Commercial Loans and Fun Blog

Super Bowl Joke:

My cousin just texted me.  "I know it’s late notice, but a friend of mine has two tickets for the Super Bowl this Sunday, February 13th.  They are box seats, and he paid $3,500 per ticket, which includes the ride to and from his house, lunch, dinner, a $400 bar tab, and a pass to the winner’s locker room after the game.  What he didn’t realize when he bought them last year was that it’s on the same day as his wedding.
 
If you are interested, he is looking for someone to take his place.   It’s at St. Paul’s Church at 3:00 p.m.  Her name is Ashley.   She’s 5’4,” about 100 pounds, a good cook, loves to fish and hunt, and will clean your truck.  She’ll be the one in the white dress.
 
Please let me know if you (or someone you know) is interested."

A Different Commercial Mortgage Portal:

I have spent countless hours over the past two months adding hundreds of new banks to CommercialMortgage.com ("CMDC").  Geez, guys, I have added a TON of them.  We must have close to 3,000 banks and other commercial real estate lenders now on CMDC, far more than on C-Loans.com.

You can look up hungry commercial lenders on CMDC in a tenth the time it takes to prepare a loan application on C-Loans.com, but you can NOT submit a deal using CMDC.  All you can do is look up some names, phone numbers, and email addresses on suitable commercial lenders.  

You have to actually reach out to these lenders from CommercialMortgage.com.  In contrast, when you use C-Loans.com, the lenders pursue you.  I think its worth it to spend a little more time to create an application on C-Loans because you can submit your deals to dozens and dozens of different commercial lenders in minutes.

During the Great Recession, most commercial mortgage brokers were driven out of the business.  Those few old veterans who somehow managed to survive did so by submitting their deals to two-hundred to three-hundred different lenders before finding a lender brave enough to fund a commercial loan.  C-Loans.com is good for work like this.

Today's Commercial Loan Tip:

When you submit a commercial loan to a salaried banker, he is not even going to open it until you follow up that submission with a phone call.  He won't even open your email or package.

You have to call him and bug him, without appearing to bug him.  Here's the best way to do it:  "Hey, Steve, I realize that you have not had time to open my package yet.  I'm just calling today to confirm receipt of the package."

This phone call tells him two important things.  (1) The deal is still alive; and (2) You have not shotgunned the deal to twenty lenders.

Those are the magic words.  Remember them.  Use them.  Unless you call and gently bug him, your commercial lender is not even going to open your package.  Remember, bankers work on salaries.  Enough said.

Where We Get These 3,000+ Banks:

We here at C-Loans.com have some awesome commercial real estate finance training courses.   Not every starving mortgage broker can afford to buy the training, so we we will trade free access to one training course for each commercial real estate loan officer working for a bank or credit union that they introduce to us.  

These commercial loan officers must work for a FDIC-insured bank or NCUIF-insured credit union.  Their branch must have a big 'ole vault.  Lots of bullpoopers call themselves bankers.  Does he have a million-ton vault in his office?  If not, he's not a banker.

For example, let's suppose you'd like to learn how to market for commercial loans.  You can trade one of these special bankers for a copy of the course.

Or perhaps you would like to learn the terminology and the ratios of commercial real estate finance.  You can trade me a special banker for a copy of my Income Property Underwriting Manual.

Need a fee agreement for commercial mortgage brokerage?

How about a regional copy of The Blackburne List, which contains 750 commercial real estate lenders near you.

Final Funny:

At work, I've got the ear of my boss... I'm still not convinced we should pay the ransom.

Joke Du Jour:

Brad lives in California.  He was sick of the world, Covid-19, Trump, Russian belligerence, China, global warming, racial tensions, and the rest of the disturbing stories that occupy media headlines.

Brad drove his car into his garage and then sealed every doorway and window as best he could.  He got back into his car and wound down all the windows, selected his favorite radio station and started the car.  Two days later, a worried neighbor peered through his garage window and saw him in the car.  She notified the emergency services, and they broke in, pulling Brad from the car.  A little sip of water and, surprisingly, he was in perfect condition; but his Tesla had a dead battery.

Banks Are About To Get Fickle:

The first thing you need to understand is that 95% of all commercial real estate loans are portfolio loans.  A portfolio loan is one where the lender does NOT intend to sell the loan off in the secondary market.  It intends to keep the loan on its books for the entire term.  

And your bank may simply not feel like making any commercial loans today.  "Not tonight, honey."  Story of my life.  Haha!

Will China's real estate bust spread to the U.S.?  Will China's slowdown cause a bad recession here in the U.S.?  The Fed is raising interest rates, and soft landings are like unicorns; i.e., few have ever seen one.  The price of Bitcoin is down sharply.  Will Bitcoin be the malinvestment - a boneheaded investment like see-through office buildings, dot-com stocks, and subprime mortgages - of the next major economic downturn?

And then there is Russia.  What the heck is Putin playing at?  Russia's puny economy can't support an army in the field in the Ukraine.  Russia's GDP is no larger that that of the State of New York; but a war in the Ukraine is bound to make American bankers nervous.   

My point is that there are lots of reasons for banks to get squirrelly right now; so you should simply plan on it.  It you submit an absolutely perfect commercial loan to three different banks these days, you can expect at least two of them to flake out on you.

Submission Tip:

In my career I have submitted the same commercial loan to two different loan officers at the same bank, maybe a week apart, only to have one of them close it.

You can always tell when you get a sleepy or indifferent loan officer.  Don't ignore your instincts.  Pull the deal, wait a few days, and then submit it to a different loan officer at the same bank.

Geez, guys, hard money loan servicing is not that hard!
The real money is in loan servicing fees.

Use C-Loans.com

This is going to sound like a sales pitch, but when you use C-Loans.com, you can submit the same deal to six different banks at a time.  Then, the moment just one of those six banks sounds squirrelly, immediately go back into C-Loans.com and submit your deal to six more banks.

Words of Death:

"Gee, George, I've looked at your commercial deal, and I'm not sure..."  Translation:  Your deal has a stake through the heart, it has a bullet in the brain, and it has Ebola.

Immediately go back into C-Loans.com and re-submit your commercial loan to six more lenders.  Just one bank gets flakey, and you re-submit to SIX MORE banks - six to one.

When interest rates are rising, and when banks fear the next recession, banks can become extremely unreliable.  Expect a lot of turndowns in the coming years, the ugly end of the real estate cycle.  

If you have a balloon payment coming due in the few years, you really need to get off the couch and start working on the refinance of your commercial loan.

My Paranoia Over China:

I greatly fear that the Chinese economy will crumble and that President Xi, in order to distract his people from his boneheaded economic decisions*, will invade Taiwan and start World War III.  We could easily lose that war, as the Chinese Communist Party pressed its 1.4 billion people to build tens of thousands of long-range and highly-accurate missiles.

Some recent fuel for my nightmare:

1. We have all heard of Evergrande's $300 billion debt problems, but the next shoe to drop may be China's high-speed railway corporation, which has US$850 billion+ in debt and which is bleeding money in buckets.  Remember, folks, we do not want China's economy to collapse.  We do not want President Xi to be desperate.  He could start World War III.
   
   
2. Contrary to what I wrote last week, our new mid-air refueling drones are apparently suffering from some serious design problems.  The refueling arms don't work.  Yikes.  Remember, right now, the Chinese can hit us with their long-range missiles with near-impunity.  Our wildly expensive F35 fighter-bombers lack the range to strike back.  We desperately needed those refueling drones, but it looks like they will not be ready by T-Day, the early weeks of March 2023, when the Chinese are most likely to invade Taiwan.
   
   
3. The Chinese this week tested a satellite with arms, which grabbed one of their own failed satellites and placed it in a graveyard orbit, where it won't collide with anyone else's satellites.  I see no potential offensive military use of this new satellite with arms.  Do you?  Without our satellites, the U.S. is blind.  If I was a Chinese admiral, and war between the U.S. and China was about to break out, I would surface a submarine in the Gulf of Mexico and fire enough conventional missiles to destroy all four of Space X's missile manufacturing and launching complexes.  America would soon be blind.

*Xi's Most Recent Boneheaded Economic Mistakes:

China generated great wealth by becoming the manufacturing hub of the entire world; but with his continuing threats against Taiwan, the U.S., India, Australia, the Philippines, and Japan, President Xi has alerted the world that these manufacturing plants may soon be cut off during a war.  Who wants their business to rely solely on parts from a totalitarian country that is threatening war?

To make matters worse, China's zero-COVID policy is locking down tens of millions of workers, who used to make parts for the world's companies.  These companies are now rapidly looking for alternative manufacturing sites in places like Vietnam, Thailand, and Bangladesh.

So real estate in China, which used to account for 29% of their GDP, is contracting.  President Xi has scared the heck out foreign investors, with crackdowns on large public companies, like Alibaba, Tencent, and DiDi (their version of Uber).  He has also driven China's top twenty billionaire Elon Musk's into virtual hiding.  

And you don't believe we're on the Eve of Destruction?  People told me I was absolutely nuts when I predicted a crash and outright deflation in 2007.  I even wrote a book.  

This isn't an ego thing.  I definitely want to be wrong, folks!  Let's all have a beer and laugh like hell at me in late 2023, when the Chinese decide not to invade.  Haha!

Learn an Entire Profession For Free:

My $549 nine-hour training course, How to Broker Commercial Loans, teaches you an entire profession, including marketing, underwriting, packaging, placement, and fee collection.  You can obtain a free copy of this popular training course by finding me twenty bankers who make commercial real estate loans.  Here is how you can quickly build a list of bankers and later use it to solicit hem for referrals.

Final Funny:

Seeing a homeless guy begging on the street, a woman took pity on him and gave him a handful of change.  “Thank you,” said the homeless man. “Your generosity is much appreciated.  You know my life used to be great, but just look at the state of me now.”

“How do you mean?” asked the woman.  “Well,” he explained. “I was a multi-millionaire.  I had bank accounts all over the world with hundreds of thousands of dollars deposited in each.”  “So where did it all go wrong?” she asked.  The homeless man sighed, “I forgot my mother’s maiden name.”

Every day you meet good potential business contacts.  Maybe you're a plastic surgeon, with your own private practice.  You meet a beautician at Supercuts, while getting your own ears lowered.  Could she refer you a new patient in need of some rhinoplasty?  You betcha.

You play golf with a new physician buddy, who is a general practitioner.  New contact for your email list?  Absolutely. 

I have personally added six to eight new contacts - people whom I have met in the legitimate course of business - to my mailing list (email list modernly) every single day for 44 years.  Every day.  I hope you'll agree that we've had some fun together.

Okay, so what do you send them?  Well, how about the best jokes and memes that your own buddies send you?  Need more?  There are tons of sites on the internet with jokes and funny memes, like dailyhaha.com. I enjoy a free subscription to six different daily joke email newsletters.  Part of my job is to sit around and read jokes.  Haha!  

Maybe you might show your contacts some of the wonderful plastic surgery work being done by Doctors Without Borders, correcting, say, some unfortunate third world children born with a cleft palate.  Maybe there is a new surgical procedure to tighten up excess skin.  If you look, you'll find something interesting to share every couple of weeks.

Okay, but where do you maintain this email list.  We here at Blackburne and Sons have worked well with iContact.com.  They not only provide the software to maintain your email list, but they will also provide email templates and blast out your newsletters for you.   They do all of this for you for just a few hundred dollars per month.

Templates, huh?  You have to be professional, right?  No-no-no!

Oh, my goodness.  Have you ever read a "professional" newsletter from a CPA?  I am asleep in ten seconds.  ZZZ.  Never-ever-ever try to be professional.  Professional is boring.  No one reads boring stuff.

Want to be rich?  Then write to your contacts as if they were your friends and sitting next to you in a bar.  Violate every rule your English teacher ever taught you.  Use contractions.  Use incomplete sentences.  Use lots of slang.  Start sentences with the word, "and" or "but."  Write the way people speak in real life.

True Story:

I am sitting in a bar watching an Indianapolis Colts game.  A forty-year-old man sits down next to me, along with this lovely 32-year-old wife.  Somehow we get on the subject of children.  (I am constantly boasting about mine.)  He announces that he and his wife do not intend to have children.  Too many problems in the world.  Yada-yada.  

I look over at his beautiful wife, and I see the pain in her eyes.  Then I tell this guy that he is missing out on the greatest joy on earth, like the time that my wonderful first-born son came from behind 14-0 at the Junior National Fencing Championship... and won 15-14.   Or the time when my second son, a natural athlete, hit four straight three-pointers in the fourth quarter of his basketball game.  Or the time when my miracle daughter (eleven in vitro fertilization attempt$$$) smashed the winning goal in the Sectional Soccer Championship against her arch-rivals.

"You are missing out, sir, on the greatest joy on Earth."  We exchanged phone numbers.  Twelve months later, I got a text, "Well, George, we listened.  We went right home and created our beautiful baby boy.  Thank you!"  And he was indeed a beautiful little boy.  [Proud grin]

So back to today's marketing tip:  I urge you to be conspicuously unprofessional and to write to you contacts like they were your buddies  And don't worry about having the most professional-looking newsletter.  You don't want to be professional.  You want to be fun!  People read fun newsletters.

Okay, let's start small.  Find a shoe box.  Every time you meet a new contact - maybe a CPA or a real estate broker - scribble his contact information on a pink message slip and throw it in the shoebox.  

Smart Tip:

Also write down the date and how you met him.  "Met Steve at the National Realtor's Convention in May of 2022."

When you get 200 contacts in your shoebox, ask your ten-year-old kid to set you up on iContact.  After that, add all your new contacts directly into iContact.  Every day.  I am semi-retired, but I still add six to eight new contacts every single day.

Don't worry if your newsletter is butt-ugly.  I want it to be butt-ugly.  For twenty-five years, I just typed my company address at the top of a piece of copy machine paper and started adding my corny jokes and interesting stories.  

Someday I'll tell you about The Hot Zone and my newsletter about it.  Ebola became airborne and almost killed us all.  My best newsletter ever - just typed on copy machine paper.

My buddy, Tom Harrier of Integrity Commercial Loans, just wrote me, "Soranus was a Greek physician.  I wonder if he was a proctologist?"  Hahahaha!

Okay, so you guys know that I live in Indianapolis, Indiana, even though my company remains in California.  Grandchildren.  Indianapolis is a lovely, lush, green city, with oodles of water.  It gets only the occasional dusting of snow.  The state has a balanced budget, a surplus actually.  The city is a wonderful place for my son, Tom, to raise our grandchildren.

Anyway, somebody sent me a cute Indiana joke:  Hey, have you heard about the latest anonymous sperm bank being established by the State of Indiana?  It will be called "Hoosier Daddy!"  Hahahaha.

Different Subject - Investments:  Investors may want to think twice about putting their money to work in China, contends DoubleLine founder Jeffrey Gundlach.

"China is uninvestible, in my opinion, at this point," the bond king told Yahoo Finance in an interview at his California estate. "I've never invested in China long or short.  Why is that?  I don't trust the data (George:  He means their hogwash GDP numbers).  I don't trust the relationship between the United States and China anymore.  I think that investments in China could be confiscated.  I think there's a risk of that."

Joke:  A fellow came into a bar and ordered a martini.  Before drinking it, he removed the olive and carefully put it into a glass jar.  Then he ordered another martini and did the same thing.  After an hour, when he was full of martinis and the jar was full of olives, he staggered out.  "Well," said a customer, "I never saw anything as peculiar as that!"  "What's so peculiar about it?" the bartender said. "His wife sent him out for a jar of olives."

A Little More About China:  With his military aggression and his threats to invade Taiwan, President Xi has encouraged India (no technological slouches themselves) and Japan to rapidly re-arm.  

Here's something that is kind of funny.  Under their Constitution, Japan's Self Defense Force was not allowed to have aircraft carriers; but they were allowed to have "helicopter carriers."  With the risk of war increasing, these helicopter carriers are now all carrying American-made F-35B fighter jets.  F-35B fighter jets take off vertically, just like a helicopter.  Haha!

Dad Joke:  "Whenever the cashier at the grocery store asks my dad if he would like the milk in a bag he replies, ‘No, just leave it in the carton!’"

Final Thoughts on China:  The Chinese Communist Party meets in the Fall of 2022 to choose its next leader.  President Xi has stacked the deck with his cronies to give himself an unprecedented and previously illegal third term.

Six months ago, President Xi was a shoo-in.  Today, it is clear that he lacks unanimous support.  His expensive $1.5 trillion Belt and Road Initiative is clearly out of favor with both his party and the world.  Countries are defaulting on these huge Chinese loans, and China has foreclosed on the national assets of several tiny countries.  Four Chinese factories were burned in Miramar (Burma) this month.  It's kind of nice not to be Evil Empire in the eyes of the world.

Joke:  When I look at chocolate, I hear two voices in my head. The first one says, "You need to eat the chocolate.”  The second one says, "You heard.  Eat the chocolate."

With the Evergrande Crisis revealing to the world that much of China's massive GDP has been in the construction of vacant apartments and vacant cities in Bum Flowers, Egypt (okay, China, haha) -

there is a growing view that China's GDP
will never catch that of the United States.

Final Funny:

Little Johnny:  “Having a farm is really hard work.”
Billy:  “It’s an ant farm Johnny, all you have to do is supervise.”

There is a big difference between an application fee and a deposit for third party reports.

Application fees are greatly abused by con men to steal millions of dollars from unsuspecting commercial loan borrowers every year.  If you are reading this article because some so-called "commercial lender" is demanding some huge application fee, trust your instincts.  You are probably being conned.

The way the con works is that some company with a fancy sounding name offers you a very generous amount of money at an interest rate that sounds irresistible - say, 80% loan-to-value at 3% fixed for fifteen years.

To get the loan, all you have to do is to give the "commercial lender" an application fee of $20,000.  Once the "commercial lender" has your money, he disappears and ghosts you.  

Here is a longer article I have written on the subject of advance fee fraud (application fee fraud) that should be very helpful for you.

But... life is complicated.  Legitimate commercial lenders, like banks, hard money commercial lenders, and Blackburne & Sons, my own hard money shop, still have to order third party reports in order to make commercial real estate loans.

The borrower doesn't want to pay for third party reports unless his loan is already approved, but the commercial lender can't approve the commercial loan request until it reviews the third party reports.  It's almost a Catch-22.  The way this Catch-22 is solved is through the issuance of term sheets.

What is a Term Sheet?

If your borrower receives a term sheet, it generally means that his loan is going to be approved, assuming the property appraises for enough money and the toxic report comes back clear.

Term sheets are sometimes also called conditional commitment letters, proposal letters, or good faith letters.

Okay, so the commercial loan marketplace is flooded with advance fee scammers.  At the same time, legitimate commercial lenders still need to collect $3,000 to $4,500 for third party reports.

How to Spot Advance Fee Scammers:

So how does a layman tell a legitimate commercial lender from an advance fee scammer?  Here are some clues:

Banks and credit unions are clearly legitimate commercial lenders; but be careful of any "commercial lender" masquerading as a bank.  It is illegal for a non-bank to use the words, "bank," "banc," or "bankers" its name.  For example, the names Northwestern Bankers or Wilmington Banc Mortgage are illegal if these "commercial lenders" are not actual FDIC-insured banks.

The following will sound obvious, but you will be surprised at how many commercial borrowers, desperate for a loan, will ignore it:  In order to be a legitimate commercial lender, you have to have money to lend.  

Banks and credit unions get their dough from depositors.  Life companies get their lending dough from insurance premiums.  Hard money lenders have funds, or they syndicate groups of private investors.

But where on earth does Northwestern Bankers get its dough to lend?  The con man better have a pretty good story.

Take a look at the so-called "commercial lender's" website.  Commercial loans are usually large loans, so the website should be very, very extensive.  

Here's a quick tell.  If the website lacks a physical street address, the "commercial lender" is a con man.  These con men don't want angry victims showing up in their office.

Here is another great tell:  When you call the lender, does a real-life person answer the phone?  Or do you have to leave a phone number and wait for a call back?  Remember, con men need to screen every call to avoid getting a tongue-lashing from furious past victims.

Legitimate commercial lenders are never-ever-ever international lenders.  That great offer from a Swiss life insurance company?  Uh-huh.  It's a con.  There are huge tax penalties levied on foreign lenders trying to lend in the U.S.  We don't want Germany's largest bank undercutting JP Morgan Chase, so we tax them into oblivion.

Lastly, be very wary of commercial loan offers that are almost too good to be true.  They are cons.  The difference between the cheapest commercial lender in the country and the second cheapest is a mere 1/8th of one percent.

If all of the banks in town are offering 5.5% and some other "commercial lender" is offering 3.5%, what on earth is going on?  To get all of the business, a hungry bank merely has to lower its rate to 5.25%.  Why go all the way to 3.5%?  It makes no sense from a capitalistic point of view.  It's a con.

One lender offers you 80% LTV at 3.5% fixed for 30 years.  A strange, unknown hard money lender offers you 55% LTV at 14% for two years.  Which one is the con man?  I hope by now you will immediately say the first offer.

I tend to trust very expensive, very conservative, very short term offers.

But be very careful of the lightning fast loan commitment at outrageous rates based on 50% of "quick sale value."  What the heck is quick sale value?  There is no enforceable definition in the law.  

The lender will charge you a $200,000 commitment fee for a $10 million commercial loan, as long as the loan does not exceed 50% of quick sale value.  

When the appraiser goes out, he values your $20 million resort at just $7 million on a quick sale basis.  The lender then offers to fund a $3.5 million loan, when you owe $7 million.  When you decline it, the lender keeps your $200,000 deposit and blames you for over-valuing your property.

I am shocked - shocked I tell you - that there are con men in this business.

Please follow my logic.

The Chinese people distrust banks for historical reasons.  They therefore keep much of their savings in real estate.  Usually they buy apartments (think of condo's) that neither they, nor any renters, will ever occupy - at least not for a decade or two.

These apartments are often unfinished.  They have rough electrical and rough plumbing, but these apartments often don't even have interior walls, finished electrical, finished plumbing, or floor coverings.

Surprisingly, there are no real estate taxes in China, so the cost of ownership is low, other than the mortgage.  Paying down on the mortgage, like the funding of an IRA, is how the Chinese people save.  Most of the savings of the Chinese middle class is in the form of these extra 50 million to 65 million vacant apartments.

New homes sales by Evergrande, China's second largest home builder, have fallen by a stunning 97%.  Sales of homes by other home builders have plummeted as well.  Who wants to buy a home today when the price will be significantly lower in two months... and perhaps 30% lower a year from now?

Since the Chinese keep their savings in these apartments, and since sales of apartments are plummeting, a great many of the Chinese middle class suddenly lack access to their emergency savings.   With no apartment buyers, they can't get at their dough.

Suppose you're a middle-class Chinese worker.  Do you feel comfortable enough, with your savings tied up for the next four years, to buy a new car this year?  Or do you muddle through with your old one?  

Or suppose you owned a small manufacturing company in China.  You build little parts that go into some other parts that eventually go into machines assembled by large companies.  Would you right now (1) open a second assembly line to expand your business; or (2) get more conservative with your spending until you have rebuilt your emergency savings in the form of cash?

Now imagine similar decisions being made all throughout China.  China's middle class consumers - who number more than the entire US population - must be cutting back significantly on their consumption.

And remember, the Evergrande default is only three weeks old.

If China goes into a great recession (can there be any doubt?) - like we did in 1986, 2000, and 2008 - will this financial contagion remain in the peeing section of the Chinese swimming pool?

What Keeps Me Up At Night:

Living through a world war is not always the fate of some other guy.  Did you know that World War I was once called, The War to End All Wars?  As Dr. Phil might have asked, "How did that work out for you?"

President XI this week will re-write the election laws that will help him cement his position as Dictator-For-Life of China at a big party meeting in the Fall of 2022.  Now I have to believe that there are some people in China, including many quiet ones in the Chinese Communist Party, who are very upset by this.  If President Xi is ever deposed, I doubt his enemies will allow him to quietly retire to a house in the country.  I'm thinking he would be taken on a long car ride, and he would never be seen again.

Absolute power corrupts absolutely.  There is significant evidence that President Xi is taking the Chinese economy in the wrong direction.  For example, he is waging a secret police war on the very billionaires who created the so-called "Chinese Economic Miracle."  As a result, many of these billionaires have retired in the past nine months.  Imagine the loss to the American economy if Elon Musk retired.  Xi has forced at least 20 of these super-capitalists to retire.

Okay, so suppose a garden-variety real estate bust drives China into a garden-variety great recession.  I say "garden-variety" because we have had three such crashes in my lifetime - the S&L Crisis, the Dot-Com Meltdown, and Great Recession.  We'll probably have another one when China's crash reaches us.

What should China do?  Chinese regulators should let their most reckless banks fail and bail out the rest, making sure that the economy still has plenty of credit to recover.

China should also just let real estate crash, until prices reach "rock bottom."  Japan failed to allow their real estate market to bottom out in 1989, and their economy suffered for two Lost Decades.  Real estate is NOT going to zero.  It will likely crash by 45%, just like ours did in 1986, 2000, and 2008.  China needs to let over-leveraged investors go bust, to teach the market a lesson.  Prudence.  Thrift.

This tendency to make the same boneheaded economic mistakes every ten to fourteen years is not a capitalist thing.  It's not a communist thing.  President Xi and the CCP arguably did nothing wrong.

Jesus' first miracle was to change water into wine, remember?

This boom-bust cycle is just a strong tendency of human beings to forget thrift (the admirable trait of saving), to borrow too much money, and to speculate.  This strong tendency reminds me of that scene with the moth, attracted by the porch light, in the kid's cartoon movie, It's a Bugs Life.  "No, Harry, don't look at the light!"  "I can't help it.  It's so beautiful."  Zap.

But China won't let the crash just play out.  The Chinese Communist Party ("CCP") is afraid of its own people.  (These are not my words.)  The deal between the Chinese people and the CCP is that the people will endure the CCP's repression in exchange for the CCP improving their lives by 6% to 8% every year.

But clearly that "economic miracle" cannot continue straight up.  Just like a forest needs forest fires to clear out the undergrowth, so too does an economy need busts to clear out the old, weak companies.  The old, weak companies need to fail, so their workers and machines can be picked up by younger, more vibrant companies.  The famous economist,  Joseph Schumpeter in 1942 called this process, creative destruction.  It is also sometimes referred to as Schumpeter's Gale (a gale of destruction).

But it won't happen in China.  The Communists will paper over the crash.  For example, the Chinese government has essentially assumed the debts of Evergrande. It is the Chinese government that is really making the interest payments to Evergrande's bond holders.  The CCP will try to contain this garden-variety great recession through money printing, the bailing out of failing businesses, propaganda, and sleight of hand.

But just as Miami may someday be unable to contain rising seawater, so too the communists may be unable to contain the dramatic slowing of their economy.  They can't prop up every company.

My fear is that when the Chinese people realize that the quality of their lives is going backwards, they will begin to protest.  To stop the protests and riots, Xi will move to unite the people against a common enemy - the United States.  He will order the invasion of Taiwan and start the next world war.   Starting a war to unite the people is an old trick, but it works.

Okay, what should you do?  I was about to say watch the price of gold and use it as a signal as to when to get out of stocks.  Then I looked up the price of gold.  Gold is up to over $1,860 per ounce.  Maybe gold's recent move is just in response to inflation. Maybe that's it.  By the way, when markets crash, everything goes up for sale at fire sale prices, including gold.  But maybe the smart money is starting to hedge.

My view that war is almost inevitable and fairly imminent is still the minority view, but if you listen to the admirals and generals on the news these days, it's a view that is gathering support.  For example, China is practicing missile fire at mock-ups of US carriers and warships in the desert this week.  A new congressional study was just released that concluded that China has the military capability to win right now.  I humbly predict that China will invade Taiwan in March of 2023, after Xi is confirmed as President For Life in the Fall of 2022 and when the tides in the South China Sea will permit an invasion.

But no matter what, China's economy is slowing dramatically.  This can't be good for the world's economy and your stock portfolio.

Commercial real estate appraisals can be quite extensive, as thick as thirty to fifty pages. The appraiser needs to determine, for example, if each lease provided to the appraiser reflects the current market rent of the property or whether the rental amount is out-of-date, meaning it is too high or too low.  The lease might even be fraudulent.  This can often only be determined by checking the rents of a number of similar properties nearby. 

Did the borrower provide the appraiser with his actual operating expenses or did he fraudulently slip in some understated expense numbers, in order to make his net operating income look higher?

The appraiser also has to carefully analyze the cost of the commercial building's construction, to help determine the fair market value of the building and to determine if the rental rate is reasonable.

Image if a developer could build an office building for just $1 million and lease it out for $1 million per year.  Clearly something is wrong; otherwise, why aren't capitalistic developers rushing to build competing office buildings?  That lease for $1 million per year smells awfully fishy.    

Whether the borrower pays $2,000 to $2,500 for a commercial appraisal or $4,000 to $4,500 for the appraisal depends on the qualifications of the appraiser.

It is the commercial lender who determines the minimum qualifications of the appraiser.  If the loan amount is small, a bank may only require a General Certified Appraiser.  If the loan amount is large, or if the property type is unusual (think movie complex), the bank will likely require a MAI appraiser.

Uh, 68?

A General Certified Appraiser is one who has been extensively training in the three approaches to value - the Income Approach, the Sales Comparison Approach, and the Cost Approach.  In order to be awarded the General Certified Appraiser designation, the state will usually require a large number of training courses in the valuation of commercial property, will test the candidate extensively, and will require that he or she have a certain level of appraisal experience.

General Certified Appraisers are usually pretty good, and they typically charge between $2,000 to $2,500 for an appraisal of a commercial property valued up to $6 million or so. Small banks and hard money lenders are the commercial lenders who will most often require just a General Certified Appraiser.

Larger banks, when valuing commercial properties worth more than $6 million to $7 million or so, will usually require a MAI Appraisal.

MAI stands for Member, Appraisal Institute, a private, well-respected professional  association.  The Appraisal Institute defines a MAI Appraiser as an appraiser who is  experienced in the valuation and evaluation of commercial, industrial, residential, and other types of properties, and who advise clients on real estate investment decisions.

MAI Appraisers are like the CPA's of the appraisal industry.  They are the top of the food chain.  They are most highly trained and experienced commercial real estate appraisers in the industry.  

MAI Appraisers will typically charge between $4,000 to $10,000 for an appraisal assignment.  For most commercial property owners, borrowing from a bank, the MAI appraisal will cost you between $4,000 and $4,500.

Borrowers, brokers, and mortgage brokers should never order the appraisal themselves.  If they do, the cheapest commercial lenders will NOT be able to use it.  

Do you remember the Savings and Loan Crisis back in 1986, when over 1,000 S&L's went bankrupt?  They lost billions of dollars, in large part due to bad appraisals.  Developers were ordering the appraisals themselves from crooked MAI appraisers.  They would shop an appraisal assignment until a MAI Appraiser promised to bring in the appraisal at the value the developer wanted.  The joke back in those days was that MAI stood for "Made As Instructed."  

The law that eventually cleaned up the appraisal industry was the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 - pronounced FIRREA (like diarrhea).  

Geesch, everyone is getting stuck in the stocks.

After the passage of FIRREA, state laws were passed to license and regulate real estate appraiser.  The appraisal industry became far more professional and ethical, and the prestige of the Appraisal Institute itself recovered its lustrous reputation.

But let's get back to the issue that a borrower or a broker must never order the appraisal themselves.  Under FIRREA, it is illegal for an insured bank or savings and loan association to accept and use an appraisal ordered by a borrower or a broker.

It is too late?  Are you stuck with a $2,000 or $4,000 appraisal that no bank will accept?  My own hard money shop, Blackburne & Sons, will often accept commercial real estate appraisals ordered by competing lenders.

Heavens, I miss 'ole Al Bundy.  Katie Sagal got hit by a car and
hospitalized this month while walking across the street.  She's okay.

So you're thinking about buying a commercial property - maybe a small apartment building or an office building.  

As a general rule, commercial real estate lenders are more conservative than conventional home loans lenders.  Conventional home loans lenders will regularly make purchase money first mortgages that are 80% loan-to-value.  You might say that 80% loan-to-value ("LTV") is the standard LTV for home loans, sort of the "default mode" for such loans.

By the way, a conventional home loan is one where the loan is not guaranteed by the government.  Examples of government-guaranteed home loans include FHA loans and VA loans.  When the government is willing to guarantee the lender against loss, obviously the lender will increase its loan-to-value ratio.

Earlier I used the expression, purchase money first mortgage.  A purchase money first mortgage is one where the loan is used to buy the property, as opposed to a refinance, where the loan proceeds might be used to start a business or pay for your kid's college tuition.

The standard or "default mode" for a purchase money first mortgage to buy an apartment building is a loan of 75% loan-to-value.  If you shop dozens of small banks and credit it unions located close to the property that you are buying, it would not be shocking if one of them - because they happened to be flush with cash - would offer to make you an apartment loan of 80% loan-to-value.

Is a triplex an apartment building?  No.  Multifamily properties have five or more rental units.  Loans on duplexes, triplexes, and four-plexes are actually considered home loans.  Why?  Both Fannie Mae and Freddie Mac will buy loans on one-to-four family dwellings.  As a result, home loans of up to 80% LTV are common on four-plexes.

Okay, but what if you want to buy a small strip center or a small multi-tenant office building to provide income for your retirement?  How large of a downpayment will you have to raise?

In most cases, if you want to buy a commercial-investment property, you will probably have to put 30% down.  If the deal is small, and if you shop 30 or more banks and credit unions located close to the subject property, you just might find one willing to allow you to put just 25% down.

What if the seller is willing to carry back a second mortgage on the property?  Can you put down less money?  Unfortunately not.  Prior the the Great Recession, some banks allowed this; but these banks got crushed in the crash.  Bank regulators will no longer allow second mortgages behind bank first mortgages - neither on purchase money deals, nor later, when there is sometimes TONS of equity.  They won't allow it.    The bank will make you you refinance the entire first mortgage to access that equity.

But wait, as they say in the Ronco commercials, there's more.  If you are trying to buy a commercial-investment property, and the seller is willing to carry back a second mortgage for some of the purchase price, you should apply to Blackburne & Sons.  Unlike banks, we will allow such second mortgages.

Okay, but what if you are trying to buy a commercial or industrial property for your company to occupy and use?  By all means, if your downpayment is an issue, you should apply for an SBA or a USDA loan.

You have probably heard about the SBA loan program.  If your business is older than three years, SBA lenders will lend you up to 90% of the purchase price of a building that you intend to use for your business.

What if your business is less than three years old?  The SBA will probably require that you you put 30% down.

Okay, you have heard of the SBA loan program; but what is this USDA loan that I mentioned above.  The US Department of Agriculture, in order to bring jobs to financially depressed rural areas, has developed a program that is very similar to the SBA loan program.  It's called the USDA Business and Industries loan program.

Click here to apply for a USDA Business and Industries loan.  When the system asks for "Loan Type," simply click on USDA B&I Loan.

Please keep in mind that (1) the Chinese economy is already starting to crumble; (2) the collapse will likely resemble the collapse of the Japanese economy in 1989, leading to the Lost Decade in Japan; (3) President Xi and the Chinese Communist Party ("CCP") will almost certainly be blamed; (4) President Xi will be at great risk of losing power and quite possibly being quietly shot in some cell in a remote prison; and finally, in desperation (5) President Xi will distract the Chinese populace from the collapsing economy and will unite them by invading Taiwan.

Students of history and wave theory can spot humans making
the same boneheaded decisions every generation.

The invasion of Taiwan will require the destruction of the U.S. air bases on Guam, and likely also those in Japan.  Otherwise, the U.S. and its allies will enjoy air superiority.  It is interesting to note that the U.S. military required the participation last week of all 3,000 civilians located near its airbases in Japan in an evacuation drill.

Guam is a U.S. territory, and neither Japan nor the United States are likely to tolerate missile attacks on their sovereign territory.  These missile attacks will probably start World War III, a conventional (non-nuclear) war fought with missiles, jets, and warships.  According the last three war games, the United States and its allies will lose this war.  

We just can't reach the bastards with our conventional weapons.  Our jets can't fly far enough to reach their missile launchers, and the range of their best (and most expensive) missiles is more than twice (three times?) as far.  It will be like a bully in the school yard, holding the forehead of the smaller guy, while the little guy swings at the air.

I try to have fun with this blog, but this is serious stuff.

A buddy of mine asked.  "Can't we just nuke the bastards?"  Between our nuclear triad (intercontinental nuclear missiles, our long-range intercontinental bombers, and our 72 nuclear submarines), we have enough firepower to destroy every town larger than 10,000 people in all of China; but as my Hong Kong buddy recently pointed out, "George, you could kill a billion of us, and we would still have more population than you."  Oh.

But we will never use nuclear weapons, just like we will never use our 2,000 canisters of anthrax or our 20,000 poison gas howitzer rounds.  China has boomers (submarines with nuclear missiles) too, and they are building a whole desert full of intercontinental missile silos.  Almost every human in the United States could die.  At least in a Chinese invasion, maybe our younger children might be allowed to survive.

Interesting note:  While China tested a hypersonic missile last week that flew around the world and then attacked a test target (missed it by a number of miles), someone in our Defense Department pointed out that hypersonic missiles are incredibly expensive.  

Perhaps China has some really cool and dangerous missiles, but maybe they can't afford enough of them.  Remember, these are all conventional missiles.  Each missile might take out an aircraft carrier or several city blocks, but it might take a whole lot of expensive missiles to take out all of our shipyards and missile factories.  Hey, hope springs eternal.

We need to finish developing our mid-air refueling drones to accompany our fighter jets on their 1,000+ mile bombing missions.  I read this week that China has the same problem as the U.S. - not enough refueling jets.

It's kind of cool to watch history play out in slow motion right in front of us, but as I have repeatedly told my kids, history does not always happen to the OTHER guy.  Just think, you and your family could make some history books someday.  Let's just hope you are dipping and kissing some beautiful nurse in a ticker tape parade, rather than...

Remember, I will shortly be sharing with you the exact moment that President Xi will launch his attack.  My earlier prediction that the U.S. and  China would go to war within three years may have been too generous.  With the crash of Evergrande, the war is likely to start a year earlier.  Poop!

Every time you hear in the coming weeks about how China's economy is crumbling, keep in mind that this economic crash only accelerates President Xi's plans to invade Taiwan and start World War III.  Absolutely don't be doing your happy dance when you read that their real estate has fallen by 25%!  

Okay, so when will President Xi start his invasion of Taiwan?  Remember, he has to invade in order to distract his people.  

Another interesting note:  In the past year, President Xi has purged over 1,400 security apparatus officers and policemen.  Does that mean he shot them?  I dunno.  Before World War II, Stalin shot 50,000 officers out of an officer corp of 100,000 - so arguably Xi is just a light weight communist dictator.

Xi would not be purging the secret police if he had no opposition.  Remember, he is trying to run for a third term, and not every communist in China can be comfortable with a President who won't step down.  

In prior blog articles, I hypothesized that the Chinese people would rise up in mass protests and riots once the economic meltdown got really bad.  I read some articles this week that suggest that if Xi is overthrown, it will probably happen from within the Chinese Communist Party.  

C'mon, George, you're killing me here.  When will China invade Taiwan?  

There is a five-month window when the the seas between Taiwan and the Chinese mainland are far too choppy for landing craft.  That five-month period starts in October every year and lasts through the end of February.  March is the first month when an invasion is even physically possible.

But before the Red Chinese can hope to invade Taiwan, they first have to soften up the island nation.  They therefore need to start their super-accurate missile bombardment in October of the preceding year.  They need to take out the shore batteries, the air defense missile batteries, the airfields, the fleets of fighter jets, the beach fortifications, etc.  This missile barrage will likely take months, so perhaps the window for March of 2022 is close to closing.

Therefore I hypothesize that the missile war will start in October of 2022 and the actual invasion will begin in March of 2023.  There is always the chance that the timing will work against Xi.  People could start rioting during the no-go months, and by the time the attack window finally opens, Xi will have already been swept from power.  Hope springs eternal.

Our generals have told Congress that, "The invasion will not start until 2025.  That's the soonest time that China will be ready."

Folks, if we make it to 2025, then Xi will have long since been deposed (and probably shot).  Please pray that Xi gets peacefully deposed.  But just remember what I constantly remind my children:

"History doesn't always happen to the other guy."

In the United States, we have the very good habit of not executing our former presidents. If the former president of a country fears that he will be executed when he steps down, it tends to discourage him from stepping down.

A good example is President Duarte of the Philippines.  His police, army, and death squads executed 30,000 drug dealers and drug users during his six years as president.  He must know that there are a lot of angry drug dealers and families of drug users just waiting for him to relinquish power.  It is going to be interesting to see if he declares martial law at the end of his allotted single term.

President Xi faces a similar problem.  He is not supposed to serve much longer, but he has been installing his cronies into positions of power within the Chinese Communist Party ("CCP"), and they have changed the rules to allow him to run again.  He has effectively become Dictator For Life in China.  If he ever gets ousted, his enemies are going to want him dead.  He is too dangerous if he simply retires.

What does this have to do with selling your apartment in China?  President Xi is desperate to prevent a real estate crash in China.  Most Chinese people store 60% to 90% of their wealth in their real estate, as opposed to in the stock market here in the United States.  

If real estate were to crash in China, suddenly the Chinese people would feel much less wealthy.  They would stop buying so much stuff and start saving more.  Imagine if Americans suddenly reduced their spending by 30%.   Pow.  The American economy would hit a brick all.  The sudden slowdown in China could be far worse.

There is an unspoken deal between the Chinese people and the CCP.  As long as the CCP improves their lives by 5% to 8% every year, the Chinese people will tolerate the repression of the communists.  So what happens when the Chinese economy suddenly crashes?  I read somewhere that an incredible percentage of Chinese citizens are homeowners.  If real estate crashes in China, it will be like the stock market crashing here.  People are going to stunned, and spending will tank.

In China, the people may start to protest and riot.  Remember, the Chinese people are sick of the corruption and the restrictions on free speech.  President Xi "is living on a powder keg and giving off sparks."

Xi doesn't want to be dragged from power and shot.  He also probably thinks that he is a great leader and a brilliant military strategist.  He knows a bust is coming, and he has a plan.  As soon as the riots begin, he will invade Taiwan.  This will distract the Chinese people and unite them behind him.   Invading Taiwan could easily start World War III.  According to repeated war games, the U.S. loses.  We do NOT want riots in China.  No, sireee.

As I wrote earlier in the week, the Evergrande default is a dangerous spark.  Everyone in China must now appreciate that apartments there are greatly overbuilt.  The rich folks in China own their own apartments, plus at least one more more.  About 20% of the Chinese people own more than one apartment.  Now if you knew that stocks were over-valued and that a crash was coming, would you sell some of your stock?  You betcha.  Therefore you can bet that at least some folks in China are right now trying to sell their extra apartments.

I read this week that the CCP is starting to erect obstacles to selling apartments.  One technique is to refuse to transfer title.  

Part of me is hoping that the strategy works; otherwise, with buyers reluctant to invest in a declining asset, the sellers will start a bidding war to the bottom.  "I'll sell for a 5% discount."  "I'll sell for a 10% discount!"  "20%."  "30%!"  Real estate crashes in the U.S. tend to always be 45%, so can you imagine the effect on the Chinese economy if their consumers suddenly feel 45% less wealthy?

We do NOT want the Cheese economy to crash!