Appraisal in Lima, Peru

An interesting cityscape resulting from upzoning approved in the 1990s. Many of the office buildings erected then have a lack of windows.

This was a one-acre site, improved with an old mansion from decades ago, situated in Lima’s main financial district, San Isidro. Per JLL (Jones Lang LaSalle), the office vacancy rate in San Isidro was measured at the end of 2013 at just 1%, so a site such as this one would have great value to commercial real estate developers.

Many Latin American cities are divided into municipios, or municipalities, which are similar in concept to the boroughs of New York City. During the 1990s, the municipio of San Isidro, a sort distance south of Lima’s central business district, was upzoned to building heights ranging from 4 to 32 stories, and most of the banks relocated to this district, making San Isidro Lima’s de facto financial district, but also home to many embassies, too. This is one of the nicest areas of Lima.

Lima and Peru have in recent years undergone rapid economic expansion, averaging 7% per year and predicted to be 6% this year, and the supply of office and residential space has been unable to keep up with rapidly increasing demand from redevelopment ventures. This has resulted in urban land values spiraling upward, quadrupling since 2006.

In places like Manhattan, New York, such land is often appraised on a “value per square foot of allowable building area”, which is based on land prices divided by site area divided by FAR (Floor Area Ratio). Such a method does not work quite so well here in Lima because many lots are so small that high density construction is not efficient, partially because of required setbacks. There are many lots of less than 400 square meters (4280 square feet) zoned for 7 stories of construction, and perhaps their main value is to serve as part of an assemblage of a larger site, which is being done all over the financial district in San Isidro.

The Lima office of Colliers International, which seems to be the most active global broker in Latin America (based on seeing their signs), was generous in providing comps. However, I found that price per square foot of FAR was not working as a unit of comparison; it was seriously undervaluing many sites with allowable building heights of 7 stories, which are selling for more than $3000 per square meter.

Because of the number of available comps, I performed a regression analysis on the data in order to isolate possible adjustments to comparable sales for both building height and for site area. Because of low sample sizes in commercial real estate markets, such regressions cannot meet the high standards of the scientific community, yet they are better than pulling adjustments out of thin air, the last resort of many appraisers. The regression suggested an adjustment of $170 per square meter of site area for extra floor allowed to be built. The adjustment for site area was more understated, a premium of $60 per square meter for every extra 1000 square meters of site area.

This assignment reminded me of a similar assignment in San Jose, Costa Rica last summer. The shortage of land within the central cities of prospering Latin American cities is resulting in a profound amount of redevelopment, and it must be an exciting time to be a real estate developer in many Latin American cities.

Common Denominators Seen in Mexican Land Scams

 

After six years of appraising in Mexico I’ve seen the following patterns that warn me when I am being deceived.

1. My favorite one is when the loan applicant’s representatives take me to a prime location and then point to their property in the distance. “There it is,” they tell me. I tell them that my client requires me to set foot on the property, which is not really true (setting foot on the property is my requirement), but wouldn’t I look foolish and my client be harmed if I didn’t know find out that the land is a mangrove swamp? Sometimes it’s hard to tell from above, as can be seen in the following photos from Isla Mujeres:

 

2. Another pattern is when excuses are made as to why I cannot meet the property’s true owner. A common response is “We have power of attorney; it doesn’t matter,” but the document supposedly conveying the power of attorney is not convincing, either that is excessively old, it conveys power to yet another individual who is not present, or it does not actually convey power of attorney and the loan applicants are just hoping that I can’t read Spanish. Some feel compelled to provide a photocopy of the owner’s driver’s license or passport, hardly a standard of proof.

3. The borrower’s representatives all have business cards labeling them as marketing or public relations consultants, yet they claim to be real estate developers. “Show me your development plan” is a good question to flush out fake real estate developers.

4. When I request a current predial (property tax bill) for the property, deceivers instead supply a predial from years before. Years 2008 and 1993 are favorite years. Year 2008 is the year before Mexican tourist land values started crashing. Year 1993 was the year that the peso was devalued by 1000:1, so every assessed value appears 1000 times larger than it actually was. The inability to obtain a current predial might also indicate that the borrowers do not actually currently represent the true land owner.

On a related note, Citibank announced in February fraud-related losses in Mexico of $400 million in their Banamex subsidiary and has also experienced hundreds of millions of dollars in losses in previous years in ill-fated Mexican residential subdivisions.  In 2011, I pitched my own Latin American appraisal services to their chief appraiser for Latin America, who is actually a gringo in Atlanta. I was then told that I cannot serve Citibank because I am "not a national firm", even though the first three years of my career were spent at international firm Jones Lang Wootton, now JLL.

Next year, a client hired me to appraise a proposed residential subdivision outside Mexico City and also hired the local Cushman and Wakefield Valuation and Advisory Services office in Mexico City.  C&W came up with an appraised value 15 times as high as mine and the client got us on a 3-way conference call to resolve this discrepancy. The C&W appraiser was a young girl right out of college.  I noted that her report had incorrect zoning for the site.  She said that she did that because the broker told her to, but there was no documentation that a change in zoning was occurring and the neighboring subdivision had only been able to sell less than 20 lots. My client told her "Don't assume anything".

Perhaps Citibank's insistence on using "national firms" is what has caused them so many losses in Mexico? Perhaps this also explains why Cushman is facing over $10 billion in appraisal malpractice claims.

 

Another appraisal assignment in Nayarit, Mexico raises red flags of possible fraud

This was the appraisal of nearly 1000 hectares (over 2000 acres) of beachfront land, my third appraisal in Nayarit. There were many red flags to cause me to be suspicious:

1. The borrowing entity was a company in Cyprus, a country known as a hotbed of offshore shell companies (2267 identified so far by ICIJ). Shell companies are notorious for straw officers and directors and untraceability. Think of Cyprus as another Cayman Islands.

2. The borrowing entity had no history and no web site.

3. The borrowing entity did not own the land but had a JVA (joint venture agreement) with the landowner, a Mexican national.

4. The principal of the Cypriot company consistently misspelled his own name throughout the JVA.

5. All the bank account information of the Cypriot company had the company name misspelled.

6. As with Mexican land scams I’ve uncovered, the borrower’s representatives extolled the development possibilities for the land, but their credentials were not as real estate developers, but as marketing or public relations consultants.

7. No credible development plan was presented, but I was told that there was an agreement with the “Canadian Retirement Association” to build thousands of vacation homes for Canadian retirees. I have been unsuccessful in verifying the existence of the Canadian Retirement Association.

8. The Toronto phone number I was given for the Canadian Retirement Association connected me to a man who seemed to be more fluent in Spanish than in English and who bragged about his 75 “advertising awards”. This is not the talk of someone who would be trusted to manage a Canadian pension fund.

9. Similar to the Mexican land scams I’ve seen, I never got to meet the actual property owner, but I was given a document that assigned the right to mortgage his land to one of the borrower’s representatives. As I learned today at the ACFE Fraud Conference in San Antonio, identity fraud is a growing problem in Mexico as it is here in the USA, so I have to be careful.

10. As with Mexican land scams I’ve seen, my request for a current predial (property tax bill) instead yielded a predial from 2008, raising the possibility that the property has diminished in value since then or even the possibility that there was no affiliation with present owner such that a current predial could be provided.

Having been collecting listing data on this part of Nayarit for the last two and a half years, I noticed that asking prices on beach land in this area have declined up to 60%. Regardless of the suspicions I had about the loan request, the appraised value fell short of what was needed, any way.

Land loans are an ideal conduit for fraud in Mexico, by the way, because the value is so hard to determine, accurate information is so hard to come by, and it is easy to hire a Mexican appraiser to appraise the land for $100 million.

 

Discounted Cash Flow Analysis throughout the world – Who does it right and who does it wrong?

I entered the appraisal profession at an opportune time – in the mid-1980s, when discounted cash flow (DCF) analysis had come into vogue in the real estate industry.  The crowning moment for DCF’s new place in real estate investment analysis became apparent in the purchase of the Pan Am building (now the Met Life building) in New York in early 1981.  The price paid shocked many, as it reflected a “going-in” capitalization rate of just 4% for an 18-year-old building in a time of high inflation. 

Manhattan was just awakening, though, from a 1970s stagflation-induced real estate coma of no new construction, and the rapid expansion of the financial industry brought the Manhattan office market to full occupancy, with rents increasing 50% from early 1979 to the end of 1980.  The buyers of the Pan Am Building relied on a DCF model based on cash flow projections for years into the future, anticipating the ability to re-lease space at much higher rental rates.  In this context, the purchase price was justified.

I was recruited out of graduate school by Jones Lang Wootton, where I was promptly put to work creating DCF models for regional malls and high-rise office buildings owned by their institutional clients.  My work wasn’t questioned because my superiors had never been taught DCF analysis and did not understand how it worked.  Many of my business school peers also landed into cozy positions not previously available to new graduates, all because they could perform DCF analyses.

In hindsight, all of the DCF models of the 1980s were toxic, rosy fantasies which failed to consider the possibilities of overbuilding and recession.  Hundreds of billions of dollars were lost based on DCF models – and will continue to be lost, as I am about to explain.

Between 1988 and 1998 I worked as a bank review appraiser and chief appraiser and reviewed a lot of commercial real estate appraisal reports, noticing that when appraisers used both a DCF model and a direct capitalization method in their reports, the DCF model usually produced higher estimates of value.  One reason why was because they projected income growth equal to or exceeding expense growth, contrary to the documented operating histories of most income properties.

In examining the long-term operating histories of income properties, expenses increase faster than revenues over the life of the building. This is why expense ratios are higher for older buildings, as is graphically demonstrated by a typical subset of BOMA data in Figure 1, and is equally supported by IREM data.  Notice how the line representing the operating expense ratio for each age subcategory increases in slope relative to gross income.  The numerator, Expenses, is increasing faster than the denominator, Gross Income.  This is a graphical proof of expenses increasing faster than income for income properties.

                              

                                                           FIGURE 1

Data from BOMA (Building Owners and Managers Association)


There is a logical reason for this. As a building ages, it becomes less competitive in its marketplace and the rate of rental increase slows, while the aging of the property requires increasing maintenance and capital improvements expenditures. This is the reality of physical and functional obsolescence.

The natural end of the economic life of a building is when expenses finally exceed collectible income. If expenses typically grew no faster than income, on the other hand, no building would become obsolete. That would be nice for building owners, but the real world does not operate in this manner.

DCF models which forecast expense growth to be the same rate as consumer price inflation are therefore fundamentally wrong.

Since it is so hard for some appraisers and valuers and even the Appraisal Institute to accept this, let me present an analogy – your car.

What are your likely operating expenses for your car in its first year of operation? Perhaps $100 to $200 for oil changes. With consumer price inflation currently at about 2%, would you predict the car to cost you $102 to $204 in its second year of operation? $104.04 to $208.08 in the third year? What about the 10th year? Would you expect operating expenses in the range of only $119.51 to $232.02? No, because the car is a deteriorating asset, and many parts will need replacement.

A building is a deteriorating asset, too. There are two forces governing expense growth – price inflation and increasing maintenance and capital improvement needs. This places the rate of expense growth higher than price inflation alone.

The above graph, indicating the typical pattern of expenses increasing faster than income for income properties, was originally part of my book (see sidebar) for the Appraisal Institute, but was not allowed by the editors, as the Appraisal Institute maintains that income and expenses increase at the same rate. This is also reflected in the 13th Edition of The Appraisal of Real Estate, published by the Appraisal Institute in 2008, in which DCF models indicate decreasing operating expense ratios as buildings age. This is a mysterious retrogression for the Institute, who published my uncensored article on DCF analysis in The Appraisal Journal in 1990. To deny now what I wrote then makes me wonder if they’ve been hijacked by the Flat Earth Society.  It also suggests that a generation of MAIs has been taught to overvalue properties using DCF analysis.

The Appraisal Institute may be a formidable opponent for me to challenge, but fortunately, I have rules of arithmetic on my side.

Why is this matter so important? Most DCF models project 11 years of cash flows, and the underestimation of expense growth gets compounded, resulting in serious overvaluation.

One of my fellow Appraisal Institute authors, Howard Gelbtuch, assembled and edited an enlightening book entitled Real Estate Valuation in Global Markets, in which highly decorated appraisers and valuers from many nations explain how real estate valuation is done in their countries. Once again, most who presented DCF models had final year operating expense ratios lower than beginning expense ratios. Many of the violators were Western nations that are considered financially sophisticated. Other nations getting it wrong were:

Belgium, Canada, Czech Republic, Denmark, France, Germany, Hong Kong, Italy, New Zealand, Poland, Portugal, Saudi Arabia, Spain, Sweden, Taiwan and Turkey.

Which nations got it right? Nations less likely to be considered part of the supposedly sophisticated Western herdthink:

Argentina, Bulgaria, Chile, Indonesia, Japan, Romania, South Korea, and the Turks and Caicos Islands.

Getting beaten by the likes of Argentina and Bulgaria in DCF analysis should shame appraisers and valuers from the most affluent Western nations into "stepping up their game".

Next stop:  Lagos, Nigeria

Appraisal of land near Cancun, Mexico

Mangrove

This is the second time this has happened to me in Mexico.  The borrowers wanted to take me to a distant spot and then point to their property without having to take me to the actual property being appraised.  I hope this is not how land is usually appraised in Mexico.

I was told that the property was adjacent to a prestigious beach resort with $500 per night rates, which I verified through Hotels.com.  The land was actually across a lagoon to the west and took about 20 minutes to reach by car, but the biggest surprise was that the land was composed almost entirely of dense mangrove swamp (known in Spanish as "mangle" or "manglar").  From the air it appears as green fields, but when inspected more closely one finds that it is all swamp and no solid ground.  Furthermore, mangroves are legally protected in Mexico, as are the crocodiles that inhabit them, and I witnessed at least one crocodile warning sign.  (For more info on why most governments protect mangroves from destruction, read http://www.internationalappraiser.com/2012/02/effect-of-mangroves-on-valuation-of.html .

 

Adjacent properties were also undeveloped mangrove swamps, and the only human activity appeared to be the presence of squatters.

 

In a previous appraisal assignment in Acapulco, a parcel was represented as being along the road to the airport.  The owner took me to another parcel along this road and then pointed to his property in the distance.  I asked him if his property was landlocked, but he assured me that there were roads leading to his property. I said “Let’s go there,” and found the property to be an ecological preserve covered with mangrove swamp, situated next to a garbage dump. Moreover, we were politely accosted by residents, either squatters or ejidatarios, who claimed the land as their own. Furthermore, the water had been polluted by a former Pepsi manufacturing plant.  The property also had crocodiles.

Landfill next to appraised property in Acapulco

In a recent post I was critical of an appraiser who performed her property inspection in the Dominican Republic by helicopter.  This is not the way to appraise land. From the air, dense mangroves can appear to be lushly vegetated solid ground. Here is what the property near Cancun looks like from above:

 

Here is what the property looked like from below:
 

 

Nothing substitutes for “boots on the ground” when conducting land appraisals, and one should wear boots for land inspections. They keep your feet drier and also protect you from snake bites.

This was not the only trick these loan applicants tried to play.  The deed showed that they were not the owners, nor did they possess a purchase contract.  Rather, they claimed they had the owner's permission to mortgage this property to finance an unrelated venture, but the contract supporting this claim seemed to be hastily and amateurishly prepared, and stated the property owner's attorney as the owner of the property.

When questioned about this, they stated that the attorney was a Mexican government official who really owned the site, using the registered owner as a proxy in order to hide his assets.  I googled the attorney's name but did not find any information on his government position. I never met or communicated with him or the registered owner. 

Updated Guide to The International Appraiser’s Most Popular Posts

The two posts still drawing in the most readers, the post about the failed New South China Mall and the post about the mass marketing of Costa Rican teak farms to international investors, are two years old now.

The New South China Mall seems to be a source of endless fascination for journalists all over the world, having opened as the world’s largest mall in 2005 and going bankrupt soon afterward. I posted about my visit to the mall and my assessment of the reasons for the mall’s failure in May 2011. (http://www.internationalappraiser.com/2011/05/new-south-china-mall-worlds-largest.html)

I published “Costa Rican Teak Farms for Gringo Investors” (http://www.internationalappraiser.com/2011/08/costa-rican-teak-farms-for-gringo.html) in August 2011, and received more e-mails about this post than any other one, discovering that thousands of American, Canadian and British Investors had already invested in such teak farms or were considering investing. My post focused on the misinformation and deceptive marketing used to sell such farms and the perils of real estate and/or development done to satisfy investor demand rather than consumer demand.

The third most read post is one of the first posts from 2010, “Appraisal in Costa Rica” (http://www.internationalappraiser.com/2010/03/appraisal-in-costa-rica.html), which examined the feasibility of a tourist medical hospital project in a remote coastal area without paved roads.

The fourth most read post, about La Riviera Maya (http://www.internationalappraiser.com/2012/11/la-riviera-maya-ruins-from-post.html), was a farcical post on the modern ruins left by speculative real estate developers in this area of ancient Mayan ruins.

The fifth most read post has been the recent post on Ronan McMahon, International Living, and Real Estate Trend Alerts (http://www.internationalappraiser.com/2013/02/ronan-mcmahons-real-estate-trend-alert.html). I subscribed to both publications and found the investment advice (as opposed to travel, relocation, or retirement advice) offered by this publisher to be of questionable value, particularly the continued promotion of raw land parcels in failing subdivisions. Most of the recommended investments or brokers appeared to have already been repeatedly advertised in International Living.

I apologize to readers for rehashing old posts because of a lack of new international work in the last few weeks. I have recently bid on appraising an affordable housing project in Santo Domingo, Dominican Republic and a tourist development in Scotland, so I hope to have something interesting to report soon.

Appraisal of an Industrial Property in San Jose, Costa Rica

Urban real estate appraising sometimes yields pleasant surprises, as the shortage of land in growing or geographically constricted cities can create situations in which a property’s land value can exceed its value as currently improved. I appraised a similar situation in San Francisco, California immediately before flying to San Jose, Costa Rica to appraise the property of a bankrupt boatbuilding company.

I stayed at the charming Hotel de Bergerac in the Los Yoses barrio of San Jose while making a two-kilometer walk to and from the subject property, located in the rapidly urbanizing suburb of San Pedro in the canton of Montes de Oca. Vacant lots were few to be found, and new, upscale retail stores were often built next to dilapidated, corrugated steel structures, as often occurs in Latin American cities concurrently experiencing prosperity and land shortages. Moreover, much of San Pedro had been upzoned, permitting building heights of up to 7 stories and site coverage of up to 85%.

Montes de Oca has a particular attribute contributing to its growth. It is also known as Costa Rica’s “Cradle of Higher Education”, including the Universidad de Costa Rica, Universidad Latina and Universidad Fidelitas, all located in or near San Pedro.

Arriving at the subject property, I was initially disappointed to see the physical deterioration of the various structures, most of which were aging metal buildings with rusting steel roofs. This is one of the common letdowns of foreign appraising – traveling many hours and thousands of miles to find a property that is far less than as described. It makes me anxious that someone is going to be angry with my report. The remaining physical life of these particular buildings was rather limited, although San Jose’s 96% industrial occupancy rate does prolong the usage of older buildings.

What was encouraging to see, though, were two neighboring industrial sites that had already been redeveloped with attractive new multifamily housing. San Pedro has a housing shortage and has been encouraging multifamily development.

In one of my posts last year, http://www.internationalappraiser.com/2012/07/appraisals-of-view-land-in-costa-rica.html, I described my lunch with a Costa Rican appraiser in which I asked what Costa Rican appraisers use for comparable land sales. He said that because of the lack of publicly available land sales data, the San Jose provincial government has created a map system for appraisers known as La Mapa de Valores de Terrenos, which sets a baseline value per district, which is then adjusted by appraisers for site factors such as size, zoning, commercial street frontage and terrain. The base rate for this section of San Pedro is 180,000 colones per square meter, equivalent to $358 per square meter (or $33.25 psf) at today’s exchange rate. These land values are comparable to CBD land values in many U.S. cities.

When the comparable improved property sales and listings and land sales and listings were compared, it became clear that the subject property was no longer improved at its “highest and best use”. The land value of the site, even adjusted for demolition and remediation costs, still exceeded the “value in use” of the current improvements, and there seems to be enough collateral value to support the requested loan, which, ironically, is going to be used to restart boat production.

More later, when the loan is funded.

Ronan McMahon’s "Real Estate Trend Alert" is Put to the Test in Costa Rica

I’ve been a reader of International Living for a few years now (I only subscribed for one year, but since they have my credit card number, they keep on renewing without my permission), and IL is just one spoke in a real estate advertising and publishing empire that includes such affiliates as Pathfinder International and Real Estate Trend Alert. Many of the IL articles are written by or about ecstatically happy expatriates who escaped dreary lives in Rochester, West Virginia or Minneapolis (December 2012 issue) to find low-cost, gringo-loving paradises without mosquitoes, muggers or muddy roads. A typical testimonial might sound like this: "Every morning we eat fresh tropical fruits on our patio while Juan Valdez roasts our coffee.  Unicorns come to us from out of the jungle -- and we can actually pet them!"

Nothing bad ever happens in Latin America in International Living. Crime? Never heard of it. Try reading expat forums to learn the downsides of living in Latin America.

A subscription to IL gets one signed up for complimentary Pathfinder Alerts, an on-line newsletter featuring foreign real estate deals. A recent e-mail from publisher Margaret Summerfield to a “select group of readers” presented a “For Your Eyes Only” audiovisual presentation from “an international businessman” with a “shockingly powerful wealth-building secret” which we, the "select readers" on their spam list, are urged to keep secret. "Secrets of the wealthy" is getting to be one of the most tired lines of the investment scam business, and this script has all the other standard vernacular of phony get-rich-quick schemes, including the requisite “what would you do with that kind of extra money!” and “You need to be serious about making money – fast!” -- except for the slight Irish accent.

The "international businessman" turns out to be Ronan McMahon, her business partner, promoting a premium IL product, Real Estate Trend Alert, featuring his alleged prowess in spotting amazing real estate deals and sharing “insider information” from his “millionaire friends”, a service normally priced at $999 per year, but temporarily reduced to $499 per year if one “acts now”. The price can even be broken down into quarterly payments of $124.75, and there is a 30-day money-back guarantee if not delighted with his service. I found myself intrigued when he said that his most recent finds are in Costa Rica, a country where I also appraise real estate. 

This presentation has many of the typical features of the Sleazy Investment Promoter's Playbook, such as:

1. Playing on our dreams.  “What would you do with all that extra money?” is a standard investment promoter’s psychological ploy that takes the listener out of the realm of reason and prudence and into the realm of dreams.  
2. Exaggerated claims of investment expertise.  Mr. McMahon’s own resume shows that he was not employed in the real estate industry prior to being hired as Pathfinder/International Living’s “real estate expert’. If he is indeed a successful real estate investor, he should give us evidence.  As for RETA's claims of profits made my its members, they use the dishonest technique of calculating profit by taking the lowest original purchase price in the development and then comparing it to the highest current listing price in the development, misleading readers into thinking that Ronan McMahon provided 100+% profits for his readers. Aren't there any resales to calculate actual profit?
3. Claims of “insider secrets” and “millionaire friends” and heavy use of investment promoter buzzwords, such as “confidential” and “insider”. This "fake exclusivity" is how many so-called real estate and advice gurus sell their expensive seminars and publications.  Truly successful investors have no need to sell seminars and publications. Most of today’s real estate and investment gurus, even Rich Dad himself, make their money from marketing books and seminars and not from investment.
4. Calling us “select”.  This is also a "fake exclusivity" trick. Twenty years ago I often received mass-mailed letters addressed to “Select Area Single” from Great Expectations, an overpriced and scammy dating service.  They didn’t even know my name or marital status.  Likewise, the only thing International Living/Pathfinder knows about me is that I was a sucker who gave them my credit card number.  For that I should be labeled "naïve" rather than "select", unless I've been selected for being stupid.
5. Special discounts if you “act now”, thus engendering a sense of urgency.

Despite suspecting a hoax, it is to protect and inform all of you, my “select readers”, that I acted as a guinea pig in subscribing to his Real Estate Trend Alert service, authorizing a payment of $124.75 on my credit card and relying on a 30-day money-back guarantee. Little did I know that the scam had already begun.

Although I chose the $124.75 (3-month) option, their server automatically upgraded my request to the full $499 subscription. An hour later, my credit card company contacted me about this mysterious $499 charge. I contacted IL and asked for this charge to be corrected.  Four days later I requested a full refund, but only received a credit for $124.75, leaving me with a balance of $374.25.  I have since asked for and received a full refund on March 7, three weeks later, after several dealings with their flaky customer service department (with excuses such as "our computer is programmed to give only one refund, and we can't get it to refund the remainder"). Remember that Pathfinder is an Irish company and might not play by (or even know) the same rules as American companies.

Two days after ordering, I started receiving the daily Real Estate Trend Alerts, which turned out to be recycled (and free) Pathfinder Alerts and International Living classified ads. Nothing secret or "insider" about these, thus contradicting his claim that his selections “truly are insider investments, not available to the public.” Some of these properties are getting shopworn after being repeatedly advertised in these publications for two years or more. And if Mr. McMahon is such a real estate investment genius, why are most of his recommendations his own advertisers? When McMahon uses the word "insider", it really means "advertiser".

Case in point is the last “Alert” I received the morning before I called to cancel my subscription. The title was “Last 2 Lots at this Low Price (Great Views)”. The project was “The Preserve at Lake Arenal”, a Costa Rican project I’m already familiar with as the result of a free Pathfinder Alert. This morning’s alert told of two remaining half-acre lots available to RETA subscribers at the low price of $25,000 each, with 10% cash down and interest-free monthly payments of $187.50 per month for 10 years. McMahon tells us “Arenal is facing an inventory crunch. Land prices have risen,” when the opposite is happening. It always amuses me when I'm told that Costa Rica is running out of land.

I had already recently communicated with owner Greg Coxon, who basically offered the same deal to me: “Our lowest price lots start at 25k.” and “Were [sic] offering no interest financing on short term loans,” thus contradicting McMahon’s promise of “off-market deals” and “massive discounts like 50%.” Moreover, the views from these lots are jungle views, not lake views, which makes a difference at Lake Arenal, also known as the "Lake Tahoe of Costa Rica".

A closer look at the sales history of The Preserve might make a buyer cautious. Having been marketed for over 2 years now (as determined from the date of the Facebook page), only 22 out of 57 lots have been sold. The pace of sales has slowed in the last year, with only 6 sales last year and one lot unsold (probably a payment default). http://mypreserveatlakearenal.com/html/lots_for_sale.html Only a model home and a clubhouse have been built. Described as a gated community, the fencing around the gate can easily be stepped over on foot. The lots are not yet graded, and this subdivision is “eco-friendly”, the euphemism for having no public water or sewers. The sewage treatment plant has not yet been built, but there is well water. In other words, this subdivision is still in mostly raw form 2 years later, and the longer development is delayed, the harder it is to sell the remaining lots as prospective buyers become skeptical about the project’s viability. I’ve also never seen slowing lot sales speed up again, as confidence wanes when sales slow down.  Subdivisions are my valuation specialty.

The viability of The Preserve also needs to be judged in the context of its milieu. It is adjacent to another struggling community known as Turtle Cove Lake and Yacht Club. Turtle Cove has a marina, boat storage, and 5 custom homes built so far (two of which are for sale). After 5 years of marketing, only 22 out of 47 lots have been sold, and now their developer is holding a fire sale, with discounts of up to 34%. This spells trouble for the neighborhood. Financing is 20% down and 5% interest. The current price list and site plan can be found via this link: http://turtlecovelakeclub.com/arenal-real-estate.html .

When lots get discounted like this, the stage is set for negative lot absorption -- many lots will become “unsold” as buyers who already put 20% down realize that all of their equity is gone and they are now “underwater” on their purchase loans, owing more than the lot is worth. Buyers like this are often litigious, too, but lucky for the developers, they will get nowhere in Costa Rican courts, and neither would you. Vacant lots in distressed subdivisions are among the worst real estate investments that can be made, because the investor could lose his entire investment. Why does Pathfinder and RETA promote them so much? And don't get me started on "Pre-construction pricing" on unbuilt condos.

In summary, this shopworn property is not a suitable investment to be offering to subscribers, is more likely to lose money than make subscribers rich, and Real Estate Trend Alert is no more than a marketing gimmick that repackages paid advertisements into recommendations from a fake expert (a young man who came to IL from the dot.com industry) while collecting hefty fees from gullible subscribers.

PS: April 28, 2013, ten weeks later --

Pathfinder Alert has become increasingly desperate to market these shopworn Lake Arenal properties, with almost daily alerts.  Today's alert reads: 

"Once word gets out about this place, and it becomes trendy or hip, it could explode. There's no reason for its low property prices, other than the fact that nobody knows about it....

A lake-view lot for $17,500 - and it's open to offers."

What?  Could Ronan's insider deal at $25,000 ten weeks ago have actually been marked down 30% since then? And still be open to offers? 

PPS: February, 2014, one year later: The Preserve at Lake Arenal now has 36 lots for sale vs. 35 lots one year ago, indicating a net loss of one sale during the past year, and they are still offering "pre-construction" pricing! I seriously doubt if this project will get built.

Nevertheless, I just received this "Pathfinder Alert" from Margaret Summerfield:

"How to make $1.1 million in Costa Rica

Last week, Ronan McMahon told RETA members how they could have made massive profits from a land purchase in Arenal, Costa Rica. If you’re looking for access to “insider deals”, RETA could be your most valuable membership. Join Real Estate Trend Alert to be briefed the next time an opportunity like this crosses Ronan’s desk."

This phantom $1.1 million profit would have supposedly come from subdividing a large residential estate that sold at half its original listing price, but what hasn't been mentioned is that permits are needed to subdivide the land and Costa Rica's rules for approving subdivisions are just as onerous as California's; approvals take years, not months.  Then you have to find buyers for the lots, and buyers have been scarce at Arenal over the last 2 years.  If someone made $1.1 million on this deal, I would like to receive proof.

The style of communication of Pathfinder also presents some concerns. I'm talking about the frequent underlining, highlighting, bolding and exclamation marks!!  Where have I seen this before?  Just about every piece of spam I get, such as ads for miracle weight loss or genital enlargement pills. It's just so transparently sleazy.

11/20/17: I have published an updated article on Ronan McMahon:
http://www.internationalappraiser.com/2017/11/five-years-later-reassessment-of-real.html .

Mexico's La Riviera Maya: Ruins from a post-Columbian Race

Storm clouds gather at El Cañón de los Condos, Cozumel

Many tourists are drawn to Mexico's Riviera Maya to visit ruins from a pre-Columbian civilization known as the Mayas, a civilization thought to be the most sophisticated civilization in the western hemisphere prior to the arrival of Columbus, with surprisingly advanced knowledge of astronomy, mathematics, medicine and engineering. Legendary L.A. schoolteacher Jaime Escalante referred to Mayan mastery of mathematics to instill confidence in his Mexican-American students.  

Unlike the Aztecs, the Mayan civilization reached its zenith 6 centuries before the arrival of Columbus and then fell into a mysterious decline. The reason for this decline is not yet understood, and their ruins leave us curious to know more about them.

In my valuation work in Latin America, I have encountered equally interesting ruins from a post-Columbian race of people, a people I label as desarrolladores especulativos (“speculative real estate developers”). Although always present in the indigenous population, their numbers exploded during the first decade of the 21st century, with a significant influx from North America, but this race curiously disappeared after 2008.

One builder's abandoned hommage to the Mayan ancestors, Playa del Carmen

As an appraiser-anthropologist, I have actually met and worked with these people and participated in their beer-drinking  and overeating rituals afterwards. The desarrolladores especulativos were of diverse ethnicity, with some being Latino and others being North American. The one thing they seemed to have in common is that they were all middle-aged and older males. Could this gender imbalance be a biological reason for the disappearance of this race?

No, because this race is not actually extinct, but is instead just hiding from creditors.

Still, there is little left to understand these people other than the ruins they left behind.

La Piscina para los Dioses

As the 21st century began, the desarrolladores greatly increased in numbers. Many came from English-speaking countries. Some called themselves “developers”; others called themselves “renowned developers”. Members of this latter group had sometimes produced only one successful development. (Would Trump need to describe himself as "renowned"?) Some had no actual development experience, and when asked about what other projects they had built, they responded evasively with answers such as “I’ve been in this business 20 years” (most likely in real estate sales).

"La Torre Disponible" peeks out of the jungle much like pre-Columbian ruins in San Miguel.  

Some historians speculate that the Mayan civilization fell due to an unknown cataclysmic event in about 900 A.D. Similar to this theory of Mayan destruction, the desarrolladores especulativos disappeared in an event known as el día en que murió préstamos “the day the lending died”, which can be narrowed down to some time in late 2008.

Here I am surveying an airplane wreck at la Playa del Cid La Ceiba. Could this have been a high-flying developer who found himself "underwater" in his development loans?

Related articles

• Researchers unlock ancient Maya secrets with modern soil science
• Tulum, Mexico: The Riviera Maya

Appraisals of "View Land" in Costa Rica

Much of my work involves flying to faraway places and then being driven in a 4-wheel drive vehicle into the countryside, up winding dirt roads, to a parcel of land with sweeping vistas featuring bodies of water, and then being told “Just look at this view. It’s priceless.”

I often encounter misconceptions of what constitutes the value of a “view parcel”. There is no argument that a finished lot with a view commands a premium over lots with no views. I emphasize the word “finished”, as “raw” mountainside or mountaintop land with views is usually priced and valued less than flat land at lower elevations.

Why? Because of the extra costs to develop land in rugged terrain or higher elevations.

Let’s indulge in a reductio ad absurdum to make my point.

The top of Mount Everest offers spectacular views, but I offered to sell you a lot up there, you would say “How ridiculous! How could I get my Range Rover up there? How and when could I get utilities connected? Where would I buy groceries?” I would attract no buyers, despite the magnificent view.

Suppose that I had already graded the lot and just completed a 4-lane road to the top of Mount Everest, installed all utilities, including digital cable, and even supplied extra amenities such as a golf course, supermarket, and gourmet restaurant? Now that might be something somebody is willing to pay a lot of money for, and the value would be enhanced by the unequaled views from the top of the world.

The extra costs of land development at such a high altitude would probably not be compensated for by the view premium for the finished lot, so this hypothetical unfinished lot on top of Mount Everest would be comparatively worthless.

View Land for Rich Gringos
Developers all over the world have spent the last few years acquiring “view land” for subdivision and sale to rich foreigners, whether they are North Americans, Europeans or Australians. Costa Rica is crowded with numerous proposed “5-star developments” as developers compete to attract rich gringos. Most of the developers are foreigners, too. Many of the projects have impressive artists’ renderings and obligatory photos of female backsides in infinity pools, beautiful women getting massages, Caucasian families frolicking on the beach, and exotic fauna and flora.

 

The result in Costa Rica, as I’ve also seen in Mexico, Fiji, the Dominican Republic, Brazil, Canada, and Barbados, is a surplus of unstarted or unfinished (see previous post on Barbados) 5-star projects and declining values for raw land.

Such was the case with two land parcels I recently appraised in different parts of Costa Rica. The dome-shaped parcel below looks very difficult to develop because of steep slopes, but there are views at the top of the scenic Orosi Valley. Also limiting value was the lack of approved entitlements and a well report indicating a water flow rate (10.8 liters per second) which can only support about 16 households.

The Orosi Valley


The other subdivision had distant ocean views and was farther along in the entitlement process, still not having local approval, and the “will serve” letter from the municipal water utility read more like “we might serve in the distant future”, as was their commitment to waste collection. This project had pre-sold 9 out of 94 lots in the last 20 months, at prices ranging from $100,000 to $270,000, but pre-sales stopped in 2011, and once pre-selling stops, it is very difficult to get it going again, as foreign buyers fear that the project won’t get completed and they may lose their deposits. When existing buyers see land prices falling, moreover, they may be willing to forfeit their $5000 deposits.

The foreign subdivision projects I actually see succeeding, on the other hand, are the ones aimed at the local nation's burgeoning professional class, offering lots and residences at lower prices within reach of the upper middle class and within commuting distance of major employment centers.  In the Dominican Republic, for instance, when a new highway improved accessibility to the beach towns east of Santo Domingo, such as Juan Dolio, Grupo Metro made a lot of money building condos and villas for sale to professionals working in Santo Domingo.  Similarly, I've seen the Palm Springs community north of Natal,  Brazil, achieve enviable pre-sales as new roads and a bridge to downtown Natal are enabling Palm Springs to become an oceanside bedroom community for Natal commuters, with lot prices starting at $30,000, certainly within reach of the middle class.

One stigma that is currently complicating lot sales in Costa Rica to foreign buyers are some spectacular development project failures, such as Hacienda Matapalo and Wyndham Jade, which are alleged to have been fraudulent schemes all along. There have been development scams, teak farm scams (see my post entitled “Costa Rican teak farms for gringo investors), and squatter scams (see my post entitled “Latin American land grabs from absentee owners”) going on in Costa Rica, many of which are being perpetrated by foreigners, too, such as Americans, Canadians, British and Dutch. That does not mean that local developers are any more trustworthy, and the inherent problem spoiling confidence in the real estate market in Costa Rica is its slow, ineffectual justice system.

Meeting a Costa Rican appraiser

In this valuation assignment, the developer asked me to meet “the independent appraiser” to discuss his recent valuation of the two properties together for a combined value of $12.4 million. Finding the “independent appraiser” sitting across from me at the lunch table made me doubt his independence, and his valuation reports were addressed to the developer.

The developer invited me to ask the appraiser questions. My first question was “¿Qué es lo que utiliza para las ventas comparables?” (What did you use for comparable sales?) His answer was quite unexpected but interesting. There is some institution, perhaps governmental, which has mapped out real estate values, and a Costa Rican appraiser consults the map and then makes adjustments much as any appraiser would. This is not the same thing as researching comparable sales, though, although the map is probably based on previous sales; I just don’t know how long ago they occurred.

Incidentally, all professional appraisers in Costa Rica, as in Mexico, are either architects or engineers, and are expected to have a more rigorous education in quantitative methods than in the U.S., where one can major in Psychology or Religion and still meet the academic standards needed to get certified or designated.

I am not an architect or an engineer, but as an appraiser I am a traditionalist. I like to use recent comps and listings (if the listing prices are below previous closed sales prices, and there is no shortage of failed subdivisions for sale in Costa Rica). Unfortunately, my estimate of value came in lower.