Shameless Book Promotion

This week I received a $17.70 semiannual royalty check for my book, Fraud Prevention for Commercial Real Estate Valuation, published by the Appraisal Institute, which I have sometimes advertised in the sidebar of this blog over the last five years since its publication.  This royalty check is equivalent to the sale of about 3 books in the last six months.

If there was a New York Times “Worstseller List”, this book might be on it.  Last year’s royalties were equivalent to the sales of 18 books.

Now the Appraisal Institute is conducting a fire sale of my book, having reduced its price from $45 to $23, and $18 for Appraisal Institute members.  I suspect that they printed 1000 copies of my book and have a few hundred left to sell.

I admit that I have not properly promoted my book, mainly because I want readers to view my blog as an objective place to instruct and learn, and not a place to boast or hard-sell.  My expert witness practice thrives on credibility.

I know very little about the buyers of the book, but I have heard that the book is in the Cornell University Library, and the director of the MIT Center for Real Estate e-mailed me to compliment the book and to offer me free admission to the MIT World Real Estate Forum last May, which I accepted.  The knowledge that scholars are reading my book also encourages me to think that there is a new generation of real estate practitioners being better prepared than today’s generation for the seamy world of commercial real estate.

There is no book like it in real estate literature except for my previously self-published book, Lessons from Losses in Commercial Real Estate.  It is the opposite of the “Get Rich Quick in Real Estate” books you see at the bookstore; it is a book on how to prevent money from being lost in real estate.

One of the central precepts of the book consists of two words that are absent from other books on real estate or finance: People lie.

A typical appraisal assignment often involves mind games and factual errors from parties that have a vested interest in the results of the appraisal, such as owners, brokers, taxpayers, divorcing spouses, etc. What this book does is catalog all the deceptions I had seen over the first 27 years of my career and explain the due diligence needed to counteract the deceptions. I explain the conflicts of interest that exist. I finish the book with a fraud prevention checklist for real estate transactions.

One thing I learned when I began my appraisal career at global firm Jones Lang Wootton was that the farther a real estate deal had to travel for capital, the higher the risk of fraud, which makes international real estate valuation riskier than domestic valuation.  I worked in the JLW Houston office and remember twice receiving phone calls from JLW offices in Asia inquiring about Houston condo deals being marketed over there. I would visit these properties and find cheap construction and adult men loitering about on a work day. Once, when I arrived on the first day of the month, I found residents hovering around their mailboxes, waiting for their welfare checks, indicating that many of the condos were being rented to low income tenants.

The book is 120 pages long and is an easy read.  My mother and father even read it and understood it. But for those appraisers (or investors or lenders) who don’t have the patience or funds to read it, much of the advice can be condensed into 5 words uttered by two U.S. presidents. 

“Show me” – Harry Truman

For instance, if a developer claims to have his residential subdivision 70% presold, I ask “Show me the purchase contracts.”  In one of my previous posts, a Canadian developer had no presales, just expressions of interest recorded on her web site.  In domestic appraisal assignments, I sometimes see purchase contracts from LLCs and shell corporations from the developer’s home town hundreds of miles away from the property being built.  I view these with suspicion. When I started my private practice in 2006 I saw my best client wiped out by a condo development scam in which 95% of the contracts were not arm’s length.  The sale was either from the limited partnership to a partner or vice versa, but the sales were all at $500,000, well above true market value.

“Trust, but verify” – Ronald Reagan

I go to appraisal assignments with an open mind, and real estate developers tend to be likable, persuasive people.  They can feel like new friends. It’s often not until I get home that I complete my verification process and sometimes exclaim, “Wait a minute!  He:

1.      Doesn’t own the property or have a valid purchase contract.  A valid purchase contract needs to have the owner of record as the seller. Or

2.       Doesn’t have the entitlements he claims to have. Or

3.       Has the property listed for sale at much less than he claims the property is worth. Or

4.       Has been previously convicted or sued for mortgage fraud, embezzlement, etc. Or

5.       Is trying to finance a non-arm’s length, “pocket-to-pocket” transaction.

It disappoints me that so many appraisers and valuers have no interest in fraud prevention, instead trying to shield themselves from liability with lengthy Assumptions and Limiting Conditions.  For example, my book Fraud Prevention for Commercial Real Estate Valuation was based on my award-winning article in The Appraisal Journal in 2009, entitled “Preventing Fraud and Deception”.  It took six years to publish that article.  I submitted it three times to the TAJ review panel.  The first time it was submitted, it was rejected as inappropriate. The second and third times, the consensus of the review panel, consisting of practicing appraisers, was that appraisers are not responsible for fraud prevention, and publication of this article would set a dangerous precedent.

It was not until I presented the article to an international appraisers’ conference in Seoul, where the then-president of the Appraisal Institute, Wayne Pugh, was present, when he suggested that I submit the article to TAJ. I told him that I had already been rejected three times and that most of the editorial reviewers considered fraud prevention to not be an appraiser’s professional responsibility.  He responded, “But it is” and encouraged me to re-submit.  With his blessing, I finally got the article and the message published.

So, if you are an appraiser or valuer who cares about his or her clients, I strongly recommend this book. 

Appraisal in Roatan, Honduras

The property was mostly raw, wooded, hillside land leading down to a beautiful, reef-protected, white sand beach, with a few existing apartments up the hill. Part of the shoreline was occupied by mangroves, which are a protected habitat in Honduras, much like most tropical countries. The idea was to build individual vacation rental residences. The surrounding area had tourist traffic, including cruise ships, scuba divers and snorkelers, a nearby dive shop and a luxurious dive resort. It was a nice setting for tourists, but a lot of site work had to be done.

I requested documentation of the property’s entitlements, i.e. what the developer has the legal right to build. Most of the documents I received were Solicitudes de permiso de construccion, which translates to “Request for Building Permit”, and there were three permit numbers assigned for structures which had already been built, including several condominiums in 2008. The rest of the solicitudes had no permit numbers assigned and were expired. In short, I saw nothing resembling an approved development plan. The developer had also changed his development goals since 2008.

When I stated that the appraisal might be more favorable with an approved development plan (typically called a “final map” in the USA), I received a development plan the next day, addressed that same day to the planning department for the municipality of Roatan. It was written in English and was very limited in detail, consisting of squares and lines on graph paper.

In the last year I have been meeting more and more “wannabe developers” who merely place squares or rectangles on a two-dimensional map, include some artist’s conceptual drawings and floor plans, and call it their “Development Plan”. What about the infrastructure, the provision and placement of underground utilities such as water and waste treatment, the excavation and movement of earth, the measures needed for erosion control or dust control, and the measures needed for environmental protection? Even the banana republics I work in have had rules that needed to be followed when building in an inhabited area, because what is built and how it is built has an impact on the neighbors and the environment. When I am unable to get plans and specifications and detailed construction drawings, how am I to determine if the development proposal is not just a hoax?

When I work with an experienced real estate developer, on the other hand, there is one point in the site visit in which I visit an office full of detailed construction drawings, surveys, third party reports, photographs of successful projects, development budgets, contractor’s estimates and laudatory newspaper clippings, including the press announcement that the project has been approved by all the required agencies. These documents take up a lot of space. If the development site is too far from his office, a developer may instead email a myriad of documents or place them in an on-line dropbox for me. On the other hand, an inexperienced developer (or a hoaxer) is more likely to ask me to meet him at Denny’s Restaurant and show me artist’s sketches.

There is also sometimes a misapprehension that raw hillside land with ocean views is more valuable than flat land. It is not, because of the costs of development. Developed lots with ocean views, on the other hand, are more valuable than lower lots without views and access to the beach.

This novice developer adamantly insisted on already having all necessary development approvals, but did not provide a relevant document on municipal letterhead in the only language legally recognized in Honduras, which is Spanish, nor did he provide construction plans and specifications and a budget. He called me a liar. He also mentioned having cousins in the Mafia. Does this mean that the International Appraiser will soon be “sleeping with the fishes”?