The property was a 20-acre hillside, ocean view parcel, improved with a 10,000 square foot home. The top half was zoned for conservation only, but the bottom half had an approved subdivision plan allowing 1200 square meter (13,000 square foot) lots. There were picturesque views of a bay and yacht harbor.
The home had been built in the 1970s and still had a few, dated design features from that time period, such as mirrored ceilings and flagstone facades, but was being renovated in preparation for the winter rental season, when it typically rents for $5500 per week. It had just received a new roof, kitchen and air conditioning units.
The buyer had not disclosed that the he was also the real estate broker who had listed the combined property for sale for the last 4 years at a price of $15 million. (Nothing else in the area had sold in the last 4 years, either.) The buyer offered $5 million, and the offer was accepted. Based on a cost approach and an income approach (based on weekly vacation rental rates) plus an estimate of value for unimproved, hillside land with ocean views, I validated the $5 million offer to be at market value.
Ordinarily, a scenario like this would result in a funded loan, but the buyer hired his own local appraiser to appraise the property for $36 million, and was intent on requesting an $18 million loan. He seemed quite insistent that he should be able to buy such a property for no cash down and also be able to pull $13 million out of the deal.
Similar to my discussion in my last Costa Rican post, it seems that there are many property owners and their pet appraisers who insist that highly sloping raw land is just as valuable as flat land. It is actually less valuable because of the extra costs to develop the land, but in the end, the finished lots are worth more becbause of the views. In the mean time, it takes a lot of money to convert hilly terrain into finished lots. In this instance, too, the local appraiser assigned the same value to the unbuildable Conservation land as to much smaller flat, buildable parcels in the neighborhood. This is what makes lending on land particularly vulnerable to fraud.
Some other lessons to be learned here are:
1. Borrower-ordered appraisals are not taken seriously by lenders.
2. Requesting a cash-out loan for 260% of the purchase price is not likely to be taken seriously, either.
3. The market for luxury residential real estate in the Caribbean is still weak, just as it is in most other tourist destinations of the world.
It never ceases to amaze me, too, when a seller or broker fails to take their listing of the property off of the Internet before representing that the property has a much higher value.
I saw the same thing last week in Santa Fe, New Mexico, with a property currently listed for sale for $6.9 million, having been listed for sale for nearly 3 years, with an application for title insurance in the amount of $4.5 million in favor of the buyer, but the only purchase document I received was an unsigned, post-dated purchase contract for a price of $8.5 million (with $4 million in seller financing). Considering that the $4 million in seller financing was the exact difference between the contract purchase price and the amount of title insurance, one can conclude that the $4 million second mortgage was a "soft second", a forgivable loan meant to inflate the purchase price and trick the lender and appraiser in believing that the $8.5 million purchase price represented market value.