Among the dozens of viable loan candidates I correspond with each month, there’s one statement that always makes me cringe: “Lender X says he’ll do the loan without seeing the property and on better terms than your lender.”
My response is almost always the same: If it sounds too good to be true it usually…no, it always is.
Sadly, in this day in age there are an increasing number of both local and national “hard money” lenders that are more in the business of real estate acquisition then they are real estate lending. Many of these so-called “better options” that borrowers believe they’ve found are actually veiled attempts at one of two things:
1. an attempt by a broker, not a direct lender, to convince you they have a lender that is ready, willing and able to finance the transaction with surprisingly favorable terms and conditions to the borrower; or
2. an attempt by a “lender” to have you enter into a loan with them in haste only to then realize at closing that the loan terms and conditions are either not what was promised or destined to result in a borrower’s default.
Scenario #1 above is almost always an attempt to get some sort of upfront payment by the borrower with the broker having no real means to close the loan and no real lender in line to close the deal. If there is a lender that they can find to close the loan it will oftentimes be at different rates and different terms then the Letter of Intent issued from the broker’s office. THAT BEING SAID, most legitimate hard money lenders will require a deposit towards closing costs paid at time of signing the commitment letter. This protects them in the event they prepare to close and cannot due to borrower's fault..after all no good businessman is going to lose money for time and costs incurred. How do you think they became private lender's in the first place?!
Scenario #2 above is no better than Scenario #1…in fact it is much worse. There are lenders out there that will issue a commitment letter, take a deposit, prepare to close and at the last minute tack on additional fees or change loan terms knowing you have to close and are in no position to refuse the additional fees or change in conditions. There are also other hard money lenders that employ the philosophy “loan to own”, whereby they will offer terms and conditions with less money down but higher monthly interest rates and shorter loan terms. This is all calculate. They are hedging their bets in hopes you will default and they will be able to foreclose. Any lender requiring less than 20% down plus payment of all closing costs has ulterior motives and a borrower should proceed with caution. As I said, if it sounds to good to be true it almost always is in this business.