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Commercial Mortgage Lenders- be wary of large up-front deposits

As a result of the credit crunch that began in 3rd quarter 2007, finding a commercial real estate loan has become more difficult.  Additionally a number of new or off the radar screen companies have emerged claiming to be lenders when they are in fact not lenders.

Sometimes they are brokers pretending to be lenders, and sometimes they are simply ploys to induce the borrower to fund a large up-front deposit without any intention of funding the borrower’s loan.

Look for red flags such as company websites that do not identify personell or resumes, lenders refuse to give references of satisfied borrowers, and lenders that refuse to provide verification of past fundings or proof of current funds.  Even a well heeled commercial mortgage broker such as Financial Compound sometimes get fooled.  Other red flags include lenders who ask for large up front deposits from the borrowers prior to loan closing.  These types of games are so widespread that some of these so called lenders are household names amongst commercial real estate players and they advertise heavily.  But sadly their modus operendum is to get the borrower stuck into a position where the borrower has to accept the loan.  A typical scenario would be an acquisition loan, where the borrower has put significant non-refundable deposits with the seller, and this lender offers say a $10 million loan and claims to be able to close the loan in 2 weeks.  Then 2 months later and on the eve of the loan closing, the lender changes the loan amount from $10 million to $3 million.  Sadly this happens a lot.  Financial Compound sees a number of these busted finanicngs and the borrowers are relieved to know that we have credible lenders that we are currently closing financings with and that we have worked closely with for many years.

Borrower beware.  If you are unsure of the credibility of commercial mortgage lenders, do a lot of checking.  If things don’t check out and the answers/excuses don’t sit right with you, go with your gut feel as it is probably correct.  For example, a good client came to me in 2009 asking if I had heard of a commercial land lender called Alpha Omega, and that they were going to put up $100,000 application deposit with Alpha Omega.  Having been very active in land financing for more than 10 years never heard of Alpha Omega, Financial Compound told the borrower to beware.  Unfortunately he didn’t heed our advice and proceeded.  Needless to say, he lost his $100,000.  The property was foreclosed by the lender and Financial Compound is currently working with him for acquisition financing to buy it back.