It seems to me that hard money lending has gotten a bad rap over the last 25 years or so. Thanks to a small number of unscrupulous lenders willing to take advantage of borrowers during the McMansion and dotcom booms, the whole industry suffered a black eye. Yet the reality is that hard money is legitimate, despite the fact that there are bad actors.
Every industry has its bad actors. There are bad auto mechanics you would not take your car to. There are home improvement contractors you wouldn’t trust further than you could throw them. Hard money lending is no different. But most hard money lenders are legitimate businesses licensed by the state and more than happy to play by the rules.
I recently read a post on the Actium Partners website discussing what borrowers should expect from their lenders. It is a great read. I will not rehash that post here, but I do want to point out some of the red flags that could tip you off to a potentially fraudulent hard money lender. Watch for them if you rely on hard money or bridge loans as a financing tool.
1. Unsolicited Contacts
It is not completely unheard of for a legitimate hard money lender to contact potential clients out of the blue. But unsolicited contacts are extremely rare. Hard money lenders do not go digging around for borrowers. They don’t have to. If a lender contacts you via email, phone, or social media in an unsolicited manner, consider it a red flag.
The lender may be new to the market and working to drum up business. That is always a possibility. But it is more likely that the lender is a shady operator looking to penetrate a local market, get his money out of it, and move on.
2. High Pressure Tactics
Another thing common among bad actors is the use of high-pressure tactics. They want to get borrowers signed quickly, before said borrowers figure out that something is not quite right. Be very careful if you find yourself working with a lender pressuring you to make an immediate decision.
A general rule in the hard money game is that borrowers have a greater sense of urgency than lenders. It makes sense. Borrowers often turn to hard money because it can be arranged quickly. They might have a sense of urgency thanks to a deal they want to get done so they do not lose it. Lenders expect it.
On the other hand, a lender who shows a greater sense of urgency than the borrower could be trouble. Rushing to closing even though doing so is not in the best interests of the borrower signals that the lender is more interested in its own interests.
3. A Shady Business Presence
Legitimate hard money lenders are private lenders with state licenses and physical premises. A borrower should be able to run a reasonable background check, read reviews, and so forth. Anything shady about a lender’s business presence is cause for concern.
One of the first things a borrower should do is check a lender’s physical address and license status. If a lender refuses to furnish such information, it is a strong signal to run. Legitimate lenders have nothing to hide.
The good news in all of this is that the vast majority of hard money lenders operate legitimate businesses. They treat their clients well, follow the rules, and work out financing deals that benefit everyone involved. And yet there are bad actors. If you utilize private lending, keep your eyes open. You don’t want to get burned.