My “too good to be true” deal by Tony Spagnuolo, B.A., J.D.
Mar 11th, 2014 | By FCT
As a real estate lawyer based in Vaughan, Ontario I have a number of clients who are private lenders. Working for private lenders for many years, I have become accustomed to some common features of these deals.
Last year, when I saw the proposed rate of interest on a private mortgage for a commercial property, I knew my client’s new financing deal was “too good to be true” as the saying goes. For a half million dollar loan on an estimated $1.8 million property in Streetsville, the borrower had proposed an 11-12% interest rate, plus a 5% fee as security on the mortgage. It was the first red flag.
The next red flag was the borrower’s constant harassment to advance the funds. He called my office constantly to request release of the mortgage funds before the paperwork was in order.
In late February, my law office received the paperwork for the deal which included an appraisal of the 3 parcels of land, and a rezoning application to the City from the corporation owning the properties. I conducted the standard searches including a corporate search of the entity. The corporate search revealed only two corporate directors. Because of my concerns, I decided to pull the original transfer document and noted that the name of the signing officer on the land transfer tax affidavit was not indicated in the current corporate search.
When I raised this with counsel for the borrowers, I was advised that the signing officer on that instrument was no longer involved in the corporation. I was told that he was a previous partner who had been bought out. So I ordered a complete document list of all documents filed with the Ministry to investigate further. The final straw came when my client and I did a site visit to the property in Streetsville. We had been advised by the borrower that the only structure on the property was a derelict house with no tenants. Instead we found a fully furnished and occupied house with a car in the driveway.
I spoke to the tenant and asked them to have the real owner contact me if he was not mortgaging his property. Then I called Marie Taylor, Director with the Corporate Underwriting Department at FCT as I consider FCT a partner in a real estate transaction. Given FCT’s extensive experience in detecting fraud, Marie helped confirm my suspicion that the transaction was in fact fraudulent. She also suggested that a caution be put on the property to alert any other lawyers or lenders who could potentially be duped by this fraudulent scheme.
Fifteen minutes after speaking with the tenant, I received a call from the true owner’s lawyer who instantly put a caution on the property at the land titles office.
Marie later advised me that this was not the only attempt that these fraudsters made to commit fraud. FCT also received a request from another lender to underwrite a mortgage transaction on this property- but this time the mortgage was $750,000. So another potential fraud was averted by these preventative actions.
This was an elaborate scheme. The fraudsters had invested considerable resources in manipulating official documents and researching lenders and owners. I am quite certain that they targeted the property and my client the private lender.
So remember if it seems “Too Good to be True” it probably is. I hope this blog helps others in my profession who have faced similar situations. If you have a similar experience please share it so we can all learn from it.