too Good To Be True
A bait-and-switch scenario means the lender isn’t being completely honest with you, perhaps promising you things that will never be fulfilled. Read over your documentation; if there are very low interest rates, spelling errors, vague terms, or no required collateral, do not sign the document, because this could be a bait and switch. Unfortunately, the only way to catch a bait and switch is by thoroughly going through the paperwork before signing off and handing over the money.
Request for Personal Details or Lack of Information
To avoid scammers and thieves, look for hard money rehab loans on legitimate websites; if there aren’t many company details or a way to contact the business, it’s probably a scam. The big giveaway is if the company asks you for personal information such as your address, birth date, or Social Security number. This type of information typically remains private in a hard money deal.
There are several other red flags for hard money lending, including the lender not having a license, an offer of 100 percent financing, a lack of a website, or emails from generic accounts. Remain alert when entering loan deals; thoroughly do your due diligence; and comb over every detail. Mistakes can happen, but it’s best to prepare yourself for instances such as these just in case you come across a fraudulent hard money lender.
