Private money is an incredible tool to use for real estate investing. There are many people looking for private money and many people looking to take advantage of those people. While it is possible to find private-money lenders, they are not easy to find, and if it sounds too good to be true, it probably is. I run a Facebook group that gets multiple scam posts every day from fake private-money lenders. I think it is pretty easy to spot the scams, but people still get sucked into them. How can you avoid these scams?
How does a private-money scam work?
A private-money loan is a money that is lent to people from an individual. There is no bank involved or hard-money lender. You could borrow money from your mom, dad, brother or a business associate, and it would be considered a private-money loan. The appeal of a private-money loan is that you may not need perfect credit, collateral, or to get an appraisal completed. I have four different private-money lenders I use for my house flips. Private money is usually much more expensive than a bank loan, and private-money scams use that to their advantage.
The scam works by someone pretending to be a private-money lender and offering a very cheap interest rate like 5%. They claim the loan could be as much as $20,000,000 and fund in 5 days. They don’t do a credit check or care about bankruptcies. When they get someone interested in the loan, they claim they need an application fee. The fee could be $50 or $500. Once the fee is paid, the potential borrower will never hear from the private lender again.
How does a real estate private-money loan work?
There are real private-money loans available, but they are not given out by strangers on Facebook. I know all of the people who have given me loans. They know me; they know my business; and they trust me. Typical private-money interest rates range from 8 to 12%, and many of the loans have points as well. A point is an origination and fee and paid to the lender at closing. 1 point would be equal to 1% of the loan amount. The private lenders I work with do not require an appraisal, but some might. None of the private-money lenders I work with require any kind of upfront fees.
How can you spot a private-money scam?
It is pretty easy to spot a private-money scam. The terms seem too good to be true with a low-interest rate and huge amounts of money they are willing to lend. People with that much money do not lend it to strangers at super-low interest rates. They also want you to send an application fee to get started. They do not want you to send it through a credit card or PayPal because they know you can reverse those charges when you find out it is a scam. Most of these lenders show up on Facebook, especially in real estate groups. You can also spot a fake lender because their Facebook account was recently created and they have no friends. It is pretty obvious when the lender is fake, but people still fall for it.