Real estate investment involves finding deals – properties or notes – at a discount big enough to generate income. And in this current hot market, you need to look for the deal that no one else has found. But how can you tell if it’s a great deal or a scam? Not every property fits into the standard mold that a traditional lender will loan on -they may have people to answer to as well. How do you know the lending company you’ve found isn’t going to run off with all your money? We have 10 warning signs that your great deal may be a costly scam.
10 Warning signs that your Great Deal May be a Costly Scam
There are actually legitimate methods to finance the purchase of a property and fund any renovations outside your traditional institution-based lenders. They will most often have higher rates and charge you points (a point is equal to 1% of the loan) and will want you to have “skin in the game.” Unless you have worked with the lender several times before or are close, personal friends with them, be very wary of any of these circumstances.
100% Financing
A hundred percent financing exists, however, not for your first loan or first deal. A lending institution wants his money back – and providing you 100% of the purchase price,
even with a first-position lien on the property, doesn’t do much to prevent you from walking away if you discover something unexpected and un-budgeted. If you don’t have any money to put down on the property, then start looking for a partner who will help fund the down payment, or begin looking for another investor to sell the deal
to. If it’s a good deal, you won’t have a problem selling it. If you have a hard time selling it, it wasn’t a great deal.
Upfront Fees
Virtually any fee or charge will be collected at the closing table, with the possible exception of an appraisal fee. The lending company will provide the loan in accordance
with the appraised value of the property, and if the appraisal also comes in low, you may choose to cancel the financing. The lender doesn’t want to try to collect the fee after
the fact – especially if you aren’t getting a loan through them. However, there is no such thing as insurance on a loan. Title insurance policy is a real thing, but that isn’t insuring the loan, it’s insuring the chain of title to the property involved. Like I said above, most fees are paid at closing, when it’s a sure thing that the loan is being funded. Be very wary about any fees the lender is requesting before you are sitting at the closing table.
Changing Interest Rates
As soon as your rate is locked in, it’s locked in. It doesn’t change unless there are plenty of pretty outstanding circumstances. If your rate is changing, take a deeper evaluate the lender.
Extremely LOW Rates
The least expensive way to fund a property is a traditional mortgage. Those rates currently (as of March 1, 2016) hover around 4%. A hard money lender isn’t going to give you a loan for 4% – he doesn’t make anything at that rate. He also isn’t likely to loan for 2%, 3% or even 8%. Hard money loans at the moment are about 12%-15% PLUS 2 or more points. Hard money costs a lot. It’s supposed to be an easy option, not a extended solution.
Extremely Bad English/Spelling
Another tell-tale sign that your lender isn’t the real thing is if all communications come through email, and they use atrocious spelling or have horrible English. I’m not talking about an occasional misspelled word; I’m talking about sentences that don’t make any sense. Look out for emails which are really hard to read, leaving you trying to decipher what they’re referring to. If someone legitimately has money to lend you, they’ll also have a legitimate grasp on the English language.
Generic Email Account
A professional lender will usually have a web presence, which includes e-mail addresses associated with the website. This isn’t always true, so consider this one as more of a pink flag. But if your lender is using an e-mail like IGiveLonz@hotmail.com, you should tread very lightly. It needs to be more like B.Johnson@legitimatecompany.com.
Google Doesn’t Know Them
Google knows everyone and everything. With a look up on Google – and you SHOULD research them on Google – and Google returns with nothing, run.
They Mention Western Union
Western Union is an excellent way to wire money. They are a recognized company, but a legitimate lender doesn’t use them. If your lender says anything about Western Union, RUN, don’t walk, in the opposite direction. This isn’t a warning sign, it’s a purple flag with flashing lights and sirens! Scam Alert!
Finding the Actual Deal
When you think you have found a deal worth pursuing, your Red-Flag-O-Meter needs to be tuned to high alert. A good deal will pass all the tests, so you should be researching ways to make the deal fail, not ways to overlook problems.
Seller Won’t/Can’t Let You Inside
Just like the rental scams on Craigslist, where someone will list a home they don’t own as a property for rent but can’t allow you to inside for any variety of reasons, this scam
also rears its ugly head in purchases – particularly if the deal is too good to be true. There are exceptions to this red flag. When a landlord has renters that he doesn’t wish to inconvenience with multiple showings, he or she may wish to hold off showing the interior until they have the property under contract. Should this be the case, make the contract contingent upon seeing the condition of the inside, or write a letter of intent with a price range instead of a firm price, again contingent upon seeing the interior. But if the seller can’t let you view the property at all and provides vague or ridiculous reasons behind this, it’s a good chance they don’t own the property or have the legal right to sell it.
The Numbers Are perfect
Finding a great deal is difficult, and locating a great deal is even harder. Whenever a seemingly AMAZING deal pops into view, you should immediately be on high alert. Though it may be possible that you will find a smoking deal from someone who just wishes to be rid of it, it isn’t probable. George C. Parker sold the Brooklyn Bridge several times to unsuspecting immigrants who literally just got “off the boat” at Ellis Island. He would bribe the men working on the boats to direct visitors to him who seemed to have a lot of money with them. Parker would sell it for virtually any amount – from $75 to $5,000, whatever they had with them. How did he persuade these people to give him giant wads of money? He portrayed himself as an exhausted bridge owner who just wanted out of it – and convinced them they are able to earn millions by erecting a tollbooth on the bridge. In fact, only when police arrived to dismantle the tollbooths did the “owners” learn they had been scammed. Should your “seller” claims to be an exhausted owner who just wants out of it at a price that seems unreal, it in all probability is. Continue but be careful.
Remedies
So what can you do to head off being scammed? Two words: Due diligence. The first stop for any too-good-to-be-true deal needs to be the public records department of the county in
which the property is located. The first stop for any too-good-to-be-true lender is Google.
Don’t Feel Pressured
Any legitimate deal needs a chance to be vetted, inspected, and researched. When someone wants an answer right then and there, just say no. You are presumably giving them thousands of dollars for the ownership of a property or receiving thousands of dollars to purchase a property. They can give you a little time to do your homework. Pressure to commit PLUS pressure for money upfront should be a glaring red flag. It is much better to miss out on a deal than to lose money simply because you felt pressured to get in too quickly.
Reasonable Deposits
Earnest funds are a real thing and is typically 1% of the purchase price of the property. Earnest money should be held by someone other than the property owner – either a title company or at the minimum, a real estate agent. Make sure you get a receipt for any money given. Your canceled check is NOT enough of a receipt.
Do Your very own Research
Sellers will give you information about the house according to their records. That’s great, but make sure you do your own research, too. Some items are easy to verify, like
property taxes and any HOA dues. But other things may not be so simple to confirm, like utility bills, actual tenant rent, or the current state of the home. Ask for copies of bills, and get tenant statements that give true rent amounts signed by the tenants themselves. Get your own home inspection, rather than relying upon the report from a “pre-inspected” home.
Vet Lenders
Legitimate hard money lenders should have an online presence. They’re going to have a website that gives information about their company, multiple methods to contact them, and information with regards to their process. It needs to be a professionally designed site, too. If it seems less than professional, it probably is. Private lenders are people you know or acquaintances of people you know. Private lenders don’t go advertising for borrowers.
Protect Yourself
Finding a great deal can take a long time, and it’s natural to be excited when you think you’ve found something before anybody else has. Finding someone to fund your deal when you’ve heard “no” multiple times could be exciting, too. Make sure you cover your financial interests. It’s far better to have lost a deal than to have lost virtually all your money.
Nick & Cindy Davis work with several investors here in the Tampa Bay area. Our job is to ensure that you you do not come victim to a real estate scam and lose your money. We have a team to provide you with quality property management after the purchase if needed. We are always available by calling us at 813-300-7116 or simply click here and we will be back in touch with.
Have you ever found a scam? What tipped you off? Please share your red flags below.