Commercial Loans and Fun Blog

The Interest Rate Was Too Low - You Should Have Known

Posted by George Blackburne on Wed, Apr 17, 2024

"Poop, poop, poop!" screamed the commercial mortgage broker, as he and his borrower suddenly realized that they had been scammed out of a $50,000 "application fee" by a con man masquerading as a direct commercial lender.

Let's examine today where this commercial mortgage broker went wrong, why he could end up getting sued by his client, and how he could lose his license when he cannot repay the $50,000 application fee, plus the $127,000 in legal fees run up by his client.

 

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The mistake that the commercial mortgage broker made was that the loan terms offered in the "commercial lender's" term sheet were too good.  This should have sent up a red flag.

The offer from the so-called lender was for a $6.5 million construction loan at 5.25%.  Hellooo?  Banks are paying 5.25% just for deposits today.  How could a bank possibly pay 5.25% for deposits, loan out money at 5.25%, absorb loan losses, pay for overhead, and then make a profit???

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Perhaps this broker and this borrower were thinking that some special lender exists - maybe some mystery lender from New York or maybe even from overseas - which makes commercial real estate loans at really low interest rates.

Let's explore this possibility.  Let's suppose you manage the Saudi Sovereign Wealth Fund, and your orders are to win the best real estate loans in the United States.  You are authorized to keep dropping your interest rate until you win the deal.  Okaaay.  [Deep inhale.  This is good stuff, man.  Is it Hawaiian?  Haha!

Even if this were true, my question is this.  In light of the fact that residential mortgage rates today are around 7.25%, what is the name of competing bank or life company that is offering commercial loans at 5.5%?  Why would any lender drop their rate to 5.25%?

 

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There has to be a competing lender for the Saudi Sovereign Wealth Fund to lower its rate to 5.25%!  Otherwise, why wouldn't the Saudi's just make all the commercial real estate loans it wants at 7.0%?  After all, the Saudi's aren't giving their money away.

Please grasp the concept that there are only a handful of different types of commercial lenders.  They are, in the order of best to worst, (1) Life Companies; (2) Conduits (CMBS lenders); (3) Commercial Banks; (4) Credit Unions; and finally (5) Private Lenders (hard money).

Yes, there are some hedge funds which make commercial real estate loans; but these are just private "partnerships" looking to earn a very high interest rate and a big handful of points.  Loans from hedge funds are expensive.

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Each of these commercial lenders has to get the money they use to lend from somewhere.  After all, to be a commercial lender, you need money to lend.  Victims of application fee fraud always forget this.  To be a bona fide commercial lender, you need money to lend.  The question then become, where does this so-called lender get its money to lend?

Life companies (life insurance companies) get their money from life insurance premiums.  Conduits sell their completed loans into the bond market.  Banks and credit unions have depositors.  Hard money lenders raise their expensive money from wealthy private investors. 

So how on earth is the advance fee scammer going to raise money at 3% so he can lend it at 5.25%?  The idea doesn't make sense. 

 

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Bottom line:  If some strange "commercial lender" has issued a term sheet for a commercial loan, look at the interest rate he is offering.  Is it less than market?  If so, drop this crook like a hot potato.

 

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Topics: advance fee fraud

Advance Fee Scammer Pummeled Into a Bloody Mess

Posted by Tom Blackburne on Mon, Apr 15, 2024

I don't know if you heard about this, but last week a furious real estate developer stormed into the offices of an advance fee scammer in New Jersey.  The developer had just been scammed out a $200,000 "application fee."

The brawny developer pounded the face of the con man into bloody ground beef.  According to the paramedics, they could barely identify the face of the con man as human.

 

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Okay-okay, the above story never happened.  I just made it up to demonstrate a point.  The featured image of a pummeled person is actually just a "victim" wearing makeup.  Ha!  

But given the very real possibility of a beating, if you were an advance fee scammer, would you prominently display your actual office address?

Or would you simply use a P.O. Box?  Or perhaps - and I have definitely seen this before - would you provide no address on your website at all?  After all, who wants to to be pounded by an angry customer?

 

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The advance fee scamming industry is huge.  Developers and commercial real estate borrowers get conned out of millions of dollars in "good faith deposits" or "application fees" every year.

These con men issue term sheets for very attractive commercial real estate loans.  The borrowers, desperate for a loan, steal from their mother's grocery money jar, to raise the immense application fee required by the "lender." 

Once the money is in the hands of the grubby little con man, the "lender," of course, stops returning any phone calls and emails.  No loan is ever forthcoming.  It is all a con.

 

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Over the next few weeks, I hope to teach you other ways of these spotting these con men; but for now -

Any time a "lender" issues a term sheet with darned attractive terms, look at his website.  Does his website have a street address?  Does he even have an address at all?

"Danger, Will Robinson, danger!"  --  the Robot in the original Lost in Space TV series.

 

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Topics: advance fee fraud

Commercial Loan Fraud and Advance Fee Scams

Posted by George Blackburne on Thu, Jul 31, 2008

Fraudulent Commercial Lenders Often Steal Application Fees

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Every year commercial real estate borrowers lose millions of dollars to con men posing as commercial real estate lenders. Here is how the scam work:

In order to get a commercial loan, borrowers have to give large application fees to commercial lenders to pay for the appraisal, toxic report, title work and legal fees. These application fees run from $3,500 to $250,000. In most cases, these are legitimate fees required by bona fide commercial lenders to do their investigations.

But sometimes con men pose as commercial real estate lenders. They're not a bank. They don't operate a mortgage investment fund. They don't syndicate wealthy private investors to make hard money commercial real estate loans. Nope. These fraudulent commercial mortgage companies usually don't have a dime to lend. But they have impressive letterhead and a great sales ability.

These con men will buy commercial mortgage leads from some internet source. They'll then call the borrower and say that they make commercial loans. After the borrower has submitted his commercial real estate loan application, the "lender" will then issue a conditional commitment letter (term sheet) with great terms - often just 6% interest in a 7.5% market - that calls for a large application fee.

The borrower is thrilled to get the term sheet and sends in his deposit.  After the check clears, the borrower never hears from the "lender" again. The borrower will call and call, but all he'll get is the sound of a telephone ringing or an answering machine. The borrower will leave repeated messages that eventually escalate to legal threats, but still he'll get get no response.

Eventually the borrower will contact the state authorities, but unfortunately few states ever follow up on commercial loan fraud. It's a white collar crime. Heaven help the ghetto kid who steals $1,000 for dope. The police will track him down and send him away to jail. But if some hustler cons a commercial property investor out of a $50,000 loan fee, his complaint will often rot forever in some unworked file.

So what should a commercial borrower do to avoid falling prey to this con?

  1. Be suspicious of any commercial loan offer with terms far superior to everyone else. If a commercial lender is quoting 6.0% in a 7.5% market, the commercial borrower should ask himself, "What lender is at 6.125% that forced this lender to drop his rate to 6.0% in order to get the deal?" Legitimate commercial lenders don't just lower their rates to 6.0% because they are nice guys. C'mon. Use some common sense here.
  2. Google your commercial lender. Many times complaints from similar victims will show up in discussion groups.
  3. Look at the "lender's" web site. Legitimate commercial lenders will have extensive and expensive web sites, not just three or four pages.
  4. Where does this "lender" get his dough to lend? Banks and savings and loan associations get their dough from deposits. Life companies get their dough from insurance premiums. Hard money lenders get their dough from private investors. If this "lender" claims to be a hard money lender, his web site should have a bunch of pages devoted to enticing private investors to invest with his company.
  5. Be more suspicious if the lender is a "mortgage company", "capital company" or a "funding company" rather than a bank.  He could be legitimate, but you'll need to do more due diligence.
  6. I am always suspicious of any "lender" pretending to be a bank when he is not. Tipoffs include the words "Banc" or "Something Bankers" in the company name. The names of legitimate banks almost always end with the word "Bank".
  7. Trust your instincts. If the deal sounds too good to be true, it probably isn't. If the "lender" is too easy on the paperwork or the length of the procedure, be on guard.
  8. Does the "lender" have a warm body answering the phone or just an answering machine?
  9. One final point. A very wise man once told me that the way to spot a con man in a crowd of 100 people. Ask yourself which of these guys are you SURE is not the con man ... and he will be the con man! They are experts at projecting trustability.

Don't be a victim. There are hundreds of these advance fee scammers at work in the commercial real estate mortgage marketplace.


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Your comments are invited.

Topics: commercial real estate loan, commercial loan, advance fee fraud, advance fee scam, commercial loan con men, commercial loan fraud, commercial mortgage fraud, loan fraud