When Extra Due Diligence on the Borrower Can Pay Off for Appraisers and their Lender Clients

Most of my work is for private lenders, and there are too many scam artists out there who think of private money as stupid money waiting for their taking. They also think of appraisers as stupid, perhaps based on previous experience.

An appraisal purist looks only at the property itself and not who owns it or wants to buy it, which is not relevant when the standard definition of market value is based on the price the property can be sold for on the open market.

Considering, however, that the appraiser or valuer is highly reliant on information from the property owner or buyer, it can help to know the background of the giver of the information. When the information source is known for being untrustworthy, it makes an appraiser revisit all of his assumptions. It also helps the lender-client and can save time for the appraiser.

If and when one of my appraisals comes in too low and a dishonest borrower wants to waste my time with falsehood-filled rebuttals, I used to spend hours reading their rebuttals, researching and attempting to verify their factoids and even reading appraisal reports from their “pet appraisers”.

To save time nowadays, I order a background check on the principal borrower and find enough dirt to stop the deal before more time is wasted. I learn of bankruptcies, legal judgments, criminal convictions and even incarcerations. It’s amazing what types of people are attracted to the commercial real estate business and are allowed to continue to practice in this business.

In my recent post on Puerto Rico I found that the buyer had been convicted of mortgage fraud just one year ago. Coupled with the fact that he could not show me valid, signed purchase contracts, presented me with a misleading appraisal report, and wanted to use his own private escrow company, this made it easy for me to make a judgment call for my client. This was probably a bogus transaction and he was “at it again”.

In another recent instance, the borrower was claiming to buy land in order to develop a 100,000 square foot corporate headquarters for an ultra-high-tech company I could not find any information on. He was paying well above the current list price of the land, putting no cash down and relying on seller financing, which I found suspicious. He had no construction plans and specifications, just artist’s drawings. The background check indicated 2 criminal convictions, 2 bankruptcies, 2 legal judgments against him, several known aliases, as well as no background in technology. He was a political science major.

My theory was that he was hired as a straw buyer to bail out the present property owner. (Such opportunities are sometimes offered on LinkedIn, which has sunk as low as Craigslist. A commercial straw buyer can make $50,000 in one transaction.)

I hope this will shorten rebuttal time, although he has complicated matters by ordering an MAI appraisal at a value higher than the inflated purchase price. The appraisal report repeatedly refers to entitlements, but I called several people in the county planning department and not only were there no entitlements, there has never been a development plan submitted for approval. How could there be, when all he has are artist’s drawings?

Some appraisers won’t do due diligence. I do, and my clients thank me.