Time for some proper due diligence/ independent auditing in our communities

[knowitall]

Some syndicators do this way too often…..

Yes- contract flipping, self-brokerage, etc are VERY common.
Though there’s an argument to be made that if investors are ok going into the deal with a 30M purchase price, does the syndicator need to tell them that he really got the deal for 29M?

(I’m not addressing the legal side, and what constitutes loan fraud.)

[knowitall]

Do they have an obligation to do due diligence on the loan and its underwriting? My understanding is that their role is to facilitate title transfer and closing.

Kind of. There are laws regarding self-dealing/arms length. If they know about fraud and don’t report it, I’d imagine they can be liable.

[aygart]

Though there’s an argument to be made that if investors are ok going into the deal with a 30M purchase price, does the syndicator need to tell them that he really got the deal for 29M?

NO THERE IS NOT! Investors are trusting the syndicator's due diligence and trusting him to get them the best deal. To add that in is outright stealing from the investors no different that taking a piece of the pie without telling them.

[AsherO]

Kind of. There are laws regarding self-dealing/arms length. If they know about fraud and don’t report it, I’d imagine they can be liable.

But they’d have to know. If they’re there to process a closing between LLCs, they don’t necessarily know the ownership structures even if it’s the same person (or lawyer?) signing.

[UKinNYS]

Let's not even talk about GC's inflating cost's... 

[yelped]

Do they have an obligation to do due diligence on the loan and its underwriting? My understanding is that their role is to facilitate title transfer and closing.

I don't understand? They closed on 2 transactions the same day at different prices for the same person? I do see in the article there are no fines or other consequences specified for them, but it seems like I'm not understanding what happened here.

[DaasTora]

Though there’s an argument to be made that if investors are ok going into the deal with a 30M purchase price, does the syndicator need to tell them that he really got the deal for 29M?

And what if he got it for 25m? Where do you set the bar? Those unknowing somewhat innocent investors are duped by “successful” syndicators that the out of state properties are worth that kind of money. If the investor knowingly inflates the value and banks off people’s innocence, that’s borderline theft.

[AsherO]

I don't understand? They closed on 2 transactions the same day at different prices for the same person? I do see in the article there are no fines or other consequences specified for them, but it seems like I'm not understanding what happened here.

Fair enough, that sounds like something you’d think they’d notice.

[knowitall]

NO THERE IS NOT! Investors are trusting the syndicator's due diligence and trusting him to get them the best deal. To add that in is outright stealing from the investors no different that taking a piece of the pie without telling them.

I’m on the fence with this one, hence why I wrote “There’s an argument”, not “I think it’s ok”.
I generally dislike shady tactics like this, as I want to see transparency, but I do hear the syndicator’s argument why it’s ok.

We aren’t reffering to a fund model, where you are giving a syndicator your money, then he needs to go find the best place for it. Deals are typically done standalone, with the syndicator finding the deal, structuring it, then raising equity for it. If a syndicator presents numbers to investors, and they like them, they don’t need to know the numbers could have been better.

Again, I’m not saying I think it’s ok, just spelling out the argument.

[knowitall]

I don't understand? They closed on 2 transactions the same day at different prices for the same person? I do see in the article there are no fines or other consequences specified for them, but it seems like I'm not understanding what happened here.

FYI dual closings are fairly common, and are usually done for legitimate, legal purposes.

[AsherO]

FYI dual closings are fairly common, and are usually done for legitimate, legal purposes.

But not with different mortgages...

[MiInvstr]

I’m on the fence with this one, hence why I wrote “There’s an argument”, not “I think it’s ok”.
I generally dislike shady tactics like this, as I want to see transparency, but I do hear the syndicator’s argument why it’s ok.

We aren’t reffering to a fund model, where you are giving a syndicator your money, then he needs to go find the best place for it. Deals are typically done standalone, with the syndicator finding the deal, structuring it, then raising equity for it. If a syndicator presents numbers to investors, and they like them, they don’t need to know the numbers could have been better.

Again, I’m not saying I think it’s ok, just spelling out the argument.

Where’s the extra million dollars going?

[Ver hut gazugt]

Unfortunately the guys who delude themselves that they will get away with it forever. In a rising market when there is no reason for the lenders to look back at the loans they just might. Then comes the downturn.

A guy I know had broker bring in a couple of guys who were willing to pay above asking on a multi million dollar deal on one condition. That the official purchase price would be 25% over the real purchase price. The seller walked out of the room and never looked back.

seller concessions is legal and there is nothing wrong with it but it needs to be done according to that states laws.

[jye]

I’m on the fence with this one, hence why I wrote “There’s an argument”, not “I think it’s ok”.
I generally dislike shady tactics like this, as I want to see transparency, but I do hear the syndicator’s argument why it’s ok.

We aren’t reffering to a fund model, where you are giving a syndicator your money, then he needs to go find the best place for it. Deals are typically done standalone, with the syndicator finding the deal, structuring it, then raising equity for it. If a syndicator presents numbers to investors, and they like them, they don’t need to know the numbers could have been better.

Again, I’m not saying I think it’s ok, just spelling out the argument.

I don’t see how anyone could possibly be OK with this. The investors are going in to the deal relying on the syndicator to do most of the due diligence and negotiation on their behalf. Instead of doing due diligence as the BUYER, they are unknowingly entrusting the SELLER with DD!

The syndicators profit is the spread between his purchase price, and the price he is flipping it to his investors for. Often there are negotiations or concessions that are significant in the course of DD and at the time of closing. The syndicator is heavily incentivized to leverage all negotiations to lower his own 29M purchase price rather than to protect his investors down the road. The 30M his investors are paying based on the assumption that he performed DD and negotiated in good faith on their behalf may be way off in terms of fair valuation. This is far worse than a simple conflict of interest. This is almost guaranteed to involve material misrepresentation.

The only scenario where I can see this merely being  a legal and גניבת דעת issue would be with seasoned investors who come up with their own evaluation and independent due diligence.

[jye]

seller concessions is legal and there is nothing wrong with it but it needs to be done according to that states laws.

When the lender is doing 70% LTV and you are borrowing 100% LTV based on fictitious docs that is not a seller concession. That is mortgage fraud.

[knowitall]

I don’t see how anyone could possibly be OK with this. The investors are going in to the deal relying on the syndicator to do most of the due diligence and negotiation on their behalf. Instead of doing due diligence as the BUYER, they are unknowingly entrusting the SELLER with DD!

The syndicators profit is the spread between his purchase price, and the price he is flipping it to his investors for. Often there are negotiations or concessions that are significant in the course of DD and at the time of closing. The syndicator is heavily incentivized to leverage all negotiations to lower his own 29M purchase price rather than to protect his investors down the road. The 30M his investors are paying based on the assumption that he performed DD and negotiated in good faith on their behalf may be way off in terms of fair valuation. This is far worse than a simple conflict of interest. This is almost guaranteed to involve material misrepresentation.

The only scenario where I can see this merely being  a legal and גניבת דעת issue would be with seasoned investors who come up with their own evaluation and independent due diligence.

Let me repeat, I dislike this type of syndicator who isn’t being transparent.

But I am not discussing a case where the syndicator found some deferred maintenance during DD and negotiated a seller credit that he kept for himself. Of course there’s no justification for that. What we are discussing is a case where he flipped the contract to himself or a JV between him and another partner and he’s keeping the spread. He will still do the same DD and if he can get a seller credit, that would flow through to the deal.

[Afrages6]

I’m on the fence with this one, hence why I wrote “There’s an argument”, not “I think it’s ok”.
I generally dislike shady tactics like this, as I want to see transparency, but I do hear the syndicator’s argument why it’s ok.

We aren’t reffering to a fund model, where you are giving a syndicator your money, then he needs to go find the best place for it. Deals are typically done standalone, with the syndicator finding the deal, structuring it, then raising equity for it. If a syndicator presents numbers to investors, and they like them, they don’t need to know the numbers could have been better.

Again, I’m not saying I think it’s ok, just spelling out the argument.

If someone were to take money from LPs for a fund. And flip the contracts to the fund and take a million or two out at closing for themselves, you would say that is ok?

[aygart]

Why is this different than anyone else (ahem ahem) who takes an undisclosed acquisition fee? We've discussed some of those here.

[jye]

Why is this different than anyone else (ahem ahem) who takes an undisclosed acquisition fee? We've discussed some of those here.

I wasn’t aware anyone taking an acquisition doesn’t disclose the fee to LP’s.

[aygart]

I wasn’t aware anyone taking an acquisition doesn’t disclose the fee to LP’s.

We've discussed some who officially put in money of their own but didn't.