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.

 

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. 

Central American Real Estate Horror Stories

I received another such phone call today. Today the offending country was Panama, but sometimes it is Costa Rica. I asked, “Did you get legal representation before you purchased the land?” The answer was “I didn’t know how to find an attorney down there, so I just went with the one recommended by the seller..” I asked, “Did you get title insurance?” The answer was “No. The title company thought it was a scam.” I’m short on time today, so let me just present 3 “musts” for investing in foreign real estate:

1. Get title insurance. It has become available in many countries where it did not exist before. If the title insurer won’t insure, that is Red Flag no. 1.

Get to know this "scent" before investing in Latin American real estate














2. Get independent legal representation. This means never use an attorney recommended by the seller. That is Red Flag no. 2.

3. Keep your property secure from squatters. If you do not plan to occupy your property, make sure that someone is there to keep the squatters off. Whether it is Latin America or Africa, once they’re living there, you will have a hard time removing them. Recall my previous post linking to a YouTube video of a desperate British investor who has fought for 14 years to remove squatters from his property in Costa Rica. My advice: If you’re just buying a vacation home, buy in a gated community.

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".

Latin American Land Grabs from Absentee Owners

Squatter housing in Mexico

When performing market research in Latin America, I heavily consult broker web sites, some of which require me to identify myself and provide contact information.

As a result, I find my e-mail inbox filled each day with “Retire in Paradise” promotions, written with the same tired old marketing vernacular, frequent underlining, bolding and exclamation marks!!!, used to also peddle miracle weight loss or genital enlargement pills.

Included are elated testimonials from retirees living like kings on $800 per month, describing cheap, delicious local food, friendly locals and $10 visits to U.S.-trained doctors. There are no traffic jams, but one still has to drive slowly in order to avoid hitting one of the many unicorns jumping over rainbows. Then there is the exhortation to buy now, before prices go up, because Latin America is running out of land, and the Baby Boomers just started hitting age 65 last year.

So you make up your mind to buy a foreign property now for when you retire in 5 years. You go down there, find some run-down property or vacant land advertised at a bargain price, hire a local attorney to verify clear title, pay the money and then leave. Everything is OK, right?

What sometimes happens is that the absentee owner arrives five years later to find squatters living on the property. When you call the police to have the squatters removed from the property you rightfully own, you find out that squatters often have occupancy rights under various “adverse possession” or "prescriptive easement" laws meant to protect landless campesinos from homelessness and starvation.

Even the United States has adverse possession and prescriptive easement laws, which recently became problematic in several states, such as Colorado, Florida and Texas, where squatters have seized unoccupied homes and transfered title to themselves, including a case in which the owner was absent only because he was being treated for cancer in Houston, 250 miles away. "Adverse possession" is different than "prescriptive easement" in that it extinguishes title for the former owner,
and in most U.S. cases, the title has been transferred illegally, as the minimum period of occupancy required in any state is 7 years. That's somewhat irrelevant, though, in removing squatters, as even American state laws protect squatters' rights until the matter has been adjudicated.

This squatter problem may be a somewhat recent problem in Latin America, which was largely ruled by heartless fascist dictatorships 50 years ago, but has recently been experiencing a democratic renaissance. Democracies give poor people a voice, effecting legislation sympathetic to their interests, including adverse possession laws.

If taken to a court of law, who would be the more sympathetic party in front of a jury or a judge -- the barefoot campesino who just wants a place to raise his chickens? -- or the rich gringo who didn’t even live on the property, letting the space just go wasted?

On the other hand, adverse possession can sometimes be a scam organized by a wealthy land grabber. Consider the case of Sheldon Haseltine, an absentee UK investor with prime land next to Costa Rica’s finest marina. He found squatters on his land in 1998 and tried to have them legally removed. He later found a billboard advertising a Wyndham hotel to be built on his site. He found out that the campesinos had been paid to occupy his site by another wealthy landowner and even found a copy of the cancelled check to the campesinos, in the amount of 100 million colones (about $200,000). His litigation has now lasted 14 years.

How could adverse possession be avoided?

1. Buy in an already-gated community (not accepting the promise that it will be gated some day).
2. Try to get some type of title insurance to protect against adverse possession (not sure if this exists). Title insurers, please comment.
3. Buy only when ready to move in.
4. Do not necessarily believe that prices will be increasing in the near future. In most countries I visit, property prices have been decreasing. There may still be opportunities available at the time when you are ready to occupy or develop your foreign property.

Related articles

• Curuguaty and the Paraguay Coup

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• Squatters lied to stay on land, says tycoon

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• Adverse Possession Law in Texas

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• Squatter legally moves into Boca mansion
• Charges reduced or dropped in several adverse possession cases

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

Condo project appraisal in Cozumel

I am currently revisiting a condo project in Cozumel, Mexico, that I appraised three years ago. Cozumel is an island off of Mexico's Yucatan peninsula, a land full of lush tropical jungles and Mayan pyramids.

This particular condo project had a successful, sold-out first phase, but by late 2008 it was apparent that many vacation condo projects all over the world were in trouble. Many condo projects that I was visiting had stopped making sales altogether.

This project in Cozumel was faring slightly better; its rate of sales was down only 50% due to one of Cozumel’s unique attractions– it is a mecca for scuba divers from all over North America. Condo buyers at this particular project were typically both doctors and scuba divers, and the recession had hit this population subgroup less severely. Still, the forecast of a prolonged absorption of the unsold units resulted in a decision to not fund the construction of another phase. It was hoped that another lender would step in, but as can be seen in the photo, construction has been halted since 2008.

General worldwide conditions for vacation condos

The last three years or more have been difficult for second-home markets all over the world, as I have witnessed in such far-ranging locales as Barbados, Fiji, the Dominican Republic, Costa Rica and Canada.

Many of the failed overseas second home projects were high end luxury projects focused on a growing number of “multi-millionaires” in the world. Each project tried to achieve a certain prestige by promising top shelf amenities vital to the ultimate success of such luxury projects.

Unfortunately, the market for vacation real estate is discretionary, and the purchase of vacation real estate has moved further down the priority scale for a large number of potential buyers. For instance, one of the main motivations for the purchase of vacation real estate has been the potential for financial return from the investment. While there were forces in place for price appreciation in advance of the recent financial crisis, buyers now recognize that the potential for appreciation of luxury second homes has significantly deteriorated. As for the ability subsidize ownership costs or earn a return on investment by renting out one’s property, a worldwide oversupply of vacation homes is driving down returns on investment.

Another concern from likely buyers relates to the continued financial viability of substantially unsold projects, and the risk of promised amenities not being built or else operating at a substantial deficit which would require increases in homeowners association dues. For instance, many golf course sales nowadays are to homeowners associations trying to rescue an affiliated golf course from bankruptcy. That often requires a substantial increase in POA dues.

In addition, the allure of owning a home in high-end vacation communities comes from the prestige of belonging to a successful community. The financial distress and litigation associated with an unsuccessful project may instead have the opposite impact. Being associated with a troubled project affects the psychology of potential luxury real estate buyers. Instead of looking savvy, a purchaser could now look naive. This makes the proposition for purchase due to a project’s prestige more difficult than before.

The valuation of a failed project is exceedingly difficult, as it typically takes several years to get such a project restarted if at all. Patient capital is required, and it is difficult to construct a discounted cash flow model that can correctly forecast the timing of the project’s turnaround.

Other Yucatecan ruins

The following photos are of ruins left behind in Cozumel by a post-Mayan race of people known as "speculative real estate developers".

Next stop: London

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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?