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.

 

Another Appraisal at Playa Novillero, Mexico

This assignment called for the appraisal of 91 hectares of beachfront land at Playa Novillero very near some land I previously appraised in 2012. Playa Novillero is Mexico's longest beach at 82 kilometers, but is isolated and lacking in visitors. Despite being zoned for tourist development, land uses at the beach reveal abandonment rather than new development.

The beach is ideal for families, having about 50 meters of sand extending inland and shallow depths for a long distance out, but the beach is busy only week per year during a Mexican holiday week.

There are no close international airports. Last time I was here it took 2 hours to get here from the Mazatlan airport, and this time it took me 4 hours to travel from Guadalajara. Decent roads end at the town of Tecuala, which is 22 km inland from the beach, and arriving at the small village (population 249) at the south end of the beach, one has to drive up the beach to access the beach properties. This time our GMC got stuck in the sand and I had to get down on my chest several times to clear the soft sand from around the tires.

Most of the beach homes are abandoned.

As in the last Mexican appraisal assignment, the loan applicants were pledging as collateral a property that they did not own yet, although they did possess a 4-year-old purchase contract and a document conveying "Special Irrevocable Power" for 5 years, with less than a year from the end of the contract. They said they were taking their time executing the purchase contract, but there was no plan to close on the purchase at the time of loan funding, leaving the lender with the prospect of having no collateral for the loan.

Just as in the other beach property assignments, the most consistent indicator of value in this case was the price per lineal meter of beach front.

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. 

Avoiding Cultural Gaffes while Appraising Abroad

British innkeeper Basil Fawlty [actor John Cleese] is confronted with an "ugly American"

 

 

One day in Perth, Australia, my Australian hosts and I had some time to kill between property inspections and we settled at a pleasant riverfront café at about 11 am.  Not quite ready for lunch, but having already had breakfast, I asked only for orange juice.  Then I immediately asked if it was “fresh-squeezed”.

 

My hosts immediately asked if I was trying to re-create a classic scene from the BBC sitcom Fawlty Towers, the famous 1979 “Waldorf Salad” episode in which an obnoxious American comes to visit.  I even remembered that episode, particularly since it was the first time I had seen Americans parodied in foreign media. This American from California was portrayed as demanding and belligerent, finishing his demands with the phrase, “or I’ll bust your ass!” And he and his wife insisted on fresh-squeezed orange juice. That episode was hilarious, but it did make me feel uncomfortable wondering if that was how the rest of the world perceived Americans.

 

As a southern Californian, I perceive one dividing line between better-quality and lower-quality restaurants is whether the orange juice is fresh-squeezed.  God knows we have enough oranges in this state, so when the waiter pours the orange juice out of a carton that says “Florida” I judge the restaurant to be “not really trying”.  Traveling in Mexico, I have found that restaurants there would never even think of not squeezing oranges. Naturally, I do not expect oranges to grow in England, but Perth, Australia looks so similar to a California city, with its palms and eucalyptus trees and waterfront, similar to San Diego or Long Beach, that I was disarmed into thinking that fresh oranges would be present.

We had a good laugh, but it was not the only cultural gaffe I’ve made while traveling in Australia.  On one hand, I have found Australians to be refreshingly down-to-earth and approachable, but have mistakenly assumed that this informality extended to attire. Last year, for instance, I again found myself in Perth on a 40 degree Celsius day (104 F), wearing a tank-top, and I spied a lively bar with a t-shirted crowd across from my hotel and tried to enter, but I was refused admittance by the doormen.  At first, I couldn’t even understand what they were talking about, as they use an Australian slang word for tank top, but then I realized that I had seen no one wearing a tank top that day and that I was underdressed for summertime Australia. Bear in mind that I live in a city (L.A.) in which I can dine at a $100 per person restaurant and not have to wear socks.  (We have a surreal culture which has adapted to the demands of imperious Hollywood stars.  If Rob Lowe doesn't have to wear socks at a 5-star restaurant, why should the rest of us?)

 

Likewise, I have been glad that I packed a business suit on my Australian trips, as there are more situations requiring it over there than here in the U.S. I even did a couple of guest lectures at an Australian university and noticed that the Australian faculty wore suits and ties.  If only they could see how California college professors dress – not much differently than their students.

 

Mexico

 

There are many Americans who misunderstand Mexico.  Despite negative portrayals of Mexico in our news media, the concept of courtesy is stronger there than it is in America.

 

Even the poor people practice courtesy.  Once, when I was inspecting a contested property with a Mexican appraiser and his colleagues, we were greeted by residents of a local ejido, a commune composed of agrarian peasants, who politely asked why we there.  When we explained that we were performing a valuation for the owner of the property, they courteously explained that the property belonged to them instead.  No shouting or cursing was involved, unlike the last time I inspected a trailer park in Bakersfield, California.

 

Another time I was traveling in Mexico with another American (not my employee) and three Mexicans, and I felt like my American colleague was raising their eyebrows with his bossy behavior, calling the shots on when and where we would meet and eat and pause for souvenir shopping.  We met for breakfast on the second morning, and although I ordered bistec ranchero (steak ranchero), I received huevos rancheros (eggs ranchero) instead.  My American companion was outraged for my sake and thought I should have had the meal returned to the kitchen, but I was satisfied to eat huevos rancheros to avoid an international incident and any unfavorable impression of Americans, all the while understanding that he came from a city where it is acceptable behavior to stand up and shout “Where’s my f***ing cheese steak?”

Every culture has its blind spot, including our own. Once I was with an American who expressed his moral indignation at the sport of bullfighting. A Mexican responded with "We Mexicans find it strange that you Americans treat your house pets better than you treat your own children."  Touche'.

Traveling abroad, I am sometimes offered food that could be considered strange to Americans, particularly when traveling in China, where I’ve been served snake, dog and donkey meat, but I cheerfully eat it and say “Thank you.  It’s delicious.”  I consider respect for other cultures to be part of appraiser professionalism.  It is also keeps an appraiser's mind open to differing concepts of value in other cultures.

 

 



The Important Synergy of Being Both a Certified Fraud Examiner and a Commercial Appraiser

Harry Markopolos, CFE, testifying before U.S. Congress

Some readers have noticed the CFE credential placed after my name. It stands for “Certified Fraud Examiner”, a designation earned from the Association of Certified Fraud Examiners requiring testing in accounting, law, criminology and investigative techniques. This once-obscure designation became better known with the media attention on Harry Markopolos, a Certified Fraud Examiner who tried for 8 years to alert the SEC (US Securities and Exchange Commission) to the fraudulent Bernie Madoff Ponzi scheme and who later testified before the U.S. House Financial Services Committee on the negligence of the SEC. He was interviewed on CBS Sixty Minutes by Steve Kroft and has his own book, No One Would Listen: A True Financial Thriller.

Most CFEs are also CPAs (certified public accountants) and thus concentrate on forensic accounting matters not related to real estate. I know of no other CFE who is also a commercial appraiser, which is a shame, because it would be foolish to think that fraud is not present in the commercial real estate industry. I specifically pursued this credential because I witness so much fraud in the commercial real estate business, and I also work with attorneys pursuing fraud complaints.

Most of my work, though, is for private lenders, and the emphasis is on fraud prevention. Private lenders are usually lenders of last resort and therefore attract some desperate loan applicants. My job is to not only value the property, but also detect misrepresentations and verify essential facts about the property and the borrower before a loan is made. This is how I got involved in appraising internationally, because international transactions bear a higher risk of fraud, and some private lenders are brave enough to venture into this area.

I also perform pro bono consulting work for swindled real estate investors, mainly because they've already lost all of their money and can't afford to pay me, but asset recovery is elusive when the swindlers are allowed to declare bankruptcy while hiding assets.  The victims are all senior citizens, which saddens me when I pause to consider how many thousands of people employed in the financial services industry work towards cheating people who spent their entire lives in honest careers and expected secure retirements.  Nevertheless, I continue to explore asset recovery strategies for these aggrieved investors.   

My CFE education has also improved my real estate valuation practice in several ways:

1. Greater ability to detect inaccurate financial statements,
2. Knowing resources for investigating buyers, sellers and borrowers, including hidden relationships,
3. Knowing how to interview buyers, sellers and borrowers in order to spot contradictions and obtain more honest information, an area of knowledge I call "deception science",
4. Learning how to better serve attorneys,
5. Learning how to testify in court, and
6. Understanding the psychology of deceit.

Let me provide some examples relating to each:

1. I easily determined that an Indian hotel owner had provided false income and expense statements because all line items had been increased at the exact same percentage over the previous year, which is a statistical impossibility.

2. I am constantly preventing commercial mortgage frauds in which properties are being purchased at inflated prices by supposedly independent parties who are actually the sellers themselves or related parties. These inflated prices were being used to request loans which were greater than the values of the properties serving as underlying collateral.

3. I like to get the property owner to confirm essential facts just in case their representation of facts changes. In Mexico City, I confirmed a property’s zoning with the managing co-owner, by saying “I see from the zoning that you can build up to 100 homes on this site” to which he responded “Yes, but even after considerable site development we would only be able to build about 80 because of the topography”. Not surprisingly, I was contacted by the lender-client several months later to be asked why my estimate of value was only 5% of the value estimated by the Cushman and Wakefield Valuation and Advisory office in Mexico City. Their appraised value was based on zoning that allowed 1500 homes to be built there. Forced into a conference call with the Mexican appraisers and my client, I asked, “What made you think that this site was zoned for 1500 homes?” Their answer was “The broker told us so.” A recheck with the zoning office confirmed that zoning had not changed, only the borrower’s story. This further confirms my low opinion of Cushman and Wakefield appraisers. See http://www.internationalappraiser.com/2011/05/warning-about-international-real-estate.html and http://www.internationalappraiser.com/2011/06/gibson-v-credit-suisse-mother-of-all.html . Are they about to become the Arthur Andersen of the real estate valuation profession?

Being a CFE has also gained me access to the scholarly research in the area of deception, including research done by Harvard Business School.  Researchers, for instance, have catalogued linguistic differences between liars and truth tellers, much like some of the lessons taught in the former Lie to Me television series, starring Tim Roth, which was based on the real-life research of Paul Ekman, a University of California professor.  For instance, liars tend to be more loquacious than truth tellers, as they require more words to make their deceptions convincing.  This is called the Pinocchio Effect, as the number of words grows longer as does Pinocchio's nose does. They also use more third person pronouns, a phenomenon known as distancing.  They also use more profanity in their oral communications.  For instance, "I swear to God, Vern -- this project has generated more excitement than any other in the history of my country."  (The phrases "excitement is building", "poised to sell out" and "potential for explosive growth" are all phrases I consider to be evasive.  I prefer to hear real numbers such as "90% pre-sold with 50% down payments" or "number of households has doubled in the last decade" and then receive documentation supporting these statements.)

4. For instance, I encourage the attorney to get me the opposing side’s supporting appraisal reports right away so that I can prepare insightful questions for them to ask in their subsequent deposition of the appraiser. When the dishonest appraiser crumbles in the deposition, the case can be settled more quickly.

5. Some of the things I’ve learned from ACFE about testifying include a) always tell the truth, b) try to provide only ‘yes’ or ‘no’ answers when being questioned by the opposing attorney, because the more one speaks, the more one can have his words used against him, and c) do not pretend to know more than the facts and analysis have revealed to me. Opposing attorneys, for instance, like to ask me “What if?” questions that would take me from the realm of what really happened to the realm of conjecture and hypothesis.

6. Fraud criminologists contend that fraud starts with a financial burden being experienced by the fraudster. In real estate, that often means a property experiencing negative cash flow or a property that is failing to attract interested tenants (in the case of developed properties) or builders or buyers (in the case of land). The fraud then happens when there is a perceived opportunity to relieve this burden (such as a naïve lender or a naïve group of investors). The final step is to rationalize the fraud, which in the real estate industry, is often the simple bromide “Everyone’s doing it”.

In discussing the problem of fraud with my professional peers, I find them divided into three camps:

1. Those who deny that it is happening.
2. Those who know it is happening, but do not think it is their responsibility to stop it.
3. Those who think it is also a problem, and make some efforts to prevent it.

An appraisal or valuation is worthless if it is based on false information.  It disturbs me that there are high-level members of the appraiser/valuer profession who think differently, people who see an appraisal analysis as an academic exercise based on suppositions.  These are people who think that an appraisal report is a good report even if the estimate of value proves to be erroneous.  They can justify faulty reports with a section entitled Assumptions and Limiting Conditions.

In summary, some instruction on fraud prevention should be part of every appraiser or valuer’s professional education. Let me also take this opportunity to plug my book (published by the Appraisal Institute), Fraud Prevention for Commercial Real Estate Valuation. See sidebar.

Tepotzotlan, Mexico, revisited: The Danger of Hypothetical Conditions in Appraisals

Maybe once a year I get feedback from a client such as this: “We hired an internationally famous brokerage firm to revalue the property you appraised and they estimated a value 15 times as high as yours. Explain yourself.”

Such was the case recently with my previous valuation of land at the periphery of Mexico City. The appraisers were from the Mexico City office of an international appraisal firm being sued for malpractice for billions of dollars in the U.S.

Presented with the new valuation report, I found the reasons for the difference in value to be obvious. The appraiser made an assumption that the property would be rezoned at 12 times its current allowed density, permitting development of 1206 dwellings on a 26-hectare site. Such an assumption would be labeled as a “hypothetical condition” in a U.S. appraisal report, but it wasn’t in this Mexican report. (The neighboring subdivision built 18 homes before going bankrupt.)

My client never instructed them to assume such a hypothetical condition. I wondered if the loan applicant instructed them to make such an assumption, although the loan applicant never asked me to. In discussing the zoning, I even asked him, “So the current zoning allows you to build 104 dwellings, right?” to which he responded, “Yes, but because of the topography we can only physically build 80 homes.” Forced into a conference call with the appraisers, two things became apparent:

1. The appraiser never met the borrower or owner of the property, but only the mortgage broker, who told the appraiser that the property was about to be rezoned.

2. Although three appraisers signed the report, including an MAI in Chicago, it was only the most junior appraiser who actually visited the property.

I had a similar situation earlier this year, in which a brokerage firm’s appraiser did her inspection of raw land in the Dominican Republic from a helicopter and photographed and described the wrong property, possibly due to being steered by the property owner. It almost seems that the major brokerage firms do not care about their valuation clients.

My hard money lender clients always instruct me to appraise “as is”. The municipality of Tepotzotlan issues “Certificates of Zoning Information”, and the position I made in the teleconference is that I appraise according to present Certificate of Zoning Information until a new Certificate of Zoning Information is issued. This particular client agreed, stating “Please don’t assume anything”.

This post is not meant to criticize Mexican appraisers, as the problem is the same in the USA. Appraisers are too quick to believe statements such as “we will be getting final subdivision approval any day now” or “the elevators will all be fixed tomorrow”. It places lenders at risk and the appraisers at risk of being sued. Also see my post on "professional responsibility".

Appraisal of Beach Land in Nayarit, Mexico

This appraisal assignment illustrates the problems in obtaining reliable Mexican market data.

The subject property is about 100 hectares of raw, beachfront land located on the Novillero Peninsula in the state of Nayarit, about a two-hour ride south from Mazatlan, Sinaloa on Mexico’s west coast. Playa Novillero has the distinction of being Mexico’s longest continuous beach, at 82 kilometers. The beach itself is not particularly impressive, consisting of dark colored sand and lacking distinctive physical features, but it does have coconut palms and is quite wide and flat.

Unlike the Mazatlan area to the north and the Nayarit Riviera to the south (close to Puerto Vallarta), the Novillero area is characterized by abandonment rather than development. I saw no new development, but plenty of abandoned beach homes. One problem is the lack of good road access to this area.

Abandoned Novillero beach homes








Prior to my arrival I was told that the owner had acquired the parcel in 1998, had received an offer of $7 million for the property and had a Mexican appraisal estimating value to be about $5.9 million.

When I obtained the escritura (deed), however, it indicated that the owner had purchased the property a year ago for only about $85,000.

Which number more accurately reflected market value? Most likely, none of these numbers, for the following reasons:

1. The only honest Mexican appraisal I’ve ever seen was one I ordered myself.

2. If I took “offers” seriously as indicators of market value, my lender clients would have ended up foreclosing on allegedly $50 million worth of scattered woodlands in rural Tennessee, an allegedly $100 million mountain in northern California, and an allegedly $100 million isolated Texas beach.

3. It is standard practice in Mexico to understate sales prices in deed transfers in order to minimize the 2% transfer tax required of the seller. It doesn’t matter that it is also illegal tax evasion witnessed and sanctioned by notaries public; the tax laws do not seem to be enforced.

I did ask the property owner to tell me whether the deed was correct, to which he indicated no, and then submitted documentation that he actually paid over $1 million, more than 12 times as much as was recorded, which seemed credible in light of much higher asking prices in the area.

Still, it bothered me that the Mexican appraisal valued the property at more than 5 times the price allegedly paid for it a year ago (and 68 times what was officially recorded as being paid), when this was the last sale in the area. How could he document an increase in value of that magnitude? When asked to show his comps, the Mexican appraiser presented listings only, no closed sales, with prices ranging from $10,000 to $30,000 per lineal meter of beach. The last closed sale I know of was at about $1500 per lineal meter, so why are asking prices so much higher than the last closed sales?

One factor influencing asking prices in southern Sinaloa, on the other side of the estuary from Novillero, was the announcement 3 years ago of a grand tourist development project sponsored by FONATUR, the Mexican government's tourist development agency. Southern Sinaloa state will be groomed to become "the next Cancun", although it lacks Cancun's white sand beaches.
The excitement has driven up beach land prices in southern Sinaloa to as high as $30,000 per lineal meter.

These high expectations have crossed the estuary which separates the states of Sinaloa and Nayarit, and asking prices on Novillero beach land are also in the range of $10,000 to $20,000 per lineal meter. Unfortunately, although Sinaloa and Novillero are just a few km apart as the crow flies, there is no bridge over the estuary and one has to drive miles inland to the highway to travel north and then travel miles back to the beaches of Sinaloa, which are much more accessible to tourists coming from Mazatlan, the general entry point for tourists in this region.

Inflated asking prices are not the same as closed sales as indicators of value, and the only closed sale I have was at about $1500 per lineal meter, far lower than current asking prices in the area. It also worries me that everything is for sale and nothing is selling.

Next stop: Bahia, Brazil

Appraisal in Tepotzotlan, Mexico

The story sounded compelling: 26 hectares of flat, residentially zoned land at the northern periphery of the Mexico City metropolitan area, not far from the Autopista, the major north-south highway leading to Mexico City, 42 kilometers south. Next door was said to be a gated subdivision with a golf course. The owners claimed to have had a bank appraisal in 2006 establishing a value of 177 million pesos, equivalent to about $16 million USD at that time.

The idea of the site’s potential for residential subdivision seemed plausible at first. As modern life takes over Mexico City, it has increasingly grown like an American city, with residents fleeing to growing suburbs and the city population actually declining, similar to Chicago, Detroit or Baltimore. The subject property initially sounded like an ideal location for a new housing subdivision.

The paper chase

One of the documents I requested from the landowner was the most recent predial (property tax receipt). I use it to double-check items such as owner, location, tax ID number (clave catastral), and assessed value, which I hope might point me in the right direction of true market value.

I was provided instead with a predial from 1992, indicating an assessed value of 87,696,000 pesos. Why would they do something like that?

At today’s exchange rate of 12.18 pesos to one dollar, the land would have been worth $7,200,000 back then, but that would be in nuevos pesos, which were not established until 1993, after a period of hyperinflation, when Mexico issued the “new peso” to replace and be valued at 1000 old pesos. The exchange rate on the date of the predial would have been 3064 “old” pesos to one dollar, with the assessed value being equivalent to only $28,621 USD!

Thus, the purpose of providing a predial dated prior to 1993 was an attempt to confuse me. The alleged bank appraisal from 2006 never materialized, either.

The property inspection

After exiting from the Autopista, we traveled another half hour on roads that progressively got narrower and rougher, making numerous turns as we traveled through residential neighborhoods with speed bumps on every block. The paved roads then ended and we traveled on narrow, rutted dirt roads.

Arriving at the site, I found it to be a hillside. The elevation dropped by 150 feet from top to bottom.

Immediately west was a neighborhood of makeshift shacks and dirt roads.
Immediately south was a neighborhood of modest, concrete block structures on small lots, served by paved roads. Graffiti was prevalent.

Immediately north was the countryside. Immediately east was the gated subdivision I had heard about.

Neighboring gated community

After walking about the subject property, we drove to the gated community next door to perhaps give me some idea of the residential development potential of the subject site.

The guardhouse was closed. One of the four gates was open to traffic, however. Once inside, I saw mostly vacant lots, a few structures, some which appeared to be vacant, and no golf course. Census data indicated that only 18 households live in this subdivision. The developer is still advertising to build attractive new 3-bedroom homes of 2500 to 2600 square feet for 1.2 million pesos unfurnished or 1.5 million pesos furnished, equivalent to about $98,000 and $123,000.

Comparable properties

Sales of large parcels were not to be found, so I turned to listings. The most similar property in terms of size and proximity was in the next town west, but its H500A (municipality of Tepotzotlan) zoning allowed 5 times as much residential density as the subject site – 20 dwellings per hectare or 8 dwellings per acre. Its listing price translated to about $72,000 per hectare, for five times the allowable density. Other local parcels were priced as low as $20,000 per hectare (although that one was in a more remote location).

It soon became apparent that the appraised value was going to fall far short of the $16 million that the lender was led to believe. Moreover, this particular lender’s minimum loan size is $1 million with a maximum loan-to-value ratio of 50% for raw land, so there was no real possibility of getting a deal done here.

Costa Rican and Mexican appraisals

Condo development site in Cozumel, Mexico

I am more often asked to review local appraisals from Mexico and Costa Rica than I am asked to appraise in those countries, as most clients are cost-conscious. Appraisal reports look very different in Mexico and Costa Rica than in the U.S. and Canada. These are the major differences I see between Central American and North American appraisals and appraisers:

1. An appraiser in Mexico or Costa Rica is likely to be an engineer or an architect. In this respect, Central American appraisers generally have more relevant college degrees as compared with North America, where any college degree, no matter how irrelevant, meets the criteria for designations and certifications. They tend to be very precise in their measurements, too.

2. Most Central American appraisal reports are delivered in Spanish, and few appraisers speak English. On the other hand, almost any successful real estate broker in either country is likely to speak English.

3. A Central American appraisal report presents no market data or comparable sales. This reduces the incentive to perform market research, and market research is particularly difficult in these countries because of the inaccuracy of public records, as the sales prices that are recorded are often a fiction serving the agenda of buyers or sellers, usually to avoid taxes.

4. Central American appraisers, probably because of their architecture or engineering backgrounds, seem to rely too much on the Cost Approach, which is land value + replacement cost – depreciation. Nowadays, many properties are selling at below cost as a result of economic depreciation (oversupply), but an appraiser not measuring market trends might only measure physical depreciation and nothing else, so the Cost Approaches end up being high.

5. Ethical standards for Central American appraisers appear to be low. Most appraisals I have seen have had inflated value estimates serving the clients who hired them; I often find this out when I find the property advertised for sale on the Internet for a price well below appraised value. One firm claims to deliver MAI appraisals, but there are no MAI appraisers in Costa Rica. Some brokers offer “free appraisals”. Right.

6. When U.S. appraisers perform valuations in these countries, they often do not include comparable sales, either, and instead construct a discounted cash flow model based on assumptions not fully validated through market research. The results of a DCF analysis can vary significantly based on the assumptions used in the DCF model.

Is there an appraiser who includes comparable sales and listings in his Mexican and Costa Rican appraisal reports? Yes. I do. After all, what good is an appraisal that does not rely on comps?