The world of lending operates on trust, integrity, and responsibility or at least it should. Unfortunately, some areas, like hard money, do not always operate this way. While traditional financial institutions adhere to strict regulations, the unregulated hard money lending sector, while a fertile ground for innovation, remains a breeding ground for unsavory practices. This is understood, but unfortunately it is also accepted as unchangeable by most who work in the space. I surmise, however, that this is not so and that we need to actively work to country the shysters.
While it might sound counter-intuitive, I am ok losing deals to legitimate competition. What I cannot abide by is the havoc that these “providers” cause and the significant waste of time and resources expended when an investor falls for the tricks of a charlatan lender. Sometimes this could even be their life savings and the fleecing not only smashed their dreams of real estate investment, but also costs them their future. This is unacceptable. It is of paramount importance for both lenders and borrowers to stand together and call out these unscrupulous individuals and entities.
The why for active self-policing of the hard money space is pretty self evident, but there are some very specific reasons for actively working to drum the unsavory players out of the space.
Protecting Borrowers from Exploitation
Unregulated hard money lenders often exploit vulnerable borrowers who find themselves in desperate financial situations. These lenders may take advantage of their desperation by charging exorbitant interest rates, imposing hidden fees, and using predatory tactics. By calling out these lenders, borrowers can raise awareness about their practices and protect others from falling into the same trap.
I will reinforce that in the context of this reasoning it is especially important to call these lenders out in a manner to prevent future targets from being exploited. Whether desperation or lack of knowledge, nobody deserves to lose their hard earned funds at the hands of a shyster. This will always happen, but the more that we can shut down their efforts, especially on social media, the better the chances that the exploitation is minimized.
Preserving the Reputation of the Industry
The unregulated hard money lending space suffers from a lack of accountability, leading to a tarnished reputation for the entire industry. Calling out unethical lenders helps to restore trust and confidence in the sector. By shedding light on bad actors, reputable lenders can distance themselves from the negative associations and demonstrate their commitment to transparency and ethical practices.
I know that I should not need to stress this, but reputation is derived by the observation of the behavior and actions of the lenders in the hard money space. Every time that a lender is successful in even posting bogus terms it makes all lenders and other providers look terrible. It is like leaving garbage on the street of your neighborhood. We need to not only act responsibly, but also impel others to do the same lest we all get painted with the same brush.
Fostering a Fair and Competitive Market
Unscrupulous lenders distort the lending market by creating an unfair playing field. They may offer seemingly attractive terms initially, only to impose harsh conditions and penalties later on. This undermines the fair competition among lenders who abide by ethical standards. By calling out unsavory lenders, borrowers and ethical lenders can promote a more level playing field, encouraging healthy competition and fostering a market that benefits all parties involved.
As I said earlier, I am OK losing clients to fair competition, but some of these charlatan lenders short circuit this. Potential investors become confused by what is legitimate and what is not. With this, the possibility of true comparison becomes impossible. The noise and fog created by the unattainable terms makes it harder to actually structure the right financing for the clients. Everyone loses, except for the bandit brokers who are onto the next client.
Empowering Borrowers through Information
Many borrowers in need of hard money loans lack the necessary knowledge and resources to differentiate between ethical and unethical lenders. By exposing unscrupulous practices, borrowers can become better informed and equipped to make informed decisions. This empowerment enables borrowers to exercise caution and choose reputable lenders who prioritize their best interests.
I learned from the residential market that borrowers can be very loyal when lenders help and educate them. I have always acted this way and, in the residential market, regulation has made the approach much more consistent. Investment lending and hard money has not undergone that evolution. Investors need to seek out the information and their lender should play a part in helping when they can. The shysters, however, depend on ignorance and a lack of knowledge to operate. If we can eliminate them, the borrowers can better find the right programs and lenders which benefits us all.
Self-Policing and Protecting the Industry from Overregulation
By actively calling out unethical lenders, the hard money lending industry can demonstrate its commitment to self-policing. Proactively addressing the issue can prevent the need for excessive external regulations that may stifle innovation and impede the industry’s growth. By adhering to ethical norms and holding each other accountable, lenders can protect the industry’s reputation and preserve the freedom to innovate without burdensome regulatory measures.
Full disclosure, I am not a no regulation ever kind of person, but I do think that the hard money market would be worse off with more regulation, especially because we can all prevent it. The last thing that both investors and lenders want is anything that will slow down deals and reduce availability to new and different programs. If, however, we allow questionable lenders to operate without impunity, we are setting the stage for regulation when enough people get fleeced.
Everyone Needs to Play a Part
The unregulated hard money lending space presents significant risks to borrowers, often due to the activities of unscrupulous lenders. By actively calling out these unethical individuals and entities, borrowers and ethical lenders can protect vulnerable borrowers, preserve the industry’s reputation, foster fair competition, empower borrowers through information, and demonstrate a commitment to self-policing.
This is clearly an us/them situation and it should be. It is those wanting to interact business in a professional marketplace and those who want to take advantage of the marketplace for their own benefit. It is crucial for both lenders and borrowers to work together to shed light on unsavory practices and ensure a more transparent and responsible lending ecosystem. By doing so, the industry can protect itself from excessive regulation that may hinder innovation while maintaining the trust and confidence of borrowers and regulators alike.
I would end with this. It is a anecdote from an exchange today on social media where a particular lender, who I will not name, was posting obviously misleading information and, based on some simple research, had been doing so for a while. In short, he was a shyster. His answer to me and several other legitimate lenders was to mind our own business. To this, I and everyone should say no. Looking the other way is allowing it to continue and I respect my clients and even my legitimate competitors to remain silent. I hope that this becomes a trend as the hard money marketplace will only be what we want it to when we step up and make it that way.