Saturday, May 18, 2013

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.
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.



Tuesday, May 14, 2013

Tropical American Tree Farms Update and Other Teak Farm Promotions

Latest update:

I received many complaints about Tropical American Tree Farms (TATF) in Costa Rica, who did not sell titled land, but sold unenforceable "certificates of ownership" in individual trees, written in the English language and thus not enforceable in Costa Rican courts. Some investors claim that they are due payments in arrears for as long as 16 years. The owners of TATF were an American couple; the husband died about a year ago. It seems that no investor has received any payouts from this investment over the last two decades.

I sometimes get requests from readers to appraise their trees, but I have not yet been able to help. I have encountered investors who have no deed (known as the “escritura”) and cannot locate their trees on a map. Lacking that information, I cannot perform an appraisal for the IRS. I cannot state that their trees are worthless, either, because trees are not worthless.

If I have the relevant escrituras, I can appraise the investor’s ownership interest in the property, and if the escritura demonstrates that title has not been transferred to the investor, then the value of the ownership interest is likely to be zero.

Continued teak farm investment promotions

These are not necessarily fraudulent but are advertised with a large amount of puffery and unproven claims. For instance, in an issue last year of International Living, former congressman Bob Bauman, who normally presents sound legal advice for would-be expatriates, presented the new Panamamian residency visa for immigrants (such as Americans) wishing to pursue forestry in that country along with the unvetted investment claims of a Panamian teak farm investment promoter. (IL promptly removed the investment claims from its web site when I informed them.) The standard line from these promoters is that income starts coming from trimmings of teak trees at 13 to 14 years and that the trees can be profitably harvested at 20 years of age. No legitimate Latin American forester seems to agree with this.

"OLAT" -- Organizacion LatinoAmericana de la Teca, the trade organization for teak farmers, tells a different story. They considered a teak tree to be mature at 30 years of age, and immature teak has less value than mature teak, enough less that they did not even attempt to measure the value of teak less than 30 years old in their price surveys. Visit their web site at .

What are current teak prices?

Costa Rica's Oficina Nacional Forestal published average teak prices in June 2012 as 225 colones per pmt (pulgadas maderera tica) for standing trees and 326 colones per pmt for logs. A pmt is equivalent to 1 inch x 1 inch x 3.36 meters. Based on 504 colones per dollar and 364 pmt per cubic meter, this translates to a price of $162 per cubic meter for standing trees and $235 per cubic meter for logs. Bear in mind that the price per cubic meter increases as the tree matures.

My continued advice is to pursue all foreign investments with personal due diligence. If one's main goal is a Panamian residency visa, a forestry investment will help meet that goal, but don't expect to get rich that way, and make sure to actively manage your property.

Final analysis

In addition to being an appraiser, I have also been a Certified Fraud Examiner for the last 13 years.  What TATF looks like is a confidence scheme from the start. The art of this con is that it takes 20 years for investors to find out that they have been defrauded.

Some of you have expressed doubt that the Brunners had bad intentions at the start, but that is how confidence schemes work -- they rely on your misplaced confidence by seeming like trustworthy people. When investment promoters or loan borrowers smile a lot and talk about Jesus, I have learned to view it as a red flag and an effort to manipulate me.  I've been had before, too.

Sunday, May 12, 2013

Down Payment Fraud – in the Perpetrator’s Own Words


I received a lot of feedback on my recent post on Purchase Contract Scams, and I was asked if I could provide an example, so I present one here in the fraudster's own words.
The above video was made in 2007 and is an illustration of a phony down payment scheme which can lead to mortgage loan losses.  Observe that he never states that his scheme is illegal. The red flag in his presentation is the discrepancy between the purchase price of $250,000 and the appraised value of $300,000.   

What immediately charmed me about the video presentation was the speaker himself in his sunglasses. Is he blind?  Is he Kanye West? No, he was the founder of a service known as Payout One, and he evidently thought his future to be so bright that he had to wear shades indoors. Payout One has ceased operations since then.
PayoutOne was one of many "private contribution" services at that time which deceived lenders into thinking buyers were making down payments and paying higher prices than actual. Some of these services, such as the Nehemiah Program, even had religious affiliations, with the attitude that this was the morally right thing to do in order to let low income people own homes. The "private contribution" would be added to the real purchase price to create a new "contract purchase price" that would mislead lenders and appraisers.

I first became aware of Payout One on a hot August day in 2006 on the south side of Kansas City, in a neighborhood (near the intersection of Broadway and Armour) that often leads the nation in multifamily foreclosure rates.
I was there to inspect an apartment building, and the purchase price didn’t make sense to me.  The price was not supported by comparable sales in the neighborhood.

It also made me suspicious when several people showed up for my visit, because additional people are often sent to persuade me about something that I might not believe if told by just one person.  
If I feel that I am being misinformed, I search for the “weakest link” in the group and try to isolate that person for further questioning.  On that day, I judged that person to be a young man who showed up in suit and tie (unnecessary and uncomfortable on the south side of Kansas City in August), carrying a very thick file.  He introduced himself as the mortgage broker’s assistant.

When I got him alone I asked if I could see the file. He said “Sure.  You can even have it!”  I struck pay dirt when I found the escrow instructions from Payout One, as illustrated here.

In short, the purchase price had been inflated by $742,500 with this phony down payment.

Final thought
Readers, please use this information for good and not for evil.

Saturday, May 4, 2013

Attempt to defraud 261 Chinese investors in U.S. EB-5 Visa Program for proposed Chicago Convention Center

Three 5-Star hotels and a convention center on a 2.8-acre site next to Hooters?

It's been a while now that this blog has been cautioning real estate investors of the world, whether North American, European or Chinese, to exercise due diligence in making real estate investments in other countries. Foreign investors are always at an informational disadvantage and can be exploited by the unscrupulous. I also promote my own valuation and due diligence services with this blog and do not have a conflict of interest by receiving sales commissions or advertising dollars or operating as a subsidiary of an international brokerage operation. Objective information on international real estate investment is in short supply.

The EB-5 Visa program and the real estate development it is spawning

The Appraisal Institute recently held a local luncheon program that spoke of new opportunities coming to appraisers as a result of the EB-5 Visa Program, a program that grants U.S. residency to foreign nationals who invest at least $1 million (or just $500,000 in “targeted” areas of high unemployment, 50% above the national average) in an enterprise that creates or preserves at least 10 full-time permanent jobs for Americans other than the immigrant’s family members, for at least two years.

Some EB-5 applicants are seasoned entrepreneurs who come here with a business plan, but there are others, many of whom are from China, who seem to have more money than ideas and pool their money into "regional center" EB-5 schemes which operate much like private real estate syndications. USCIS (U.S. Citizenship and Immigration Services) recently reported that over 90% of EB-5 visa applicants are choosing the regional center route, and by far the largest number of applications come from China. Many of the new millionaires from China made their wealth through real estate flipping and are attracted to real estate schemes created by "regional centers". Not every regional center is well-conceived or honest, though, as the example below illustrates:

$156 million EB-5 fraud in Chicago

In February, the U.S. SEC (Securities and Exchange Commission) filed suit against A Chicago Convention Center, LLC and 29-year-old Anshoo Sethi, its managing partner, in an effort to protect more investors from fraud. In the Offering Memorandum supplied to investors were counterfeit documents and misrepresentations, including a bogus franchise agreement with Hyatt Hotels and a counterfeit letter from the Qatar Investment Authority promising $340 million in funding. The defendants are also accused of misrepresentation of franchise agreements with Starwood Hotels and Intercontinental Hotels, permits from the city of Chicago, and an appraisal of the 2.8-acre site near the airport for $177 million. 

The site, seen in the above photo, lies between a Hooters restaurant and a Spring Hill Suites hotel along the Kennedy Expressway leading to Chicago's O'Hare airport.  My first reaction is that the traffic infrastructure was a bit lean for such a large project with 995 rooms and 260,000 square feet of convention space. It is also located across from a residential neighborhood. In a situation like this I would call the city planners, but no one did in this case.

Mr. Sethi's appearance on CCTV (China Central Television)

Mr. Sethi also claimed to have 15 years of real estate development experience, which means he would have started developing real estate at the age of 14. He has also spent several years working as a pharmacy technician. There is no record that he or his family has ever developed anything. They simply owned the hotel that previously occupied the proposed construction site.

Each investor supplied $500,000 plus a $41,500 administrative fee which was purportedly placed in escrow to reimburse unsuccessful visa applicants, but more than 90% of these administrative funds have been taken out already, including $2.5 million transferred to Sethi's private Hong Kong bank account.

Willfully Blind Accomplices

Investors need to realize, too, that promoters of such schemes, whether American or Chinese, receive large sales commissions, and the dodgier the investment, the higher the commissions.  Chinese migration agencies have been offered up to $125,000 per customer, an obvious conflict of interest in advising would-be immigrant-investors, leading to serious competition among finders to reel in the Big Kahunas. Many American "finders" are failing to register with the SEC as broker-advisors.

There is a lot of money to be made in misleading Chinese investors, but who is there in China to protect them? Likewise, when they arrive in the U.S., they are heavily influenced by their handlers, and who is there to caution then?

Independent inquiries need to be made before making such investment decisions. Some of the real estate projects spawned by this visa program seem ill-conceived, and immigrants would be better off starting businesses that create needed things or services rather than unneeded buildings. If immigrants feel that they must invest in real estate development, they should get a second opinion from an objective advisor, such as American Property Research, for instance.

Update 2/22/17:  Anjoo Sethi has received a 3-year prison sentence for his fraud.