Legit or Madoff's Cousin?


I have a good friend who started invested with a guy who buys houses from banks (in lots) then turns around and sells them for 2-3 times what he paid. He pays all cash for the houses. My friend has been loaning him money on short term deals (getting deeds of trust) that are anywhere from 2 weeks to 3 months. The returns are roughly 7% for the 2 week deals and up to 20% for the 3 months deals. Like I said my friend has been doing deals with him for about 2 years now and has gotten all of him money back at times (when he needed it). I think this would be a great way to build my cash reserve before I start purchasing properties. My questions is are these amounts of interest being paid normal, hard to find but possible, or scam?
Then again I am new to this and maybe it is legit. In your experience have you seen these kind of returns for people? How could I check to see if this guys company is legit. He says he has been in business for 20 years. Thanks for any information you can provide.

In simple terms, your friend is a hard money lender to another investor/company who buys pools of REOs from banks and flips them. Of course I would do my due diligence before lending your money out, but nothing from your story raises any red flags in my eyes.

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