Commercial Loans and Fun Blog

Advance Fee Scammers Are Now Disguising Their Upfront Fees as Appraisal Fees

I received an interesting email this week from a mortgage broker who was pulling his hair out in frustration. Advance fee scammers keep conning his innocent borrowers into sending in large application fees for commercial mortgage loans - and then the scammers disappear without ever delivering the promised loan.

It's not as if the borrower simply did not qualify for the requested commercial loan. The whole act was merely a charade from the very start. The scammer had absolutely no ability to lend millions of dollars. The con man was probably just working off of his laptop from a desk in his short-term rental apartment.

Advance fee scams have been around for years, and most borrowers, investors, and mortgage brokers have learned to be wary of them. But as my mortgage broker put it, "Ah, but scammers are nothing if not resourceful. Many of them have begun to advertise, 'No up front fees whatsoever, just the cost of the appraisal!' Such a deal!"

"Turns out, this is a form of stand up comedy.... What it really means is, they now load their preposterous fees into the cost of the 'appraisals' which, coincidentally, can only be performed by their own, enlightened, specially-designated, one-of-a-kind "appraiser' or 'national appraisal management company'. And of course, with still no reasonable expectation of funding an actual loan..." What he means is that you send in a check for the appraisal, and then the scammer simply keeps it and stops returning your phone calls.

Okay, so what can you do to protect yourself (or your borrower)? Here's a fraud checklist:

1. Ask your lender if you can pay the appraisal company directly. While your lender may complain about the additional hassle, if you really push him, a legitimate commercial lender should be willing to bow to your request. Certainly my own commercial hard money shop, Blackburne & Sons, would allow it (after some complaining). The lender will insist on ordering the appraisal himself, in order to avoid collusion between a corrupt appraiser and a bad-intentioned borrower; but a legitimate commercial lender should be willing to allow you to pay the appraiser directly.
2. Once the name of the appraisal company is disclosed, check the company out. Are they licensed as either an MAI appraisal firm or at least a General Certified appraisal firm, the minimum required licensing to perform a commercial real estate appraisal? Is their license current and in good-standing? Do they have a website?
3. Here is an earlier blog article that I wrote that may help you spot an advance fee scammer.

Be careful out there.

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Need an expert witness in an advance fee dispute?

This is the year of the hard money lender.  The banks have stopped making commercial real estate loans, and they are unlikely to return to the commercial mortgage market until they see enough private commercial lenders making outrageous profits. There is no reason why you can't be one of these hard money commercial lenders making outrageous profits.

If you have ever considered becoming a hard money lender yourself, you may want to join Leonard Rosen at the Mirage in Las Vegas on March 3rd for his 2011 National Hard Money Conference. 

Leonard Rosen's hard money conferences are legendary.  Your legal questions regarding banking, lending laws, mortgage pools, REO (bank owned properties) and private placement memorandums will be addressed by one of the top real estate attorneys nationwide.

If you have ever wanted to meet me, I will be one of the panelists, and I would be delighted to chat with you at the hosted cocktail party afterwards.  One of the things you learn after attending scores of mortgage conferences over thirty years is that the evening cocktail parties are where much of the schmoozing and real networking takes place.

Here are the details on the conference.  I hope to see you there.

Yesterday a commercial mortgage company applied to join C-Loans.com, purporting to be a hedge fund that makes bridge loans on commercial real estate.  When we asked them to prove that they were a bona fide hedge fund, and not just a bunch of advance fee scammers, they got a little huffy.

Frustrated, I sent an email to my buddies on LinkedIn.com.  The question I posed was the following:  Are All Hedge Fund Guys Liars?  Do Hedge Funds Actually Make Commercial Really Estate Loans?  The responses I received were quite interesting.

One guy - a guy who I have known for years - replied that he had left the mortgage REIT for which he had worked for nine years - to start his own hedge fund four years ago.  I am confident that his firm was a bona fide hedge fund making commercial real estate loans.

Other guys replied that they too had met a tons of scammers claiming to be hedge fund managers.  These scammers were in fact just a bunch of liars who were just trying to steal application fees.

But the best response came form an old buddy named George Witherspoon:

"All hedge fund guys are not liars; but I do understand your frustration, because we (too have run across a lot of ) investors that stated they are a hedge fund or represent hedge funds as their funds advisor.

In my experience with hedge funds there are several methods to use to determine if the hedge fund or hedge fund manager is legitimate and are listed below:

1. Hedge Fund Directory - Barclays publishes a directory which list all legitimate hedge funds worldwide. The cost of the directory is about $1,100.00 when I purchased mine in 2009. They also publish an electronic version which is helpful in locating funds by investment types.

2. Most funds managers are registered and can be checked out on any of the following sites -

a. http://www.finra.org/Investors/ToolsCalculators/BrokerCheck Use this site to check registration of Managers to see if they are a registered Broker/Dealer.  The Manager does not have to be a registered Broker/Dealer, but they should have a Prime Broker.  Additionally, any fund with assets in excess of $25MM should be registered as an investment advisor with the SEC.  This status can be checked using the same link above then click the link to the right side of the page.  If the fund is not registered, then the management company must be registered. Some hedge fund manager get around the requirement by limiting the amount of investors in the fund.

b. If the fund or the manager is not registered with the SEC and or IARD then check with the NFA at http://www.nfa.futures.org for the fund or the manager being registered. If the fund the manager or the management company is not registered, then, in my opinion, the fund is not serious about their business.

c.  If the fund is registered in the Cayman Islands, as so many are, to get around the US regulation, you have to check with the Monetary Authority at http://www.cimoney.com.ky.  If the fund indicates they are a Cayman Island Fund, and it is not registered with the Monetary Authority, it is either a fraudulent fund or it is not properly set-up and my advice to you would be stir away. We have had several funds approach us from the Cayman's that were not legitimate.

3.  You can also visit the following sites, they provide information on hedge funds although the listing on the sites are voluntary:

 http://www.hedgefund.net

http://www.hedgeworld.com

Hope this information helps. Let me know if I can be of further assistance.

Regards,

George Witherspoon

A mortgage broker wrote to me today and asked,

"George, I still have a handful of clients needing funding for their commercial projects ranging from $5 million to $454 million, but they have little to no cash reserves whatsoever.  Moreover, most have been burned in the past by scam artists or by unscrupulous brokers charging upfront fees with no capabilities of funding a loan at all.  So my question here is this…. Do my clients have a chance at getting any funding at all, or are they all just dreamers with good ideas?"

My answer is a clear and unequivocal, "No.  These deals do not have a snowball's chance in hell of funding."  

There are only a few occasions when an institutional commercial lender will make a commercial loan today:

1.  If a borrower keeps hundreds of thousands of dollars on deposit with his own bank, he can use that deposit relationship to twist the arm of his own banker to make him a loan.

2.  The borrower is buying an REO from a bank for 60% of the property's 2006 value.  Then a commercial lender will make a loan of 60% of the actual purchase price, if the buyer is putting 40% in cash down.

3.  A bank is discounting an existing commercial loan to its existing borrower by 40% to get the loan off its books.

4.  A builder in a primary market (Washington, DC; New York City, Boston, Chicago, San Francisco or Los Angeles) is contributiong 40% to 45% of the total project cost in cash, prepaid development costs, and equity in the land.

5.  An investor is refinancing a loan of at least $5MM on one of the four major food groups (multifamily, office, retail, industrial) in a primary market (see above).  In this scenario, a conduit will probably be the lender.  Conduits are coming back into the market, but only for very attactive deals.

6.  Everything else will probably have to be funded by a private money (hard money) lender.

7.  As Porky Pig would say at the end of one of those old-time Loonie Tunes cartoons, "That's all, folks."  These are the only types of commercial loans that are regularly getting funded these days.

Now I have a question for you (I wrote to this young mortgage broker).  What on EARTH are you doing trying to broker commercial loan larger than $2 million when you are new to commercial real estate finance?!!!  Even if you found a perfect loan - and finding a perfect deal is never gonna happen - you still couldn't place it because you don't have the relationships with the loan officers at the big banks that close deals of this size.  

You need to work on small commercial loans.  Remember these words, "Big commercial deals never close (unless you have a full pipeline of small deals and you don't need the commission).  Small commercial loans close."

There are two ways to place a commercial real estate loan.  One way is to hire a mortgage broker and pay him one point to place your commercial loan.

A better way is to buy a huge list of commercial lenders for $30 or so and then place the loan yourself.  This second method saves you almost $25,000 - enough dough to pay for a year's tuition at an in-state college.

To buy one of these wonderful lists, please go to CommercialLenders.com.

All across the country banks are turning to their commercial mortgage borrowers and saying,

"Look, our regulators are concerned about your commercial loan.  We know your commercial real estate loan is current right now, but the vacancy rate for commercial space in your area is pretty high.  Here's what we're going to do.  Right now you owe us $5 million.  If you pay us off in the next 90 days, we'll accept just $3.5 million."

Bankable commercial borrowers are therefore hitting the streets in search of a new bank that will help them off their old bank at a huge discount.  But here's the problem:

Paying off a commercial loan from a bank at a discount is a form of default.  The next bank will not enthusiastically make a loan to a borrower who has just short-changed his old bank for hundreds of thousands of dollars.

So what should the investor do?  

In real life, the investor simply has to take advantage of the discount; otherwise, the first bank will eventually foreclose on his property.  To find a new commercial mortgage lender, however, the investor will need to use a non-bank commercial lender, like a REIT or a hard money lender.

Essentially mortgage REIT's and hard money lenders are the same thing these days.  There are only two surviving commercial mortgage REIT's in the country, and both of them are more expensive than the cheapest hard money lenders.

Bottom line:  The investor has to bite the bullet and use a hard money lender to pay off his existing bank.  The moment this hard money loan is closed, however, he should immediately apply to a small bank near his home or office - one that will appreciate his deposits - to refinance the new hard money loan and its high interest rate.

The wise investor will choose a hard money lender with low points and no prepayment penalty, even if that means living for a few months with a high interest rate.  The idea is to keep the cost of this bridge loan to a minimum.

My own hard money shop, Blackburne & Sons, recently funded a deal where, in addition to convincing the bank to accept a large discount, we were finally able to convince them to also subordinate part of their debt to our new loan.  These are indeed strange times when a bank can be convinced to subordinate part of their debt; but they were wise to do so.  Now a new permanent lender will be able to come in and refinance both our new bridge loan and the bank's small subordinate second mortgage.

I have now heard it all. Yesterday I got a lead call on a medical marijuana farm in Colorado.  The buyer was prepared to put 25% down and was seeking a loan of 75% LTV to buy a former nursery in order to grow legal, medical marijuana.

So, did Blackburne & Sons, our hard money commercial mortgage company, make the loan?

Naw, but we seriously considered it.  Remember, hard money lenders are portfolio lenders.  Our loans do NOT have to fit into some little square box with pre-defined underwriting criteria.  If a hard money lender thinks that a commercial loan is a good one, and if he can find a group of private investors to invest in the loan, he is free to do the deal.

Now a commercial loan against a medical marijuana farm would be a VERY expensive loan - anywhere from 14% and 5 points to 18% and 15 points.  Most of those points would have to go to those private investors (high net worth individuals) who invested in the loan.

The investors would almost certainly require additional collateral as well.  The loan would probably have blanketed the personal residence of the buyer, as well as at least one other investment property, like an apartment building.  The personal guaranty of the borrower would, of course been required, and perhaps the personal guaranty of a wealthy, outside party would also have been required.  The personal guarantor might even have been required to put up collateral for this guaranty.

But my point is that a commercial real estate loan, secured by special use property (odd-ball collateral), is definitely available from a hard money commercial lender, under the right circumstances.

Now Blackburne & Sons did not make the loan because the seller of the old nursery was asking $1 million for the former nursery, which was just 10 acres.  The sales price simply made no sense; but we definitely considered the deal.

Who would have thunk it, huh?

I recently read a fascinating book, The Next 100 Years.  The book makes some surprising predictions about the future, some of which are extremely relevant to commercial real estate finance.

The author, George Friedman, predicts that the population of the future will migrate from the suburbs to mega-cities, connected with high-speed rail lines.  The reason why is because future job growth will take place in areas of large population concentration, where ideas for new products and new companies are exchanged more quickly between budding young entrepreneurs, perhaps meeting at the local bar or bistro.

It is interesting to see the CMBS market moving in the same direction.  The commercial mortgage-backed securities market essentially disappeared for two years following the crash in 2007.  Bond buyers had no appetite for bonds backed by commercial real estate.

In the past seven months, however, bond buyers have displayed an increasing appetite for huge CMBS loans, secured by core assets, in primary markets.

A core asset is an essential asset for a business, an asset without which a business cannot carry on its main activity.  For commercial real estate investors, their core assets are those commercial properties that can be relied upon to stay rented and generate cash flow, even in the severest of recessions.  Typically core assets are Class A office buildings, R&D buildings, and retail centers that are leased to very strong tenants.

Okay, so we know that CMBS investors want huge loans - ideally larger than $10 million, but at a minimum larger than $5 million - secured by core assets in primary markets.  But what is a primary market?

As far as commercial real estate finance is concerned, a primary market is a large metropolitan area that consistently generates new enterprises and new jobs.  In plain English, its where commercial real estate investors want to be invested.

The number one, most desireable, primary market today in the United States is unquestionably Washington, DC.  and the surrounding suburbs.  The Federal government is a huge employer, and government employment is growing. 

The next most desirable primary markets are New York City, Boston, Chicago, Los Angeles and San Francisco.  Houston, Atlanta, Dallas-Ft. Worth, and San Diego would also be considered primary markets.

Las Vegas and Phoenix are greatly out-of-favor with commercial real estate investors today.

What is interesting to note is that the mega-cities described in George Friedman's book, The Next 100 Years, are the same ones described as primary markets today by commercial real estate investors.  

If Mr. Friedman is right, the population of the United States will be migrating to, and concentrating in, these primary markets in search of employment.  In a way its counter-intuitive.  One might think that the internet and tele-commuting would allow workers to spread out across the country.  Great minds, however, are convinced that the incubation of ideas, stemming from workers working in close proximity to each other, will lead to a greater concentration of the population of the future in primary markets, living along mass transit routes.

What on Earth is a Family Office?

It sounds like a simple concept, but a lot of commercial mortgage brokers and investors forget it. In order to be a direct commercial lender, you actually need money to lend.

So the next time some clown, who is asking you for a $20,000 application fee, tells you that he is a direct commercial lender, ask yourself this question, "Where is he getting the dough to lend?"

Money to make commercial loans only comes from a small handful of sources. Life companies get their commercial lending dough from the premiums that policy holders pay for their life insurance policies. Banks, savings banks, S&L's, and credit unions get their commercial lending dough from the deposits that they receive from depositors.

Conduits, also known as CMBS lenders, get their commercial lending dough on an interim basis from bank lines of credit. Their commercial loans are eventually sold to a trust, that securitizes the loans into commercial mortgage-backed securities. This source of funds was almost completely dried up for two years following the crash in 2007, but the CMBS market is now showing some signs of life - but only for deals of $5MM or larger.

I think there are only two surviving commercial mortgage REIT's - Avatar and BRT Realty Capital - and they are making loans at hard money rates. (Do you know of any other commercial mortgage REIT's? I'd love to hear about tem. george@blackburne.com.) REIT's get their commercial lending dough from the sale of shares in the real estate investment trust.

The remaining source of commercial lending dough comes from private investors and mortgage funds. In 2006, before the Great Recession, there were about 250 large mortgage funds making commercial loans nationwide. Virtually every one of these funds got crushed during the Great Recession. Commercial real estate fell by 40%, and then commercial lenders flooded the for-sale market with commercial foreclosures. Since "everybody" knows that you can buy commercial foreclosures for 60 cents on the dollar, everybody wants a deal. Nowadays few commercial property buyers will pay more than 60% of 60% of 2006 valuations. Therefore almost every commercial mortgage fund in the country is now in the process of being wound down.

This means that today, in early 2011, the only way to fund a hard money commercial loan was for the hard money broker to syndicate a fresh group of private investors. Raising private money is much more difficult in 2011, compared to 2006, because so many private investors got chewed up in commercial real estate and in stocks because of the Great Recession. Large hard money commercial loans - deals larger than $2 million - have become almost impossible to obtain because there are so few mortgage funds remaining, and large syndicates of private investors are extremely hard to assemble.

I did see recently, however, a brand new commercial mortgage fund that raised $100 million in their initial offering. They were able to raise this kind of money because they raised their dough from endowment funds and family offices.

So what is a family office?

A family office is a private company that manages investments and trusts for a single wealthy family. The company's financial capital is the family's own wealth, often accumulated over many family generations.

Traditional family offices provide personal services such as managing household staff and making travel arrangements. Other services typically handled by the traditional family office include property management, day-to-day accounting and payroll activities, and management of legal affairs. Family offices often provide family management services, which includes family governance, financial and investment education, philanthropy coordination, and succession planning. A family office can cost over $1 million to operate, so the family's net worth usually exceeds $100 million. Recently, some family offices have accepted non-family members.

More recently the term "family office" or multi family office is used to refer primarily to financial services for relatively wealthy families.

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A Wise Friend Has Advised Me to Often Get Additional Collateral

A buddy of mine, Paul, owns a hard money commercial mortgage company similar to Blackburne & Sons. He was kind enough to share the following pearls of wisdom:

Paul wrote: "It's been my experience (and I've been around longer than George, although I've been told that I'm younger and better-looking) that when your run-of-the-mill, medium-sized investor gets into trouble, he doesn't sink all at once. He takes a while to drown."

"There's generally some money coming in in dribs and drabs, and the question is, 'What is his motivation to pay us, rather than the other guy? Maybe some money comes in on rents, or maybe he manages to sell one property, etc. It's not just our problem with the debtor. It's just as much us versus the other creditors. The more dear the guaranty or the additional security, the more likely it is that we'll get paid in preference to someone else. AND, I CAN TELL YOU DEFINITIVELY THAT THIS IS THE REALITY, NOT JUST THE THEORY!"

"The vast majority of my deals include either a guaranty and/or additional security (cross-collateralization). Probably half my deals include both. It has saved my (bottom) MANY times. It can be a very effective weapon."

"My convoluted logic: A lender should demand and obtain the type of additional security that provides the borrower with a strong motivation to retain the property. When brokers ask me, "How much additional security do you need?", my answer is, "Enough to make it WALK-PROOF". The borrower cannot walk away from the loan."

"The example I use is - suppose the borrower has $1MM in equity he can pledge in a first mortgage position on something questionable (let's say land in . . . Indiana?), I may or may not be terribly interested. If he could also give me a $750,000 second mortgage on a high-quality apartment building, that could well be more interesting that the $1MM first mortgage on land. And, if he has $500,000 he can put up in third position on his primary residence, he has my undivided attention. Why? Because in a lot of these homes there's a wife with a butcher knife! ... and, she's my best friend. You've just added a whole another element to the motivation factor. We all want to keep our appendages intact.

"(Obtaining a personal guaranty also helps to make a property walk-proof.) The borrower certainly doesn't want his friends and relatives getting a letter from the guarantee holder notifying the guarantor of a default. I could go on and on about guarantys and additional security or both. The laws can differ in different states."

"Just one 'head's-up' that almost all the brokers and the majority of the lawyer's get wrong. Be very careful about additional property being put up by someone who is not the borrower. Don't make them both borrowers by taking the easy way out and having them both sign the note. One is the guarantor, and one is the borrower. Don't make them both borrowers on the note. In California, screwing that up can get you in big trouble. Further, the additional security being put up by the guarantor is not the security for the loan. It's security for the guaranty. One one property, you'll have a note secured by a mortgage. On the other, you'll have a guaranty secured by a mortgage."

Note to self and staff: Get either an outside personal guaranty (not just the owner of the LLC) or additional collateral, or both, on every deal.

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