Signs Your Private Lender Is Pulling A Bait-and-Switch

Single-family real estate investors are usually good with numbers – they have to be in order to achieve success in the real estate investment business. The math equation going into every real estate investment is paramount to profitability – which makes it easy to get fixated on finding the lowest possible interest rate (especially when interest rates are high), and potentially overlook the signs of a wily lender attempting a bait-and-switch.

Suspicious you’re not getting the deal that got you to walk in the door? Here are the telltale signs your private lender does not have your best interest in mind, and how to avoid the bait-and-switch trap:

The Rate is Too Good to Be True

Be wary of lenders offering exceptionally low rates that seem unmatched in the market. They may technically offer loans at that rate, but the qualifications are so strict that very few people can actually secure it. These lenders might be using this tactic to draw in borrowers, only to reveal later that you don't qualify for the advertised rate, leaving you with higher, less favorable options and no time to spare. This puts you at risk of not being able to close; and if you do close, it puts your deal at risk of being less profitable. Time is money and the juice has to be worth the squeeze. Always read the fine print, inquire about qualifying criteria before you apply, and proceed with caution if the interest rate seems suspiciously too good to be true.

Related: Questions to Ask When Choosing a Rental Property Loan

Confusing, Lengthy Fine Print

Pay close attention to the loan documents provided by your lender. Reputable private lenders use standard, clear, and professional documentation. Overly complex loan documents containing vague clauses could be obfuscating unfavorable terms (hefty down payments, prepayment penalties, difficult repayment schedules, etc.)—ones not discussed in your earlier communications. Always read the fine print before signing and reach out to legal counsel if you have concerns.

Your Contact Won't Put It In Writing

Make sure your lender puts the rate in writing at the time of your application. Trustworthy lenders will take the time to answer your questions completely, and won’t avoid discussing the specifics of the loan terms: rate, down payment, repayment schedule, fees, prepayment penalties, etc. A classic bait-and-switch move is to verbally offer you a great deal and then “go talk to their boss” who “says they can’t offer you that initial deal” and then offers you another, less advantageous loan on paper… at the closing table… and time’s up!... sign on the dotted line.

Last Minute Changes & Hidden Fees

It’s a huge red flag when your private lender introduces significant changes to the agreed-upon terms just before closing the deal. While minor adjustments can be legitimate, sudden and substantial alterations might indicate that your lender is trying to pull a bait-and-switch. Don't hesitate to question these changes and insist on explanations. A reputable lender will have a reasonable and valid explanation for any adjustments.

And don’t be afraid to walk the closing table. In our 15 years of business, we can’t count the number of times that we have received the following phone call: “Hey, the lender I was set to close with just increased my interest rate. I feel like they are taking advantage of me. If I have everything done, can we get this deal closed tomorrow or this week if I give it to you?” And we did just that.

Likewise, hidden fees can quickly turn a profitable house flip into a financial heartache. Carefully review the loan documents and keep an eye out for any unexpected fees or charges. Some shady lenders may try to tack on additional costs, hoping you won't notice or won't want to risk losing the deal. Always be diligent in understanding all the fees associated with your loan.

Related: 5 Common Mistakes Seasoned Real Estate Investors Make 

Pressure to Commit Quickly

A classic tactic of bait-and-switch lenders is to pressure borrowers into making quick decisions. They may create a sense of urgency, claiming that the offer is time-sensitive and you must act immediately. This approach can be overwhelming and may lead you to overlook critical details. A trustworthy lender will give you ample time to review and consider the terms without using high-pressure tactics.

Delays Without reason

Time is of the essence in the house flipping business. Delays can cost you money and potentially kill a deal. If your private lender keeps stalling the loan process without providing a legitimate reason, it could be a tactic to pressure you into accepting unfavorable terms later on. Trustworthy lenders understand the importance of timely funding and will keep you informed about any potential delays, along with valid reasons for them.

Have a Backup Plan

If you do choose to pursue an irresistibly low rate from a private lender, have a balance sheet lender in the wings you know you can count on in the event it’s a bust. At Residential Capital Partners, our terms are plainly written and don’t change. We strive to provide our clients with the fastest “yes” and the fastest “no” in the industry and are proud to have been the lender our clients called when the other lender they were working with were, in fact, offering an interest rate too good to be true. Relationships matter.

Have an application on the books with a lender you can take at their word.