Private lender exposes shady industry practices

Watching out for private lender red flags

Private lender exposes shady industry practices

Specialist Lending

By Ryan Johnson

A Sydney-based developer faced a loan nightmare when a shady private lender was nowhere to be seen at settlement.

Fortunately, a resourceful broker found a reliable alternative just in time, highlighting the importance of caution with private lenders.

Gee Taggar (pictured above) – a private lender himself – explained the case study, revealing the red flags brokers should look out for. 

“There are many private lenders in the market known to be unethical. Luckily, brokers have become pretty savvy at knowing how to spot a loan shark,” said Taggar from Archer Wealth. “They offer bizarrely low fees. Or an unusually fast pre-approval time. Or weirdly low interest rates.

“Basically – they offer something from your experience that you know is too good to be true.”

Risky private lenders: The borrower’s issue

John – whose name was changed for confidentiality purposes – was a Sydney developer looking to purchase a development site in Box Hill NSW for a six-lot subdivision.

He went to his broker, said Taggar, whom he had entrusted with his credit needs for years.

“The two had a solid working relationship and done many deals together – from residential and commercial property to construction deals and land.”

Normally, John would always be able to get a loan from a big bank.  But unfortunately, things were different this time.

“The pandemic had changed the scene. And the big banks had tightened their lending restrictions so much that he wasn’t able to get a loan from any of the majors,” Taggar said.

One bank said they can do it at 40% LVR. Another bank said it no longer had appetite for development sites.

Frustrated, John went to his broker, who found him a solution through a private lender.

How the borrower was duped by a private lender

Taggar said the private lender, at first, didn’t seem to be shady.

“The broker checked. They had good reviews on Google, they had some degree of reputation and his broker had used them before.”

But then they offered terms which the broker thought was a little weird:

  • LVR of 70%
  • Rate of 7.85%
  • Term 24 months
  • Establishment fee of 1.10%
  • Upfront fee of $20k

“The broker had his doubts and conveyed the risk to John. But John was desperate. He instructed the broker to accept the deal,” Taggar said.

Communication with this lender was difficult, but ultimately a date was set for settlement.

John had his ducks in a row legally – all he needed was the money to complete the sale.

But, on the morning of settlement, the lender was nowhere to be seen.

John had signed a legally binding contract that he would pay money to his seller, but he had no funds to do so.

The broker tried desperately to get in touch with the contact at the lender.

“They had completely ghosted him,” Taggar said. “John had no money in his account to complete the sale.”

“He risked being sued if he didn’t get money fast. He was terrified.”

How the borrower recovered

The broker rushed to find another lender and got in touch with one of the business development managers at Archer Wealth based in Sydney.

This broker had not used this private lender before, but they seemed to be available and ready to deliver finance quickly.

“The broker hadn’t used us before and he called me directly, ever so cynical,” Taggar said. “But thankfully, we reassured John and his broker that we could help.”

The broker explained the scenario and told Taggar that he needed finance in under seven days.

“Time was ticking and the team needed to act quickly. We offered him 60% LVR, 9.50% p.a. rate and 2.20% establishment fee… John accepted.”

“We just hit the ground running, fast-tracked pre-approval and asked for minimal documentation along the way,” he said.

John received formal approval in 72 hours from the time he approached Taggar and the settlement was completed within five business days.

“John was saved.”

Watch for private lender red flags

While unfortunate, John’s story is a common one, according to Taggar. 

“Borrowers get duped by shady private lenders all the time.”

Here are some of Taggar’s key private lender red flags brokers should look out for:

  • They present an offer that is too good to be true
  • Unusually high upfront fee and high LVR
  • Unusually low interest rates
  • They advertise a strangely quick pre-approval and release time (for example, 24-hour loans)
  • Incredibly expensive valuation
  • They don’t have a website or any reviews
  • Their exit fees are exorbitant.

Gee said John was one of the lucky ones, and ended up finding a lender who was reliable. But it doesn’t always end up that way.

“It is incredibly important to stay vigilant, and to always ensure you deal with a reputable lender – even if you find yourself in a desperate situation,” he said.

“Even the most experienced brokers can fall into the trap of being duped by a shady loan shark.”

What do you think about private lenders? Comment below.

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