How to Spot and Avoid Hard Money Scams

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By Greg Herlean

Hard money loans are sometimes the easiest and best means for new real estate investors to fund their flip houses. Unfortunately, because they know that new investors aren’t as wise to how these loans work, there are a few hard money scams out there that can get you in real trouble. Not only do they take your money, but they also leave you without funding for the deal you’ve been banking on to make a profit in the coming weeks or months. Because scammers are everywhere and don’t care at all about your real estate business, and because new flippers get caught by these a lot, I thought I’d give a few insights into the various scams out there and how to avoid them.

Identity Theft Scams

Identity theft is the most common kind of scam in any industry. In this case, a scammer will pose as a hard money lender. They’ll then ask you for personal and confidential information – usually as part of an “application process” – but your application won’t ever actually go through. Your loan won’t be approved because there is no actual lender, just someone collecting Social Security numbers, bank account information, and/or credit card information.

Before you give a lender any information about yourself, look them up. Google their name by itself and then Google their name and the word “scam”. Ask other investors in your area about them. Go online and post on real estate forums to ask if anyone’s worked with them before. If you can’t get a good answer from any of this searching and you can’t find evidence that you’re dealing with a legitimate lender, move on…without giving them any of your info.

Fees Due Before Closing

In this case, your “lender” (scammer) will basically pretend to fund your loan. They will have everything in order for your loan to go through at closing and for your funds to be available. However, for everything to work properly, they’ll need you to just pay a simple upfront fee before closing. Don’t fall for this. If a lender asks for a fee before dispersing your loan to you, they aren’t a lender at all.

In this case, find out all of the terms before you sign anything (not that your signature will mean much on a fake loan document, but still). If they ask for an upfront fee, just walk away from them and move on to a reputable lender.

Changing Terms

This is actually the only scam on the list that’s also a legitimate loan. In this case, you’ll still get your funding, but it will also come with an unpleasant surprise. Sometimes called a “bait and switch”, this kind of loan scam works by showing you one set of terms and then switching them out for another right before closing. Always have your attorney look over your loan contract before you sign it, and make sure that the document your attorney approves is the same one that you sign. If the lender tries to change documents, don’t sign anything.

Get References Before You Choose a Lender

Finally, you can avoid many scams just by going with a reputable lender. Get references for lenders from other investors and real estate professionals you’ve worked with. Talk to people at your real estate investment club or investment forums. The last thing you want when you’re trying to get your real estate business off the ground is a scam that robs you of funding or your identity. Go with a good lender, and you won’t have anything to worry about as you continue to flip houses and make profits.

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About the author

Greg has spent the last 10 years focused on the growth opportunities and wealth accumulation through Real Estate vehicles. He has provided management direction, capital restructuring, investment research analysis, business projection analysis, and capital acquisition services which governed and impacted over $700 million in Real Estate transactions. Greg is also a much sought-after platform speaker on the topics of capital development, investment growth through use of self-directed IRA vehicles, and estate planning.

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