The Seduction of Cheaper Hard Money

Over time hard money lenders come and go. Which ones stay? The lenders who survive in this business are the ones that understand they must charge enough to operate, service loans, and most importantly, service customers who are in most cases, making one of their largest investments ever. They understand that they are not loaning the money over a 30-year time period, where there is long term cash flow, and so they must price their product accordingly. Without boring you with any other details, let’s skip to what’s important for you to know.

As the real estate market remains strong, more lenders are entering the space and want to put their money to work as quickly as they can. In order to do this, many of them advertise what appears to be a lower cost hard money loan, when in fact, it is a much more expensive product.

While this may seem innocuous, the reality is the consequences this brings to the investor. Failure to disclose the other fees and/or structure of the loan puts borrowers at risk of not knowing their true costs and is absolutely deceptive on the part of the lender.

Many of these lenders are not real estate investors and do not understand flipping, buying a rental property, or even wholesaling, putting themselves and their customers at risk of losing money.

Recently, rates have been advertised from 2.99% – 10.99%. When you see anyone advertising rates below 12%, read the fine print, and look for the “catch.” What’s the catch? Any attempt to trick someone with a bait and switch loan. Here are eight examples to keep in mind:

• The borrower needs the maximum FICO score of 850 (which is very unattainable) with $100K cash in the bank to qualify.
• The borrower must do a “specified” number of loans with the lender to qualify for the lower rate.
• Interest is charged on the full note amount when the repairs have not been borrowed yet is a lending practice by most lenders, but is not advertised upfront. Also, if the repair holdback is a large amount, the borrower is paying additional interest on funds they haven’t used yet!
• The lower advertised rate is for a short initial period in the loan (i.e., 30 days) and then it increases to a normal rate. Of course, the borrower is also being charged on the full note amount, even though the repair funds have not been drawn.
• The loan term is for 90 days with expensive extension fees built into the note.
• Junk fees that make up the difference in the lower points and/or interest being advertised (underwriting fee, admin fee, evaluation fee, etc.).
• An offer of 100% financing, or anything that is not based on the ARV in the offer. This is designed to make the borrower think that no matter what their purchase price + repairs are, they are going to get all of it financed, irrespective of the ARV.
• A lender who advertises no application, no credit check, no appraisal, etc. Be suspect anytime there is no due diligence being offered on the part of the lender. It is for the benefit of the buyer and the lender that all the numbers are verified on a property.

As a member of the Ethics Advisory Committee for the American Association of Private Lenders (AAPL), I helped create the guidelines for what all lenders must follow as members of this organization. AAPL bans bait and switch lending practices as well as false advertising.

So, just as you would perform due diligence on your investment property, be sure to do the same for your lender. We disclose everything regarding our hard money programs on the website. If you are looking for a hard money lender within your area, contact us today!