How does somebody commit fraud when applying for loans?

Question

I’ve looked in to things like HELOCs before, and from what I know when you’re looking for something like that or some sort of loan that needs some underlying collateral banks usually use appraisers to determine the value of something you’re taking a loan out against. Do people who commit fraud somehow just say “Yup, my properties are worth $X,XXX,XXX” and the banks just gave him loans based on their words? During any of these processes do appraisers get involved? How can you get loans by just saying “My property is worth this much” Do people alter the financial records of how much income properties are making so banks assume buildings are worth that much? Don’t things like the physical characteristics / condition of a building itself, and the location, and similar comps mostly dictate the price tag of real estate?

In: 26

Answer 1

If you’re talking about loans for commercial properties, worth millions of dollars, there are a few ways you can commit fraud.

First, the bank doesn’t usually send their own appraiser for commercial real estate loans – the borrower will have an appraisal done by a licensed firm, the bank will ensure that firm is on their approved appraisers list, and they’ll get a letter from the appraiser saying, “you can rely on this appraisal for your loan underwriting”.

Having an approved, licensed appraiser list limits the risk of the borrower using a friend to give their property a high valuation, but reports can be altered, which would be one source of fraud.

Second, commercial properties are typically valued based on the level of income they produce. A borrower could create fake leases for all of the units in the building to make it appear less vacant/make rents appear higher. This would be another source of fraud, and a more important one than appraisal fraud.

The biggest factor in valuing a commercial property is “how much money can I make off of this property.” Location plays a factor, but only because rents in New York are higher than in Akron. Building age plays a factor, because people will pay more to lease space in a new building. If someone can show a building fully leased up at a good lease rate, that income is much more important than the building’s actual qualities (assuming it’s not an abandoned haunted hospital or something).