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The US Real Estate Lending scam network

By Guest Author | August 9, 2016

The US real estate market has always offered opportunities for both foreign and domestic developers and Investors.


I have worked in this market place in nearly every capacity over the last 10 years on projects as little as $30,000 to as much $100,000,000. As founder of Rycal Investment Group, I have worked with Realtors helping foreign investors purchase property in the US. We have personally bought and renovated, rented and sold Residential real estate as well as developed new build real estate for the same reason.

In addition, we have developed Commercial land projects and worked heavily on the planning process of such projects. On the other side of this and in my capacity as CEO of the Carlton James Group I have designed complex funding structures in the alternative investment market and in turn have invested in other companies in the US Commercial Real estate arena.

US real estate is an attractive and vast open market, with an array of new laws, processes and pitfalls that many investors may be unaware of. At Rycal, we have coined the phrase – ‘if you’re not earning, you’re learning,’ a phrase that encompasses the importance of learning lessons from your own as well as other’s mistakes. Here are some of the lessons I have learned:

1. US rental market

The US real estate rental market has above global average returns on an annual basis, but due to a landlord’s outgoings and reasonable expenses associated, your returns can suffer exponentially. From property taxes to water and refuge, your Return on Investment can be reduced by as much as 35%. This increases significantly once you factor in vacancy rates and upfront Rental agent fees. Picking the correct rental agent is key as many agents are paid for both the maintenance of a property and a monthly rental fee. Most rental agents own a separate maintenance company to facilitate to extra services, which can result in high and unnecessary fees. My suggestion here is to hire a separate maintenance firm that you trust and make sure you really research your rental agent before hiring them.

2. Commercial Real Estate Lending

When building a commercial development, developers and investors associated with these projects, can face financing issues if the location is moving too fast for standard bank underwriters to catch up. What that means is that standard banking actuaries utilise historical evidence to evaluate whether a geographical area fits within their lending criteria. However, this background does not account for changes in technology or new market trends which can be problematic for lending. Many developers must go to alternative lenders who can charge much higher interest loans that put strain on profitability and can lead to loan defaults.

Once you move in to the higher valued commercial sector you begin to fall into the realm of the alternative Commercial Lender scams. This is where alternative ‘lenders’ will prey on commercial developers with small but significant upfront fees for underwriting, appraisals, administrative fees, site visits, commitments, and the list goes on. Below I’ve included an overview of some of the scams I’ve seen frequently to look out for:

Outright unapologetic Upfront fee scam – This scam is based on pretence. These are fake ‘lenders’ that align their names and locations with well-known companies. They charge a fee and then avoid the borrower after its been collected.

The lender who never lends what you need – These ‘lenders’ charge double digit interest rates, but provide less capital then what is initially asked for. This puts a strain on developing a property as astronomically fees can affect a project’s direction. These lenders demand payment whether a project is completed or not and in most cases prefer developers default so that they can claim the property.

Lenders known as Gate Keepers – These are the most prolific lenders, but also the ones you should be most cautious of as an investor. How they typically work is that they will have contributed to a small proportion of a loan in the past and use that to call themselves lenders. It is only after they charge an underwriting fee; you then start to understand that they are shopping out your loan request to the market. Following this, a succession of fees and lenders will be a developer’s destiny and addressing this with your lender typically leads to aggression and anger from both sides. In most cases, a major red flag is if you’re speaking with the owner or director of the company, all they talk to you about is the multiple hundred million dollar deals they’re working on.

If these signs arise in your real estate dealing, walk away before paying any fees. Do your research and if you need to use a lender, look to a local small commercial banks. Often they syndicate with other lenders and if they’re unable do the business, they can point you to another trusted lending source so that you can capitalize on your investments and make great returns.


About the author: Simon Calton is founder and CEO at Rycal Investment Group, a US and UK-based property advisory firm.

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