Let’s check out the maxims of the Hard Money Pirate’s Handbook… take an insider look at their tactics… see what the red flags are to recognize them… and find out what the alternative solution is to their scams so they don’t rip you off:
Let’s face it; not every lender is created equal. It seems like new hard money lenders pop up every week that are simply out for a quick buck and don’t have their client’s best interest at heart.
I’ve been at this game a long time and have seen so many scammers try to rip off investors in any way they can. But we can beat them by bringing their sketchy practices out to light so that you investors are better protected. These Hard Money Pirates are nothing but a headache for both you and me, especially when we at The Investor's Edge need to help scammed investors work their way out of an investment mess.
So let’s talk about the five most common money traps hard money scammers use and what you can do to stay out of their clutches.
What’s a Hard Money Pirate?
Okay, so this is obviously not an industry-standard term (though it totally should be), but a Hard Money Pirate is a lender that’s in it solely for the money. Or rather, they’re strictly in it to take your money.
Hard money pirates rarely have long-term clients because they don’t need them. Their line of business is preying on new or inexperienced investors who don’t pay attention to the terms or know about better, credible lenders out there.
To them, any loan is a win-win. If you can pay off your loan with them, you’ve most likely paid some seriously exorbitant fees, so they’re happy. If you can’t pay off your loan, then they get your investment property that’s most likely in some state of rehab and can most likely be flipped to another investor for a profit.
Five Simple Ways to Prevent Yourself from Getting Ripped Off By Bad Hard Money Lenders
Let me say first that not every one of these is a hard and fast rule, as many pirates will be sneaky enough to skirt around a few of these and make up for it another way. But when your potential lender checks off enough of these boxes or gives you answers that set off alarm bells, then you know it’s time to get out of that call or meeting ASAP.
Avoid Lenders That Have High Minimum Down Payments
Why? In my opinion, having a high minimum down payment requirements signifies a lack of trust with the client. I’ve seen pirates that have insane down payment requirements and use that as a way to get as much money from you as possible. The thinking behind it is: If you have a lot of money to put down now, we can probably get more out of you later.
While The Investor's Edge has no minimum down payment requirement for our direct loans, we’re the exception to the rule. Most lenders will want something around 20% – 25% down. If you see anything higher, question whether this lender is really interested in working with you or is just in it to rip you off.
Avoid Working with Lenders That Don’t Want Details.
Why? Yes, it would be so much easier if hard money lenders didn’t want so many details about your scope of work and contractor lists. But all of those detailed submission requirements are there for your benefit as much as ours. Credible lenders will have programs for their clients that put them in touch with experienced project managers who will go over their scopes of work with a fine-toothed comb and ensure you’re getting the best deal possible without any blind spots.
On the other hand, Pirates don’t care if you’ve got a sound plan. They want you on the hook for the loan. If you fail, even better! They’ve got a new investment property.
Make Sure the Terms are Clear and Easy to Find
Why? The less-informed you are, the better it is to take advantage of you. Hard money pirates will make the terms of your loan vague or hard to find until it’s too late. I’ve also seen contracts that have closing costs explicitly laid out so that everything looks legit, but come to find that third-party fees, which add up fast, are MIA.
Your lender should be able to give you a breakdown before signing about your closing costs, interest rate, processing and service fees, etc. In addition, look for the breakdown of fees associated with the title, agents, hazard insurance, utilities, and transfer taxes. If these are missing, then ask for them before signing. If it starts to feel weird or your lender won’t provide them until you sign, it’s probably best to back off.
Ask About Pre-Payment Penalties
Why? Some lenders will have pre-payment penalties which help mitigate the money lost in interest from you paying off your loan early. These are pretty standard in the industry, but only to a point. Seeing a pre-payment penalty for a loan paid off within the first three months of funding is normal. Seeing a pre-payment penalty for a loan paid off one month ahead of the final deadline is not. If you’re seeing penalties that go into the last 25% – 30% of the loan term, look somewhere else.
Do the Work and Deliver On Time
Why? Pirates make the biggest chunk of profit on the loans that default. In fact, they’re betting on it, which is why their terms or application requirements will be so lax. If you’ve gotten yourself mixed up with a Hard Money Pirate, then the easiest way to come out ahead is by doing the work you need to do to get the house sold profitably and then paying off your loan in full.
In many cases, foreclosing on an investment property is avoidable if you do the work to plan out your rehab ahead of time. Don’t let their profit increase become an inevitability if you can; use any resources or tools available (check our resources if you want some stellar help) to get this property sold and get out of that terrible partnership as quickly as you can.
Getting scammed sucks, especially when you’re so passionate about getting it right. When you’re ready to look for a hard money lender, keep this guide handy so that you know what red flags you need to pay attention to that can kill your profits. The more informed you are, the less likely the chance you’ll lose everything to a Hard Money Pirate.
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