Do "Hard Money" Scams Exist?
Is The Investor's Edge a Scam?
Normally I would leave the issue alone and just let the sleaze balls be sleaze balls, but investors I talk to keep getting taken advantage of by hard money scams and rip offs. And there is a great deal of misinformation available online. We want to address these questions, because The Investor's Edge exists to help real estate investors get funding for their deals and as a lender we deal with many of the same types of complaints as other institutions. Think about it, financial institutions and lenders deal with money, and there are bound to be misunderstandings. Look at reviews for any type loan provider. We want our borrowers and members to feel good about doing business with us, and tackle the topic head on.
I also wrote this post to answer questions I get from investors about the shady and confusing practices used by some of the hard money lender companies out there. Let’s just go ahead and address the issue head on first, and then below I can give you some tips for recognizing actual scams.
The Investor's Edge Complaint or Misunderstanding #1
You HAVE to Enroll in a DHM Training Program in Order to Get a Loan
Simply put, NO. Enrollment in one of our training programs is NOT a requirement to get a deal funded. We extend traditional hard money funding to borrowers who are not enrolled. We do have a variety of loan types and funding programs though, and in order to obtain some of them membership may be needed.
When I began my career as a real estate investor, one of the biggest hurdles I needed to overcome was getting my first deal funded. I had a great deal, but lender after lender turned me down because I had never done a deal before. Talk about frustrating. I founded The Investor's Edge specifically to solve this problem for first time house flippers. And as a company it is easily one of our favorite aspects of this business, working with new investors and watching how a completed, successful first deal changes their lives. We LOVE it!
We soon realized a problem though: new investors require much more support and help than experienced investors. New investors don’t necessarily understand the importance of timelines or what various terms mean. They often improperly word contracts. And most of all, they don’t know how to recognize a great deal or how to walk away from a bad one. In order to pay for the support staff this requires, we created special programs for the borrowers who are most likely to need the help (i.e. new investors, those with bad credit, and people wanting to get no or low cash to close). If you want 100% financing you’ll need to use the tools and resources we created to help you find and value that property, which means you will need to enroll. You can’t value properties the same way as lender who is asking for a big down payment to mitigate loss. We take on a great deal of risk with those, so using our methods is crucial.
The great news is that if you use the tools and resources provided with your enrollment, you get better results. Deals brought to us by those enrolled are over 60% less risky, over 17% more profitable and on average require $5500 less cash to close than the deals we fund for those not enrolled.
Let me state it again – we can fund your deal with a traditional hard money loan requiring a downpayment if you are not enrolled. Just submit a loan application for any property you have under contract and we will match it with the best funding option available to you.
The Investor's Edge Complaint or Misunderstanding #2
“They Just Take Your Money and Then Never Fund a Deal”
Really? We make money on the loans we extend, so why wouldn’t we fund a deal? We have capital waiting to be put to work. If you enroll in one of our programs, the payment is for all the help and resources you get by being a member. It is NOT a guarantee that we are going to fund any deal you bring to us. As I mentioned above, many new investors do not know how to find a good deal, let alone one that would qualify for 100% financing. Not only does the deal have to be profitable, but it also needs to meet our risk guidelines. We DO turn down some deals. However, by speaking with other hard money lenders, I’ve discovered that we do not turn down a higher percentage of deals than they do.
When we get a complaint that we’ve “turned down deal after deal,” we can go look at records, and those tell a different story. Usually only 1-2 loan applications (if any at all) have ever been submitted on the account. I suspect that they could be entering a large number of deals into the calculator and not getting the numbers needed, so they just give up instead of using resources (like trying to invest in real estate without ever leaving the house). We did a survey last year of real estate investors (not just our members) and discovered a significant difference between new investors and experienced, successful investors. New investors tended to use 1-2 property finding strategies verses the 10+ being used by those making their living from investing. I will tell you that the types of deals that qualify for no and low cash to close are NOT found on the MLS, and unless your real estate agent specializes in fix and flip, these types are not the kind they would know how to find either. This takes work, patience and ingenuity (plus our new property finding software is amazing as well).
Finding this type of deal is tough. Many of the deals that we “turn down” do in fact qualify for funding through our other loan programs; they just don’t qualify for the no or low cash to close. For no or low cash to close everything—the property purchase, rehab costs and loan costs—all need to total less than 70% of the ARV. A review of our loans in the last year shows that over 25% of the borrowers using our no and low cash to close funding needed to bring $2000 or less cash to close.
If you are going to enroll (highly recommended), do so to LEARN, not to get funding. Listen to what we say. Learn from the bad deals you find that we turn down. Learning to recognize this very specific type of deal will pay off for you time and again no matter which lender you use. The funding will just naturally follow!
Signs It’s a Hard Money Scam
A hard money scam company will attract hopeful investors with rates and lending practices that sound too good to be true.
To easily spot a rip off, ask yourself these three questions about a lender:
Question 1: Are their rates way too low?
First of all, if a hard money lender doesn’t clearly post their rates, run.
That being said, interest rates on a hard money loan should be between about 12% and 18%. In cases where the investor has really good credit, you might see rates as low as 10%. And there are always additional fees with every loan. We disclose all of our fees upfront.
Beware the Bait and Switch Technique. Some dishonest lenders know exactly how to trick their investors, by enticing them with extremely low interest rates to get them in the door. After assuring the investor that they’re getting a great rate, they wait. When the deal is about to close and all the paperwork signed, this unethical lender will greatly increase the rates in their contract to much higher than normal. At that point, the investor, having everything all set up for the deal and not enough time to find a new lender, will likely agree to the inflated rates.
Question 2: Do they approve loans WITHOUT evaluating the property?
Legitimate hard money lenders will assess the risk involved in a loan before finalizing the loan approval. They usually do this by performing:
- a thorough analysis of all of the loan application details (which takes a couple of days), as well as
- a physical evaluation of the investment property
Because hard money lenders are already lending in higher-risk situations that traditional lenders won’t touch, it would be insane for a real lender to give money to people without first doing their own homework on the deal.
So if a hard money lender approves your loan without some kind of analysis or evaluation of the subject property . . . something is seriously fishy.
Question 3: Do they claim they will fund ANYTHING?
An honest hard money lender will always have to turn away applications for deals that look too risky. That’s just the way it is.
Rip off lenders try to lure investors with outrageous claims that they will fund every deal.
The DoHardMoney website says “Every Good Deal Gets Funded Guaranteed.” And that’s exactly what we mean, every good deal.
Signs a Lender is Legit
Customer Reviews and Testimonials
- When hard money lenders do their jobs right, they help investors make money. I don’t know if you’ve noticed, but helping people make money makes them very happy.
- So you can expect that a good hard money lender will have lots of positive customer reviews and testimonials on display.
Responds to Customer Complaints
- Anyone who has ever owned a business knows that even the best businesses will have dissatisfied customers and negative reviews. As they say, “You can’t please all the people all the time.” And as I mentioned above, financial institutions and those lending money tend to have negative reviews because they deal with money. People don’t like to be told they cannot get a loan. But remember, when we are turning down a loan we are not turning down the borrower, we are just declining to fund a specific deal. That borrower can still go and find a deal that qualifies and get the funding they desire.
- However, how a company addresses complaints will tell you a lot about how they do business.
My Reasons for This
You might be wondering, “Why would you be teaching me how to look at other hard money lenders, Ryan? Aren’t you a hard money lender yourself?” Good questions.
First of all, there are a number of reasons why a hard money loan with DoHardMoney might not work for every investor. We get that. We don’t lend directly in every state, and, like I talked about above, we may have to turn down a deal if it doesn’t measure up to our standards.
The Investor's Edge mission encompasses more than just funding deals for investors. We’re here to help investors be successful any way we can, whether through information, REI coaching or other investing tools.
If you can’t get a loan through us, I want you to get your loan safely and avoid the scam companies. Maybe we’ll be able to fund you on another deal down the road.
Learn how all this works by attending our next webinar.