Bait and switch is an unethical practice which is quite rare in professional private lending, and there are situations where real estate investors may feel that they were a victim of this, but the lender is not at fault.
Here’s how bait and switch works in private lending: The lender provides a term sheet with low pricing and maybe higher leverage too, but knowing in advance that they would never actually close with those favorable terms. They’ll string you along the loan process and when you get close to the funding date, you’ll be hit with higher pricing and lower leverage. By the time this happens, it may be too late to start over with another private lender, and you may feel forced to accept the new terms just to get your deal closed on time.
It’s only bait and switch when the lender intends to change the terms from the very beginning.
Reducing the Loan Amount and Leverage
There are many cases when the lender changing the terms during the loan process is completely justified. This frequently happens after the appraisal, or the lender’s site visit, when the lender determines that the value of the property is much lower than what you thought it was.
Even if the value is not the issue, perhaps there is something wrong with the property that you failed to disclose upfront. Anything that adds additional risk may cause the lender to reduce their maximum loan amount, so this is not bait and switch. When you receive a term sheet from a lender, check to make sure that a maximum loan-to-value is mentioned. Next to the loan amount, it should state “not to exceed X% of the appraised value” or something similar to that.
Increasing the Interest Rate and Fees
A private lender increasing the pricing after issuing a term sheet may also be justified if they determine during the loan process that the loan is riskier than they initially thought. This typically happens when the borrower fails to disclose something important, such as liens on the property, financial hardship, poor credit history, a criminal record, pending lawsuits filed by you or against you, and much more.
The easiest way to avoid this situation is to be absolutely honest and upfront with the lender. Don’t hold anything back and don’t lie about anything. Private lenders do a lot of due diligence, and they will find out everything about you and the subject property. Even though private mortgages are typically asset-based, private lenders do care about the borrower’s financial situation and their ability to pay off the loan.
Bait and Switch More Prevalent with Individual Lenders
Intentional bait and switch is very rare in the professional private lending industry. You’re more likely to fall victim to it when dealing with individual investors or private lenders that don’t openly advertise to the public since they don’t typically face consequences for their unethical behavior.
This is why I always advocate borrowing from professional private lending companies that have an online presence and a reputation to maintain. It’s highly unlikely that a professional lender will risk ruining their reputation with unethical practices.
Private Lending Trade Associations
Many private lending companies are members of a trade association that have a code of ethics which members are required to abide by. Our industry has 4 trade associations:
- American Association of Private Lenders
- National Private Lenders Association
- California Mortgage Association
- Arizona Private Lender Association
Check to see if the lender you’re dealing with is a member of any of these organizations. This is a good indicator that you won’t experience unethical practices by the lender, although it’s not guaranteed.
Resource to Find Reputable Private Lending Companies
If you’re seeking a private lender for an investment property deal, use PrivateLenderLink.com as a resource. We do our best to vet each lender, and we don’t tolerate unethical behavior. If you’ve had a negative experience with any of the lenders listed on our platform, we’d love to hear about it so we can address it with the lender.
When you do a search on our platform, you’ll find that all the lenders listed have a very detailed profile that shows their lending guidelines, and you can contact each lender directly. There are two options for using our platform.
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state or metro area where the property is located.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.
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