Despite plenty of bad press, the vast majority of hard money lenders are legitimate companies that do things by the book. But just as in any industry, hard money has its black sheep. There are scammers who think nothing of robbing people blind by posing as legitimate lenders and then taking the money and running.
How can you know you are dealing with a scam artist? You cannot ever be 100% sure, but certain signs can tip you off. Four of those signs are discussed below. They are offered by Actium Partners, a Salt Lake City hard money firm with years of experience and a solid industry reputation.
1. Lack of State Registration
Though state regulations governing hard money differ, nearly every state requires lender registration at minimum. Some require licensing based on meeting specific conditions. A hard money lender lacking registration, or a state license is automatically suspect.
Some lenders publish registration and license information on their websites. Borrowers can use that information to look up a lender in the state’s database. However, not publishing the information on a website does not mean a lender isn’t legit. So smart borrowers are not afraid to ask for it.
2. Ambiguous or Nonexistent Borrowing Requirements
Hard money lenders are no different than traditional lenders in having certain borrowing requirements. For example, Actium Partners does not make hard money loans for residential home purchases. All real estate transactions they fund must be commercial in nature.
A lender with ambiguous or nonexistent borrowing requirements is just as suspect as one without state registration. Requirements establish the parameters under which a lender will lend. If there aren’t any, there is a strong possibility the lender isn’t legit.
3. Approval Without Appraisal
The next sign suggesting a hard money lender might be a scammer is approving a loan without doing an appraisal first. Understand that hard money approvals are based almost entirely on collateral. If a lender is not appraising the offered collateral, on what is the approval decision based?
The simplest way to put it is to say that not doing appraisals is awfully suspicious. It is too risky for lenders to go into a deal without knowing what collateral is worth. That’s why they don’t do it. If there has been no appraisal, do not sign on the dotted line. Turn and walk away.
4. A Loan Without a Contract
Finally, offering a loan without requiring the borrower to sign a contract is a huge red flag. If nothing else, loans are legal agreements between lenders and borrowers. They are governed by contracts in order to protect the rights of both parties. A lender willing to loan without a contract is crazy. The lack of a contract puts all the risk on the lender. How many legitimate lenders are willing to take it all on themselves?
Do not ever try to apply for a loan through a lender that doesn’t require a signed contract. In all likelihood, that lender is just looking to take your down payment and get lost. Not only will you never see a contract, but you will also probably never see a loan or your down payment.
Fortunately, most hard money lenders are reputable companies that do things above board. They take care of their clients by offering access to fast cash with fewer requirements. But equally unfortunate is the fact that there are always people willing to scam borrowers.
If you are looking to borrow hard money, do yourself a favor and look for the four things mentioned in this post. They could save you from being scammed.