How to Avoid Hard Money Lending Scams

Hard money lending is a legitimate financial service on par with other forms of licensed private lending. Unfortunately, our industry is given a black eye every time a fraudster manages to scam people out of their hard-earned money. We consider it part of our responsibility to educate people about how they can avoid hard money lending scams.

The first thing to know is that legitimate hard money lenders are licensed by the states in which they operate. They have to be if they want to deal in real estate transactions for which they become the registered mortgage lender. Stick with a properly licensed lender and your chances of being burned go way down.

Above and beyond licensing, you can do some simple things:

Check Out Their Websites

Legitimate hard money lenders generally have websites that offer plenty of helpful information. A lender’s website should tell you a little bit about the company and its origin. It should clearly outline all the company’s lending services. It should absolutely offer contact information – which you should verify for yourself.

Most lenders in our business also include case studies on their websites. Case studies offer more information you can research to ensure the lender is legit. Simply put, legitimate lenders invest time and effort into developing and marketing their websites. Scammers do not.

Avoid Suspicious Online Profiles

Online profiles separate from a hard money lender’s website are cause for suspicion. You can find these types of profiles on social media sites and an online classified ads. Stay away from them. Be especially wary of online profiles with typos, spelling errors, and punctuation mistakes.

If you do choose to look up a hard money lender on social media, pay attention to what you find in terms of contacts. Who else on that platform is the lender in contact with? How many contacts do they have? Contacts, or the lack thereof, can reveal a lot about a lender.

Pay Attention to Terms and Conditions

Scammers have a bad habit of offering terms and conditions that seem too good to be true. If you are getting an offer with an exceptionally low interest rate and a down payment requirement that doesn’t come close to other offers you’ve seen, that’s a red flag. Differences in rates and terms among legitimate lenders should not be too drastic.

For example, one hard money lender might offer you a 50% LTV and a rate of 10% on an 18-month loan. Competing lenders should be within the same general vicinity. Avoid a lender that offers you 5% on a 24-month loan with an 80% LTV.

Do Not Pay Anything Up Front

Another favorite tactic scammers love to use is requiring applicants pay some sort of upfront fee. That is not how hard money lending works. Like traditional bank lending, you shouldn’t be putting any money on the table until closing, with the possible exception of appraisal fees and travel costs. Everything else – including origination fees, closing costs, etc. – get paid at closing.

Scammers ask for upfront payments because they are looking to take your money and run. They are banking on the fact that you will pay the application fee and then sit around for a few days waiting for a response. Meanwhile, they are long gone.

Unfortunately, every industry is plagued by fraud, and hard money is no different. But rest assured that most hard money lenders are legitimate businesses licensed by their states. They are registered corporations that do business like any other. If you make the effort to find that kind of lender, you will be all right.