How to Avoid Lending Scams

Question

Mortgage scams and other lending scams are common in today’s tight credit markets. Banks aren’t lending and everyone is looking for private money loans to fund their investments and businesses. When the market demand is high for anything, there are always crooks in the marketplace that try to rip their customers off. In private money/hard money lending, there are plenty of lending scams everywhere you look. Here are 3 tips for avoiding popular lending scams:
1.	Run away from fee collectors: A lending scam is usually present if high, upfront fees are paid directly to the lender.
2.	Obtain references from the lender: Although real references are hard to verify, always ask for references from the lender’s clients. If only one reference is provided, this may be a red flag.
3.	Look for reviews about the lender online: If you find good reviews, but you also notice some very bad reviews, take warning.
Group members, please share your experiences or thoughts on this topic.

Jeff S. · Answer

I’d fully expect to be laughed at by anyone I asked to give me money to prove they’re “serious.”  Considering the dozens or sometimes even hundreds of properties most investors look at to buy just one, nobody has to prove to me they’re serious when they present even one deal for financing.  This is not a game for most borrowers and I appreciate how hard they work.

I also expect, and encourage, all experienced borrowers to maintain a stable of lenders they can pick and choose from as their properties fit. Losing an occasional deal is just a cost of doing business and I don’t expect to be paid for every phone call (Yes, I’m exaggerating).

This topic was also covered at length in this thread: http://www.biggerpockets.com/forums/22/topics/65735-how-to-verify-private-and-hard-money-lenders

There are many problems you can protect yourself from.  Others, unfortunately, you might not experience until it’s too late:

1) Up-front fees are the obvious and most easily avoided for all but the more complicated commercial loans.

2) Hollow Loan Commitments
Some lenders will promise the world to anyone whether they have the money or not, and then pick-and-choose the deals they really want to fund at either the last minute or when they have the money.   The rest are given some B.S. reason they can’t do the loan near the end.

3) Worthless Proof-of-Fund Letters
POF letters are generally not worth the paper their printed on.  Even with an associated bank statement, I can’t believe some sellers still request these.

4) Lender changes terms just before closing
“Oh, we didn’t realize the house was painted blue.  We charge an extra point for that.  Are you still due to close tomorrow?”

5) Loan-to-Own; the most insidious of all scams.
Lender does everything possible to take the property after closing by not cutting you a break for anything.  A few days late on your payment? Closing delayed beyond the maturity date on the note? Permit/city issues?   Well tough, pay up or walk.  Is your lender also in the flipping business?  Some are and almost all are honorable.  Take heed though.  Do I have to quote Ronald Reagan’s view on trust?

Word travels fast in the real estate community.  It pays to belong to some REI clubs and local trade organizations, to do business as locally as possible, and get as many live references as you can.  I would not be a fan of recommendations you receive solely over the Internet.

Jeff

P.S. I’ll note too, that lenders don’t like to work with flakes either.  Backing out of too many deals, late payments, or general ineptitude, will cost a borrower the same relationships.

Joel Owens · Answer

I disagree about the charging the upfront fee makes a  serious buyer.

I can't tell you how many scammers I have seen in the commercial lending arena.

I can say one problem lenders face is they get  a package submitted to them and then give an LOI.Then in due diligence the buyer finds out the income levels and returns were not as stated.

Now the lender wants a bigger payment down from the buyer or the buyer has to get the seller to reduce to the actual proven numbers.

The deal falls out and the lender made nothing.The way to solve this is submit a detailed and verified package upfront.This way you know the numbers you are sending have been verified.

Lenders site confidentiality etc. when doing loans so you can't verify other properties they have closed.

If lenders state money has to be in escrow or  a deposit have YOUR attorney hold in an account the lender does not have access to or authorization to.This way the money can be shown to be there and earmarked for the purposes of the loan.

I am telling you these scammers will do anything to separate you from your money.I know some deals I wasn't involved in where the people chased the lender for 6 months to get back 500k.

Do not let lenders PUFF fees.If they say they have to pay for appraisal then tell them you will pay the appraiser directly.If you are a legit lender and you make money when you close a loan you should have no problem with this.

If however you are a fee generator mill and you hardly close anything or a point taker with upfront fees I can't tell clients to work with you.Some point takers take money to submit apps knowing the lender will not close or that it's a sham.

They usually charge a small amount upfront to entice the victim.Usually 500 to a few thousand.

Dion DePaoli · Answer

Good thread!  A couple of thoughts.

I agree high fees upfront are not a good sign.  Fees in general for either the lender or the broker or both should be success based fees.  That being said, asking for a reasonable fee upfront (commercial loans ONLY) I think is important to get a commitment out of the borrower.  Lenders and brokers who are good at what they do will charge fees to help hedge their time by working with a committed client.  Understanding how those fees apply to the deal and the needed vendors will help judge the merit of the fee.  A good lender or broker is not in the business of collecting fees however that is a great line to use to get a fee paid.

Borrowers should spend a little time getting some initial opinions on their project.  A good deal is a good deal and will be credit worthy at more than just one lender.  Some good brokers will show you more than one option on your project for contrast.  The knowledge of how credit worthy your deal is really falls onto the shoulders of the borrower.  As a borrower if you can not take a step back and look objectively at your project find a friend who can.  When you let your emotions drive your decisions you are more susceptible for deals which are not in your best interest.   This of course is a two way street, borrowers do tend to think their project is more credit worthy than it is many times and real lenders want credit risk insulation.  As a borrower get to know how the deal is being looked at, the good and the bad ask about it even if you do not like the negative aspects.  A good lender/broker should be able to talk about these concepts  in detail.  This is not a discussion to "change their mind" about how they view credit risk, just a fact finding mission for the borrower.  If your cash flow is weak, your cash flow is weak, if your exit strategy is a bit to aggressive or without real plan, just take it as they state.  If two lenders give you similar feedback, they could be right (probably are right).

The other concept which I have seen more lately than before is wacky title vesting to get a deal done.  I think sometimes REI folks try so hard with their own business doing "wraps" and options and all kinds of other unconventional ownership strategies that they tend to think there is more of a market for this than there truly is.  Recently I have seen a hard money  lender convince the borrower that the lender is forcing the property to be sold to a straw buyer in order to take a short pay.  In a logical world, this makes little sense.  A lender should be interested in one thing, lending money and getting paid back in full.  For the most part, who pays the lender and how is not typically restricted.  I think borrowers get confused with residential lending practices by the agencies and everything else.

I love to say "there is no magic in mortgages".  In the world of lending things make sense, do not create realities.  A lender will not take a risk that is greater than your risk, do not kid yourself.  If your cash flow is good, your take out might be allowed to be a little weak.  If you exit is strong your cash flow could be a little weak.  If you have a debt service plan and a wishful exit plan, you don't have a deal....you have a dream.  If a lender offers a deal where the borrower has little skin in the game or just "sweat equity" they are not giving you a loan, they are buying your project which likely you will be removed from shortly.

Dion DePaoli · Answer

Corey,

I agree with the first one you say.  If you were turned down because your deal is not good, be weary of the first guy who says your deal is great.  The second one may not always work out, if you have a good deal....really a good deal then it follows that a lender would approve it.

I know when I size up deals it doesn't take more than a couple minuets maybe an hour tops to figure out if it is good or not.

When desperation drives the car, you will likely hit a tree.

Also, Joel made good points to the LTV funding levels, I do think there is a limited amount of guys out there who will entertain the deal if the home has true equity upside.  I would not lend on it without the borrower's skin in the game personally.  As without their skin, I am the buyer making myself a loan.  I am the only one who can loose in a situation like that.  But as I said, I know there are "some" guys out there that will do it with folks who have proven track records.  I do not think the newbie sees to many legitimate deals like that.

I really think nothing beats not being naive and desperate.  If you were the lender would you honestly do your deal?

Joel Owens · Answer

Lenders who can perform I don't know why people wouldn't share them for the benefit of others.

One of the only reasons I could see is that the private source only has limited funds to give out and the buyer wants the source for themselves.Another reason could be that with more applicants to the source the buyers deals take longer to close or other buyers wanting the money offer better rates to the loan source to get the money.

In these situations I could see why someone would not want to share their sources for funding.

Joel Owens · Answer

"Again, would anyone agree, or disagree, that 100% financing lenders just don't exist anymore? Everything I have seen since 2008 is just a scam."

I have seen 100% financing that works if the LTV and the deal is good enough.Example appraisal has value at 1 million and contract price is for 65% or 70% LTV (650,000 - 700,000).

What I have seen promised and has been a scam is lenders loaning 100% of stabilized value or market value.I have not seen one of those close.

They typically take fees as stated or I have seen them take LARGE DEPOSITS and then delay closing the deal and never close but use the money for 6 months to make interest and money for themselves.

Corey Dutton · Answer

Dion,
On that note, if you are instantly approved by a lender and you have been previously declined because the deal is tough, this is another reason for instant suspicion. If you are instantly approved, they give you a Letter of Intent, and then ask for an upfront fee, you are almost certain its a scam.

Dion DePaoli · Answer

I agree, 100% finance is just plain silly to think you can get it.  For the most part the US is still a declining market and at 100% on what is likely majority investment properties, the lender would have no insulation against any value deterioration in the market.

Under that same concept, I would presume many victims suffer from self-inflicted wounds.  The get emotionally attached to their deal and only believe it to be a win, win.  Why wouldn't a lender give me 100% finance at 10% and pay for all the repairs when I don't have any exit strategy in sight except, "I am going to sell it"?

I think good lenders charge fees.  Perhaps not all, but it is not uncommon.  Nothing will ever beat being an informed borrower and objectively look at your deal.  Perhaps even, if your lender can not tell you 3 things wrong with your deal, you should run.  I can always find a list of reasons why I want more risk insulation.  Lenders are conservative by nature, borrowers are aggressive.  Don't be confused.

Corey Dutton · Answer

Jeff,
Great comments. One hard money lender out here in Utah offers 100% financing, no money down. They may do one deal a year where they provide 100% financing so then they can advertise and say they do 100% financing. But how they make money is that they require people to submit a $500 evaluation fee. I was told they collected 27 evaluation fees in January. All of those people gave the $500 because they were hoping and praying that the 100% financing, no money down was true. Unfortunately, the company probably funded 1-2 of those 27 loan requests and the rest of those people lost their money. The part I don't like about it, is that its just too good to be true when something offers 100% -- I mean, there's always a catch. Would everyone agree that 100% financing lenders just don't exist anymore? Everything I have seen since 2008 is just a scam.

This company is out there actively promoting its program to 100% financing, no money down to poor fools that are trying to get in the real estate game and have less than $1,000 to do a deal. Its these people that fall victims to these types of schemes because they have a dream. It's too bad.

Again, would anyone agree, or disagree, that 100% financing lenders just don't exist anymore? Everything I have seen since 2008 is just a scam.

Todd Hoffman · Answer

Jeff, good comments and reference.

One question (Admittedly I am fairly new to hard money lending). In CA do hard money lenders process loans without charging upfront for the appraisal or BPO or other valuation method? In Denver metro area all the “big” hard money lenders I know of charge $300 or more for the appraisal (or BPO or equivalent- which is more than what we charge for our valuation).  Paying an appraisal (or equivalent) fee would obviously prove seriousness.

This post is only my personal opinion. I make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information. None of the content should be considered a binding offer or agreement. Any terms or rates mentioned are subject change without notice. I am not an attorney nor am I a legal or tax professional. You should consider seeking professional legal, tax and other professional advice before acting.

How to Avoid Lending Scams

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