fbpx

Hard Money Loans: What To Watch Out For


loans
Hard Money Loans: What To Watch Out For

This post was most recently updated on August 3rd, 2022

Why Hard Money Loans

If you’ve ever held an interest in real estate investing before, you might have already heard about hard money loans and how they can be helpful to investors who don’t want to opt for the traditional lending route when it comes to acquiring property. Hard money lenders are everywhere, and their deals can be very inviting. For example, because hard money lenders aren’t bound to laws and legal processes that govern traditional financing options, they don’t spend too much time on background checks and verification steps like banks do. Loan approval can be almost instantaneous.

Hard money agreements also tend to be more flexible than commercial loans truerate services and mortgages. Repayment schedules and even the duration of the loan itself can be tweaked on a case-to-case basis. Though you would have to deal with higher interest rates and charge fees, this kind of loan is perfect if you are looking to quickly acquire a property in the hopes of selling it later on for a profit (e.g. “house flipping”).

What to Watch Out For

With their attractive terms and quick turnaround, it’s no wonder that a lot of investors are drawn to hard money loans. The downside of this is that there are also a lot of unscrupulous individuals out there looking to cash in on unsuspecting investors who can’t recognize subtle red flags. If you’re a newbie investor or just someone who is curious to learn what to watch out for when it comes to hard money loans, here are a few tips to get you started.

See also  Guide To What Lenders Look In A Loan Application

1. Avoid hard money lenders who charge unreasonable upfront fees

Upfront fees aren’t actually a major red flag on their own. In fact, it’s actually quite normal for lenders to charge upfront fees. Some of these include fees for appraisals, inspections and origination fees. However, there are lenders who tack on unnecessary items like “application fees” or “diligence fees” just to rip people off. Most of the time, these lenders aren’t actually lenders at all, just con men who are out to collect these scam fees and then bail out of the deal as soon as they get their hands on the money.

It’s best to keep yourself informed about what fees are usually collected when availing hard money loans. When you see something out of the ordinary, ask why that particular fee is being collected.

2. When it’s too good to be true, it probably is

Hard money loans come with a lot of advantages that make them appealing to a lot of people. While they’re not traditional loans, it still pays to be wary. Go through the terms and conditions, read all the fine print, ask questions. Not all lenders are honest and some of them might hide shady clauses in their documents. Also, if a lender offers something that seems too good to be true- like super low interest rates or a no-collateral required kind of deal- then it probably is a scam. Here are some of the red flags you should look for in a hard money loan contract.

a. Spelling and grammar errors, with confusing and rambling terms – The document should lay out its terms clearly and concisely. If the document seems rambling to you, then it’s probably an attempt to confuse naive lendees.

See also  There is more focus on easy tax collection

b. Low interest rates – The going interest rate for Florida commercial hard money loans range from around six to fifteen percent. Anything lower than that has a high chance of being a scam.

c. Not requiring a collateral – The whole point of a hard money loan is that an existing property is used as collateral. The property is the way to secure the loan. If somebody promises to approve a loan without collateral, then that’s not legit and will only probably try to rip money off of you through upfront fees.

How to Avoid Scammers

There are plenty of hard money lending options available out there, but there’s also plenty of scammers looking for people to victimize. Here are a couple of pointers so that you won’t fall victim to these crooks:

1. Check for reviews online. Also look if they have a legitimate-looking website that has ways to contact them through phone, social media, or a brick-and-mortar address.

2. Ask for recommendations from family, friends, and your colleagues in the industry. A referral can go a long way.


Scoopearth Team

0 Comments

Your email address will not be published.