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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Fraudulent Commercial Lenders Often Steal Application Fees

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.