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Private Lending (13) – The Closest I’ve Ever Been To The FBI
This story is true, and it’s really just a big rant. It’s full of pitfalls in due diligence, and most people would indeed fall for it. If it weren’t for our years of being cautious and wary of pitfalls, we might have fallen for it as well.
Why do I say most people would fall for it? Because based on the data, this deal looks very standard. First of all, there are no issues with the area—it’s a small upscale neighborhood with good liquidity. Secondly, there’s no debt whatsoever, no first mortgage, which eliminates various steps in underwriting. Furthermore, although there’s no appraisal report, an internal valuation was made, and it matches with the broker’s valuation. In this case, the loan-to-value ratio (LTV) is around 70%, providing a sufficient safety margin. The price wasn’t heavily negotiated—it was market price, making it hassle-free. The term is 6+6, meaning there’s a penalty for repayment within 6 months, but it becomes open after 6 months with no penalty, allowing repayment at any time. This aligns with what the other party mentioned about selling the property this year and exiting. They also paid the deposit, demonstrating sincerity.
The only thing is, because this deal looked so standard and there were tenants involved, no appraisal report was provided. This is quite common in practice, and such cases usually don’t require it. However, we, being cautious due to our past experiences, usually request an informal walkthrough if the other party doesn’t provide an appraisal report. This is to ensure that there are no hidden issues inside the property. Our experience tells us that even if there are tenants inside, we would agree not to require an appraisal report, as the other party has no reason to refuse a walkthrough that could save them money. However, the response from the broker on this point was somewhat hesitant this time.
Our radar started buzzing loudly; we felt uneasy. So, we decided to dig deeper. Upon investigation, it turned out that the price they bought the property for was significantly below the market price for that area, and it wasn’t a transfer among relatives either. Our experience tells us that in 99.99% of cases, this indicates money laundering. We continued to investigate the rental situation, and it was indeed normal market leasing, which also didn’t match our thesis. Could it be the tenants’ problem? We checked the historical records. Since we were already checking these, we decided to look into all the people and events involved in these transactional records while we were at it anyways.
The results of this investigation were quite surprising. The reality was that the property wasn’t involved in money laundering, so that was fine. However, it turns out it’s for something even worse. The parties involved in several transactions were related parties, with the funds being used to finance war in their home country, and the organizations involved were on the terrorist watchlist published by governments. . There was no news in Canada yet but there have already been lawsuits in the United States for several years now, and there have been judgments, although extradition hasn’t happened yet, and the FBI is still following up on this list.
It’s no wonder that the loan amount the borrowers requested was reasonable, and the LTV was also reasonable. If this deal were approved, they would have already pulled out the bulk of the funds from the property—they’re going to war, so they don’t care about some small financial losses here and there. In fact, they would be extremely lucky to have fooled some lenders and got most of their money out of the property. Furthermore, we found that the borrower’s related parties had opened lending companies themselves but didn’t lend on this property; instead, they brought these assets to the market. This was very clear—they knew that these assets would eventually be seized, accounts frozen, and the property couldn’t be sold, and the money couldn’t be recovered. Lenders couldn’t even go through the power of sale/foreclosure process to recover any funds. At that point, these borrowers have already got their money, and they don’t care about anything that happens after to anyone else. They really thought they had it all figured out.
It feels like they would eventually deceive some lenders into lending to them, because you really need a comprehensive and meticulous investigation to follow these leads and discover everything like we did, which was quite complicated.
Next time, I’ll talk about some eye-opening reasons that some borrowers borrow loans for.