Monday, November 6, 2017

A Reassessment of Real Estate Guru Ronan McMahon: Real Math vs. "Ronan Math"

Almost 5 years ago I published a post that was critical of International Living magazine and their anointed real estate guru, Ronan McMahon, for the bad investment advice being presented. . I also pointed out a conflict of interest, as IL must serve its advertisers, and certain problematic real estate markets were being continually touted despite declining real estate values. It seems that Ronan touts troubled real estate projects, almost as if he was being paid to do it. (In my own travels, I have observed that the foreign vacation home/retirement home market has not yet recovered from the global financial crisis 9 years ago, and the price of land has been declining for years.)

Each month, Ronan McMahon writes in IL of another “get rich quick” market, and I have to bite my tongue because I may not have been to that place recently or at all. Nevertheless, in the last 5 years I have received many e-mails about the blog post about him, plus more than 50 comments published on the post, and no one has ever disputed me, but many have thanked me. I’m still waiting for the comment, “Ronan and Real Estate Trend Alert made me rich!”

Which brings up his latest article in the November 2017 issue of International Living, “Gold in the Hills: Prime Ocean Views No One is Looking For”. The article mostly refers to Nicaragua, where I have not visited yet, but he also refers to Costa Rica as a real estate investment success story. As he specifically refers to “ocean view” land in Costa Rica, I feel the need to offer a dissenting opinion.

My first appraisal of Costa Rican ocean view land was in early 2009, before I started this blog. When I returned in 2012 I was surprised to find that asking prices on ocean view land had declined by 75%, and there were many “se vende” [for sale] signs around. Two years later the asking prices were even lower, and the only sale I could find was an ocean view parcel that sold at one third of its listing price.

Real Math vs. Ronan Math 

This brings to mind his constantly deceptive proofs of price appreciation of his previous buy recommendations.  The legitimate method of measuring price appreciation is to measure closed sales prices over a time period and establish a price index or compute percentage increases over a fixed time period. The big real estate brokerages do this in the U.S., and I saw the same process used in France. Although I do not always trust brokers, I have learned to rely on their data. Occasionally, I have seen a realtor enter a false comparable sale into the Multiple Listing Service or LoopNet, but that is not common, so it should not have much effect on price indexes.

"Ronan Math" involves taking the lowest closed sales price in a condominium complex, probably a smaller unit, at the beginning of the time period, and compare it to the highest asking price in the same complex (probably a larger unit) some time later. There is no discussion of today's closed sales. Then he tells the reader that if we had taken his advice, we could have achieved returns over 100%. This is so disingenuous that it mocks the field of Mathematics.

The truest statement McMahon made in the article was “There needs to be a finite amount of coast and beach.” My own observations of Costa Rica are that it has an almost infinite amount of ocean view land, owing to its topography and coastlines, and much of this land is for sale.

Magazine articles often use callouts (insets) to reinforce the key points of the article. McMahon uses two callouts in his latest article:

Make a killing in the medium to long term”

It’s been a long time since I’ve heard of an investor making a killing in Costa Rica. If this is happening, I would expect it be happening in a trendy neighborhood in San Jose, where the real land shortage is.

The better the views, the more you’ll sell for.”

A view is worth little, though, if it has no access nor building permits nor infrastructure nor water or the grade is too steep for development.

McMahon never discusses such things, though, suggesting that his knowledge of real estate investment is primitive at best. It's almost as if he has never taken a class in real estate. 

Each article also recommends buying in a “Path of Progress”. My own observation is that the moment an area is labeled as a “path of progress”, asking prices for land skyrocket and then gradually fall as reality sets in that progress takes longer than expected.

In 5 years, no one has e-mailed me or left a comment that my opinion of Ronan McMahon is wrong.  His real estate investment advice is consistently bad.  I have seen no testimonials to the contrary. Even his arithmetic is bad.

So why does International Living continue to employ him?  It is because IL is a sales organization and McMahon is a master bullshitter. 

Some of my friends in the real estate sales profession have a favorite film -- Glen Garry Glen Ross -- released in 1992 with such star actors as Al Pacino, Kevin Spacey, Alec Baldwin, Ed Harris and the late Jack Lemmon. All the characters are land salesmen at a Chicago real estate firm, relentlessly telemarketing land in the faraway states of Arizona and Florida using every sales trick in the book.

The management of the firm sends Alec Baldwin to motivate the salesmen into improving their sales or face termination, with lines such as:

"Only one thing counts in this life -- get them to sign on the line which is dotted."

and the oft-quoted "ABC -- Always Be Closing".

So remember that Ronan McMahon and International Living have an agenda that might be inimical to your interests -- to get you to sign on the line which is dotted.

"Wot? Are you accusing me of bad arithmetic, too?"

Saturday, November 4, 2017

Rental Properties Marketed on (Global Investments)

Rental home in Inkster, Michigan

Lately I have been receiving e-mails from real estate agencies and, both headquartered in the United Kingdom, advertising preconstruction opportunities to buy individual rental units in hotels, senior care facilities and apartment buildings.  These opportunities are often accompanied by guarantees of rental income for a period of two or more years and sometimes an optional buyback from the seller at higher price after a few years. 

As it has been 4 years since my last UK valuation assignment, I cannot comment on the merit of these investment opportunities which are mostly in the UK. It has been my observation over the last 33 years, though, that when properties are being built for investors rather than occupants, that is the sign of a real estate market entering a bubble phase.

If owner-occupants cannot outbid investors, that is a sign of impending weakness.  Investors often enter these transactions expecting that negative cash flows will be rewarded by ever-increasing property price appreciation, but such a market collapses on itself when there is an insufficient number of renters to occupy all units and cover the investor’s ownership costs. In Southern California I saw this happen in the early 1990s and again starting in 2006 in the more distant L.A. suburbs. Southern California home prices plunged afterwards.

One disingenuous technique I see used by advertisers on Mondinion is to advertise unbuilt projects with projected 9% yields, ignoring the Law of Supply and Demand.  An increase in the supply of units could drive rents downwards. This is a natural consequence of building for investors rather than occupants. New York City is already experiencing the consequences.  The median price of a new condominium has so far declined 27% this year, yet many more luxury condos continue to be built.  Likewise, the ultra-luxury Metropolis in downtown Los Angeles is experiencing a slowdown of sales as an estimated 60% of buyers are investors, not occupants.

Existing Rental Properties for Sale

Recently, Mondinion and PropertyO have advertised U.S. rental home investment opportunities in areas I have appraised in. One thing in common is that all the properties have been in depopulating cities.

The first opportunity was that of rental homes in the Detroit, Michigan metropolitan area. Curiously, the advertisement stated that this investment was not suitable for U.S. investors, raising the question of “how can an investment unsuitable for U.S. investors be suitable for foreign investors?” Another questionable claim was that all of this seller's properties were in "safe neighborhoods". The broker is Marigold Investment Properties, a British company.

Having a friend make an inquiry, I was informed of a 900 sf, 3 bedroom, 1 bathroom rental home, built in 1955, available in Inkster, Michigan, a western suburb of Detroit, for the price of $48,000, guaranteed to produce $9000 per year in rent. The owners paid $26,500 for this home on 4/23/15 and have assumedly renovated it since then.

Checking a demographic research web site, I found that this forecasted rent was close to the estimated median rent of $738 per month ($8856 per year) for Inkster. I was also pleasantly surprised to find that the official living area (per tax assessor) was 1036 square feet. What was more sobering was an estimated local vacancy rate of 16.9% (better than Detroit’s 22% vacancy rate), and a population decline of 37% in the last 50 years. More troubling is that rated Inkster as having a higher crime rate than 93% of Michigan communities, with a violent crime rate three times the Michigan average. Not a "safe neighborhood", as advertised.

I sometimes consult data-aggregating web sites such as and to garner real estate market information. All analysis is done by computer, which is not quite as accurate as a competent and honest real estate appraiser. Trulia has estimated the median home value in Inkster as $42,300, having declined 50% in the last decade. Zillow placed the median home value at just $40,900. Zillow estimates that this home has decreased in value by 14% in last month. CoreLogic indicated nearby home sales in the last month in the $38,000 to $43,000 range. report on the subject property and its neighborhood

Why you should hesitate to buy rental homes in depopulating cities

I have seen other rental home opportunities marketed by PropertyO in other cities such as Chicago, Cleveland and Memphis. These are all depopulating cities., for instance, compiled a list of the 10 U.S. cities losing the most residents between 2015 and 2016:

1. Chicago

2. Baltimore

3. Milwaukee

4. Detroit

5. St. Louis

6. Shreveport

7. Columbus

8. Cleveland

9. Jackson, MS

10. Memphis

Here’s the reason to avoid such investments:  Depopulating cities experience decreasing property values and rents. Investing in older buildings in depopulating areas is a prescription for failure.  The Rust Belt, for instance, has many cities that have lost half their population in the last 50 years, including Detroit, Cleveland, Youngstown and Dayton.  This usually means increasing vacancies, despite gallant leasing efforts.  Rents are so low that only the lowest cost renovations make any sense, too.  Even then, new space gets built, hastening the demise of the older buildings. 

Back to Inkster, this investment is being marketed without any guaranteed rents, but the seller will manage the property for you for 10% of gross rental income.  Such a high rate is typical of a problematic housing market where good tenants are hard to find. 4% is more typical.

I have also seen other rental properties marketed with short-term guarantees of rental income.  Guaranteed rental income for the first two years” is a seller promise that should be interpreted as a sign of weakness, not security, because an adequately performing rental property does not need to be sold with any such guarantees.  It is almost tantamount to saying that Year 3 is going to be a crapshoot because tenants are hard to find. Do not be surprised to see that the property’s previous asking price has been inflated to more than cover the amount of these guaranteed rents. Can the guarantor remain solvent if real estate rents and prices decline, though?

This reminds me of a phrase I have sometimes read on Craigslist:

“Only a scammer will ‘guarantee’ your transaction.”

-- Craigslist

Friday, September 29, 2017

The International Appraiser’s 3rd Successful SEC Whistleblower Complaint Against an EB-5 Regional Center

This week the SEC filed an asset forfeiture action against the Home Paradise Regional Center in Commerce, California, a EB-5 regional center that gained temporary green cards for foreigners based on false reports to the USCIS on its alleged creation of 345 jobs at a fake home and commercial design center in Ontario, exaggeratedly measured at 111,000 square feet.

I first became acquainted with Home Paradise in Beijing at the Overseas Property Investment Exhibition.

A background check on Ed Chen, the CEO of Home Paradise, revealed a history of liens and civil judgments against him before he started Home Paradise, a matter of public record, which he had a duty to disclose this to investors per U.S. securities laws. If investors had known his legal history, they may not have entrusted him with $545,000 each.

All of this once again indicates the initial flawed design of the EB-5 visa regional center program. Imagine a federal agency announcing, “Who wants to collect tens of millions of dollars from naïve foreign immigrants?” and all of the hundreds of entities who responded by saying “We do! We do!” and not a single background check was performed. I wouldn't want the responsibility of creating 10 jobs out of each $500,000 investment. 

To get approved as a regional center, the most difficult thing they had to do was order an economic study proving the number of jobs they were going to create.

The approved regional centers were never subject to audits, just a yearly I-924A form explaining their job creation progress to functionaries in Washington, DC. Was it realistic to expect truthful I-924A reports? Now we know that Home Paradise was lying, as was the California Investment Immigration Fund I reported on in April.

Now the USCIS has already started a program to visit more than 200 regional centers per year to check facts, while the SEC investigates regional centers suspected of fraud. With 843 EB-5 regional centers, though, this process will take a long time.

It is time for USCIS to make I-924A forms public (meaning that the public does not have to obtain consent from the regional center). Civil servants in Washington might not know if a regional center is lying, but local rivals and investor advocates can find the lies much quicker than the current regulatory system if allowed access to the I-924A reports.

Thursday, September 21, 2017

EB-5 Regional Centers Touting Fake Projects. Here are some more.

Mythical California Chinatown in Rancho Cucamonga, advertised in China

EB-5 regional centers are hastily assembled, opportunistic business entities who have received approvals from the USCIS to collect $500,000+ investments from foreigners seeking U.S. green cards. The idea is to pool the foreign money into a job creating enterprise that creates at least 10 jobs per investor, and the foreign investor is then given permanent residency after 2 years.

While in Chicago during the summer of 2013, I visited the site of the “A Chicago Convention Center” scandal. This fake EB-5 project promised a new convention center and five hotels on a 2.8-acre site along the Kennedy Expressway leading to O’Hare Airport. This scam lasted a couple of years, attracted the endorsements of Illinois Governor Quinn and Illinois Senator Durbin, and collected $160 million from 290 mostly Chinese investors before a rival regional center manager took one look and turned the developer, Anjoo Sethi, into the SEC. In those two years, no one had called Chicago planning officials to verify that this was an approved project.

In the eleven years I have been practicing as an independent appraiser, at least half of my practice has been the valuation of land entitled for development projects. Calling the relevant planning officials is one of the first things I do, because real estate developers occasionally lie or forget to disclose costly conditions of approval.

When I returned from my Chicago trip, I called a former neighbor of mine who is a Chinese-born immigration attorney.  I asked him if he referred clients to EB-5 regional centers.  He said, “No, because I don’t want to go to jail.”  I figured that I was possibly on to a new, unaccountable industry rife with fraud.
The most conspicuous local EB-5 regional center in LA was that of the California Investment Immigration Fund (CIIF) in the lobby of the San Gabriel Hilton hotel. I visited them during the summer of 2013 to ask about what projects they were working on, and I was told about Victoria Center, a hotel, office and restaurant project to be built in the desert town of Indio, California. I called the Indio planning department and they confirmed a development application for Victoria Center, but it lacked an office building. Nevertheless, I gave CIIF the benefit of the doubt.

Two years later I stopped by the CIIF office again to inquire about the Victoria Center, and the manager on duty had a frightened look on her face. She denied knowledge of Victoria Center. Since the CIIF had been open continuously since 2008, I asked her if they had found anything to build in the ensuing 7 years, and she gave me a Chinese-language brochure featuring a new project in Rancho Cucamonga, CA, pictured above, to be called California Chinatown. I called the planning officials in Rancho Cucamonga and they had not heard of it. 

Considering that the California Chinatown project was not even featured on the CIIF U.S. web site, I did some searching and found that CIIF had an alternate Chinese web site ( with several fake real estate projects in Ontario, Riverside and Rancho Cucamonga. I called the relevant planning authorities and none were familiar with these advertised projects. These were fake projects, the most absurd one being the future headquarters building of the American Chinese Business Association, a fake business association created by CIIF to gain access to politicians. Before the FBI raid, political commendations were posted on the front window, such as this one:

I referred the matter to the SEC (Securities and Exchange Commission) and they called me one month later to ask me to discuss the matter with the FBI (Federal Bureau of Investigation).  The FBI raided CIIF and shut it down in April 2017, 17 months after I made my initial complaint. Charges have not been filed yet because the nature of the raid was to seize evidence.

Since November 2015, I have made complaints on over 30 EB-5 regional centers, and the U.S. government has pursued complaints against two of them – CIIF, and the ZGlobal regional center, aka PDC Capital, operated by Emilio Francisco. The SEC and FBI are limited in resources and must follow meticulous investigative procedures which take time, but result in 90+% conviction rates.

I have a high regard for the work that the SEC and FBI are doing, but this still leaves the problem of how quickly the EB-5 regional center industry can be cleaned up.  There are 835 regional centers at present, none of which have had their executives properly vetted by background checks, and my own background checks of some of these executives make me quite uncomfortable; many of them are underemployed lawyers, securities salesmen and real estate salesmen, not skilled in job creation, with legal histories of tax liens, civil judgments and foreclosures, and occasional bankruptcies  I am concerned that there are fraudulent regional centers still taking hundreds of millions of dollars in money from foreign investors.

Some of the EB-5 regional centers I have contacted would not discuss the projects that they are supposedly working on. I find this suspicious, but I cannot prove wrongdoing.

Some other regional centers advertise fake projects, projects that city planners deny any knowledge of, and this wrongdoing is more apparent and more interesting. Let me tell you about some of them.

United Venture Regional Center is headquartered in Turlock in California’s Central Valley and advertises oversized projects in poor, undersized cities. Here are some examples from their web site

·       Under Kern County they mention that they are building a 55,500 square foot office/hotel project in the town of Wasco.  Roger Mobley, the head of the Wasco planning department, (661) 758-7200, tells me that no such project has been proposed nor has anyone from the UVRC acquired land that would support such a development. The planner also considers the project to be too large to work in Wasco, a town of 25,000 residents, 22.4% of which are incarcerated in the local prison.

·       Under “Villa Crest” they announce Villa Crest Apartments and Commercial Complex, which will encompass 126,800 square feet of office, retail, restaurant and apartment space in Ridgecrest, a military town of 29,000 residents. Pam Contreras of the Ridgecrest Economic Development Department tells me that no such development application has been received.

·       Under “Westpointe Commercial Complex”, they announce a “165,700 square feet retail commercial center with office buildings, a supermarket, a restaurant, and a residential facility” in Ceres, California. City Planner Tom Westbrook confirms that there is no such proposal in his city. He can be reached at (209) 538-5778.

American Vision Regional Center is based in Houston.  Open for business since as early as February 2013, there is only one project listed on their web site, and several others vaguely listed as “Coming Soon”. The only illustration of an EB-5 project they claim to be theirs is an office building called the Kingwood  EB-5 project. 

Kingwood is a town near the Houston Intercontinental Airport. However, the office building depicted above is that of the canceled 25-story office tower which was to be built at 22 Waugh Drive in the Houston Heights area near downtown Houston. This project was canceled due to the lack of preleasing activity. Meanwhile, American Vision’s CEO has made the following vehicular purchases since entering the regional center business:
2013 Bombardier Canada boat, 1/10/13
2012 Mazda 6i, 6/21/13
2012 Jeep Patriot, 7/22/13, $15,995
2014 Triton Boat trailer, 5/2/14
2015 Porsche Macan, 6/6/14, $49,900
2015 Toyota Scion, 11/3/14, $24,900
2015 Mercedes Benz 350, 5/15/15, $48,300
1984 Land Rover, 4/19/16
1987 Land Rover, 4/19/16

Meanwhile, the Southeast Florida EB-5 Regional Center has several unverifiable projects listed on its web site.  It started last year with a Great American Diner to be built at 6239 Lake Worth Road in Greenacres, Florida with $3 million from 6 EB-5 investors. Instead, the land has been listed for sale since 2014.  Meanwhile, they have since announced a 300-room Marriott Westway hotel to be built at 1216 N. Atlantic Avenue in Daytona Beach, but city planner Hannah Ward denies receiving a proposal or development application for this project.

Finally, they have announced the Biscayne Park Residency, a 44-room continuing care retirement community with a 5-star restaurant and 38,000 square foot office building to be built in Miami, but unknown to Miami city planning personnel I have talked with. The selected operator, the SR Healthcare Group, is a previously unknown operator, founded on 10/7/15 and declared inactive since after being revoked after its annual report.  Meanwhile, the operator of the SE Florida EB-5 Regional Center has a sordid legal history of 29 liens and civil judgments against him and one bankruptcy.

Golden Pacific Ventures in Concord, California, states on its web site:

“Below are specific projects Golden Pacific has worked with developers and immigrant investors on building.

Plantation Agro-Tourism

Combining a the world’s largest organic tea plantation with a luxury destination resort makes “agro-tourism”.  Organic agriculture meets vacation spot.”

Their photo is actually of the well-known BOH tea plantation in Malaysia’s Cameron Highlands, which serves as a tourist destination to escape the heat of the lowlands of Malaysia.  Visit and you will seem the same tourists in the photo.

It also troubles me that the managers of this regional center have such lengthy legal histories, such as tax liens, civil judgments and foreclosures.

At the EB-5 Investors Magazine conference in Las Vegas in January 2016, I visited a booth of the Great Southwest Regional Center advertising a 90-room Holiday Inn Express and the 264-unit Lakeside Vista Apartments in a 70-acre tract called Westside Peak in San Antonio, Texas, near Lackland Air Force Base.  The San Antonio city planners claimed no knowledge of these projects or any development applications, nor was this parcel legally subdivided for development of these projects, but what was more surprising was that the land for these projects had actually been listed for sale on LoopNet since 8/20/2014, and 65.35 acres are still listed for sale .  
I questioned Rich Zhang of EB-5 Investors Magazine about whether he failed to vet this regional center, and he seemed to get right on their case, and the fake projects were soon removed from their web site.  No new projects have been announced on their web site, but meanwhile, the CEO has purchased the following vehicles since being approved by USCIS to be an EB- regional center:

2012 Mercedes CLS 550               $71,300
2013 Jeep Wrangler Sahara        $27,695
2014 Mercedes CLS                       $106,500
2014 Mercedes E350                    $51,900
2015 Mercedes GLK350               $37,900
2015 Mercedes S550                    $94,400
2016 Mercedes S550                    $121,550
2016 GMC Sierra                           $49,135
2017 Mercedes GLE350               $52,000

Meanwhile, the CEO's younger brother, who serves as managing director, has a history of two bankruptcies, a civil judgment against him, and a recent tax lien.

Considering that every EB-5 applicant must supply more than $500,000 of capital and that there are 835 EB-5 regional centers we know little about, it concerns me that tens or hundreds of millions of dollars might be in the process of being stolen by people who are not vetted and not audited.

I believe the EB-5 scandals that have emerged so far are just the tip of the iceberg because none of these entities and their executives have been vetted by background checks or have been audited.
Every year, each regional center must report to USCIS on form I-924A about their progress in creating jobs . If I want to read a particular regional center's I-924A, I must make a Freedom of Information Act request, but I first have to receive the regional center’s written permission. In other words, USCIS is granting the same privacy standards to regional centers as they grant to vulnerable visa applicants.  But regional centers should not merit such privacy when they are taking billions of dollars from vulnerable visa applicants. The bad regional centers would probably not consent to my FOIA requests, any way.

The California Investment Immigration Fund is a case in point.  They filed false I-924A forms claiming progress that they never made and even got conditional green cards for 3 of China’s top 100 criminals. If I had been able to read their I-924As, I could have stopped the fraud two years sooner.
I wrote the following suggestion to Senators Feinstein and Grassley (the Senate's EB-5 skeptics) last week. Make all I-924A forms public; redact visa applicant names for their privacy.  Functionaries in Washington are not in the position of knowing the truthfulness of the I-924A forms, but a lot of local people like me will be watching, and the lies will be detected much more quickly.  For the EB-5 program, sunlight is the best disinfectant.

Friday, June 2, 2017

Commercial mortgage “straw buyer” scams

Future Bible theme park or flooded sand quarry?

“Straw buyer” mortgage scams are often associated with handwritten “real estate investors wanted” signs stapled to telephone poles. Call the number on the sign and someone might just offer you $5000 to buy an overpriced house for them, using your good credit and good name. After closing, just transfer the deed to them and they will take over the payments. Then they disappear before you can transfer the deed and you are stuck with a house you overpaid for and are legally obligated to make mortgage payments for. You can’t report them to law enforcement, as you have just become a part of the mortgage fraud. The FBI has already labeled the practice of using straw buyers to mislead a lender as illegal "nominee fraud".

Straw buyers are sometimes employed in commercial mortgage scams, too, but are likely to be knowing participants in the fraud. They may be recruited in a LinkedIn group by someone offering $50,000 to someone to help buy a commercial property that cannot sell. For a clever person down on his luck, this can seem like good money.

The straw buyer has to come up with a believable enterprise that would make a compelling story that would justify an unwarrantedly high offer.

In one such case, a hyperscale computing startup company sought a location at the edge of a southwestern city and chose a 70-acre parcel to build a 100,000 square foot headquarters building. Their CEO presented me with an unsigned purchase contract for $8.5 million, of which $4.5 million would be provided by my client as a first mortgage loan and the remaining $4 million would be seller financing. I am always on the guard against “soft second” financing, which is tacitly a forgivable loan, so I checked the preliminary title report and the listing history of the property for some answers.

Red flag no. 1: The preliminary title report ordered for the buyer requested only $4.5 million of title insurance coverage, not $8.5 million.

Red flag no. 2: The property had been listed for sale on LoopNet for 28 months and the sellers renewed their listing 8 days previously at a price of $6.9 million.

Red flag no. 3: The sellers, who were local, never tried to contact me or meet me at their site, a situation I find common in straw buyer scams. They count on their straw man or men, hired for their marketing skills, to do their selling. Most ordinary sellers want to be there when I visit and can be pushy as hell, but in straw buyer scams they never want to meet me or talk to me.

Red flag no. 4: The borrower’s company had no history. A check of LinkedIn indicated several employees scattered around the country, but way too few employees to justify a 100,000 square foot headquarters building. The company web site was supposedly under construction and had the cryptic statement, “We are in stealth mode”. This statement is now 6 years old.

When the appraised value ended up being too low, the CEO insisted on having the appraised value increased, even flying across the country to bother the lender. I told the lender to ask him why he does not make the same effort to have the purchase price reduced; after all, this shopworn property was already listed for sale at $1.6 million below the contract purchase price. The borrower responded that he didn’t want to bother the sellers. He instead ordered an MAI appraisal which claimed that the property was worth $10 million.

Then I ordered a background check on the CEO and everything became clearer. While I expected someone with perhaps a PhD from Cal Tech or Stanford, instead I found someone with a bachelor’s degree in political science who kept on moving around from apartment to apartment in various states, had a bankruptcy on his record, as well as a criminal conviction for check fraud – perhaps the type of guy who would respond to a “real estate investors wanted” ad.

In a more colorful straw buyer scam, I was sent to Texas to visit the site of a proposed Biblical theme park, seen in the above photo. The developer had a purchase contract for $3 million but stated that the property was really worth $12 million. Although this developer claimed to have an office near the airport, he insisted that I meet him at a Denny’s restaurant near the site. (I prefer to meet real estate developers at their offices just to prove to me that they are real developers.)

I had already tried to run a background check on this man, but his name was so common, I could not distinguish him from many other people. I found his LinkedIn profile, but he had no history that extended back farther than 5 months. He claimed to have an MBA from Harvard. I e-mailed the HBS registrar and they replied that there was no record of him as an MBA student.

After a one hour presentation at Denny’s of marked up surveys and a singularly unusual illustration,
he drove me to the site in a rented subcompact car. The site was an abandoned, flooded sand quarry. I commented that a lot of the land was under water, and he responded that much of Disney World was built on Florida swampland and that the water would suit his “Jesus walking on water” and “Moses parting the Red Sea” exhibits. But quarry water can be deep, and the only uses I have seen quarries repurposed for are agricultural or fishing uses. Perhaps he could have built a "Voyage to the Bottom of the Sea" exhibit?

(The above illustration, titled "Babylon", was located by Google search as created by Austrian artist P. Pirker in 2007 and is available for free download at . It has been downloaded 17,302 times since 2007.)

The developer's
survey indicated that the parking lot would extend into the adjacent nature preserve, and he said that the local town had approved this intrusion, although the nature preserve was state-regulated. When I walked on to the nature preserve I found four of these signs:
Imagine children and alligators in the same parking lot.  What could go wrong?

Researching comparable sales I found the perfect one just across the street, an abandoned sand quarry which sold for $225,000 to an organic farmer, which begged the question, how can one abandoned quarry be worth $3 million and the other just $225,000?

There was no development plan, not even a written plan that could be shown to me. There was no sewer leading out to this site and the road leading to its southern boundary was only two lanes, but then he told me that he had searched the world for the right location for a Bible theme park, and that this was it.

I had no credulity left, but since I now knew what he looked like I did a Google image search and found him as an alumnus of Tel Aviv University (an Israeli university). But when I re-ran the background search I found no history of the man after year 1987. No addresses, phone numbers, relatives, co-workers, places of employment, property ownership, etc. It was as if he had not been in the United States for more than a quarter of a century. Israel, perhaps?

His project did not get funded, but I learned some other amazing things. The man had two legitimate social security numbers. How can this happen? The Social Security Agency explains that it assigns sequential social security numbers to an immigrating family, but a minor is permitted to request his own unique SSN, which he did at age 17 while also having his name legally changed. A background search on the other SSN showed the use of both the old name and the new name and at least one alias name.

Here is the pattern of a commercial straw buyer scam:

The buyer, not the seller, shows the property.
2. The seller does not contact me, and if I contact them they tell me "talk to the buyer."
3. The buyer inundates me with irrelevant and misleading data designed to inflate my estimate of value.
4. When the appraised value is too low, they try to either beg or bully me to increase the appraised value. 
5. Most buyers thank me when I tell them they are overpaying for a property and subsequently reduce the price (Yay!) or else terminate the deal. Then I suggest that the buyer gets the seller to reduce the price and they tell me that they can't do that, yet there are no other bidders on these undesirable properties. And there's no sale.

In some cases, the straw buyers have already acquired the property, such as acquiring the seller's LLC (not recorded as a real estate transaction) or establishing a private joint venture with the seller. If the appraised value comes in too low, straw buyers do not try to negotiate a lower selling price, but instead waste their efforts on discrediting me or begging me to increase the appraised value.

Here are some parting thoughts. Appraisers are trained to analyze the property only; whoever owns it is immaterial because the standard definition of market value asks us to estimate what the next owner would pay for the property. In real life, though, an appraiser can be misled by false representations. Doing a background check on a commercial mortgage applicant can often clarify the loan applicant’s real agenda and alert the appraiser to perform a higher level of verification of the facts presented.

Monday, May 29, 2017

Luxury Condominium Towers and Foreign Absentee Ownership

Pavilion Residences Tower No. 3 in Kuala Lumpur
Three months ago I received a request from a Chinese-American bank to appraise an unbuilt condominium as a rental property at The Metropolis, LA’s most extravagant new residential tower yet, which is being developed by the Greenland Group, a Chinese company. 1500 condominiums are being built and offered for sale for prices ranging from $600,000 to $2,000,000.
The Metropolis in downtown Los Angeles

Inquiring with Chinese-speaking Los Angeles realtors, I heard the opinion that many of the buyers at The Metropolis were Chinese and did not intend to occupy their units. I have heard similar rumors for Oceanwide Plaza.

A National Association of Realtors survey a couple of years ago even measured that the percentage of Chinese buyers purchasing such homes for primary occupancy was only 39%.

I turned down the appraisal assignment, as once these towers open and owners place their unoccupied units up for lease, how far will asking rents fall? I don't want to be responsible for a loan loss.

One decade ago, downtown Miami had a problem with empty, see-through condo towers. Miami is not the same town as Miami Beach, an affluent oceanfront community on the eastern side of the Intracoastal Waterway. Downtown Miami has no beaches, and it fronts the Intracoastal Waterway, not the ocean. Capital flight out of South America, particularly Venezuela, took care of that vacancy problem.

With capital flight, the primary objective of the buyer is to move money out of the home country for its own protection into nations with secure property rights and stable political conditions, not necessarily with the expectation of profit.

In New York City, appraiser Jonathan Miller noted that similar condo towers in New York City serve as "safe deposit boxes in the sky that buyers can put all their valuables in and rarely visit."

In a follow-up visit to Kuala Lumpur, I saw a similar phenomenon at work in the luxurious Bukit Bintang section of town, with numerous high-rise luxury condo towers under construction at once. I was already familiar with the 44-story Pavilion Residences towers at the Pavilion Mall; Tower 2 is said to still be only 40% sold, mostly to foreign absentee owners. There are still few lights on at night. Now Pavilion Residences Tower No. 3 is finishing construction.

History has not been kind to condominium communities with low rates of owner occupancy. Ten years ago a CPA friend urged me to buy Las Vegas condos “before it’s too late”, but too many units were bought by investors rather than occupants. The result was an oversupply of investor-owned units which could not pay for themselves, and tumbling condo prices. The more expensive the unit, too, the harder it is to find renters to cover the ownership costs. Wealthy people prefer to own rather than rent.

Flight capital is more patient than investor capital, which lessens downward pressure on prices, but there is another risk, instead, which is when the home country political conditions change enough for foreign condominium owners to bring their capital back home. This can create a sudden surge in condos for sale, such as witnessed in Vancouver at the turn of the century, when condos owned by Hong Kong investors were put on the market all at once.

There is a reason why lenders and Fannie Mae and Freddie Mac instruct appraisers to indicate whether the residence they are appraising will be owner-occupied or investor-owned, and whether the condominium building itself is primarily owner-occupied rather than rented out. Owner-occupied condos are more stable, and when real estate markets decline, investors are much more likely to bail out than owner-occupants.

Sunday, May 28, 2017

Macau vs. Las Vegas Gaming Revenues: A Reversal of Fortune

Lately, my post from 6 years ago, , has had resurgence in readership, but it is outdated now.

Back then I commented that Macau had 4 times the gaming revenues as Las Vegas and was growing rapidly (43% in the previous year) while Las Vegas gaming revenues were shrinking because of the U.S. recession.

Macau Casino gaming revenues topped at $45.27 billion in 2013 and have steeply fallen since then to $28.04 billion in 2016, a decline of 38%.  This may have been caused by:

1. A limit placed by the local government on the number of gaming tables (5500), and

2. Chairman Xi’s crackdown on government corruption. This made corrupt civil servants reluctant to visit Macau, and the rumor was that many of the high rollers were government officials.
Las Vegas Strip gaming revenues have recovered since then, with $6.35 billion in 2015, up about 8% from that time, as the city continues to reinvent itself.

Atlantic City continues to lose gaming revenues to new casinos in the New York and Philadelphia metropolitan areas. Both states have been experiencing about a 3% annual gain in gaming revenues, and Pennsylvania now ranks second nationwide in gaming revenues.

Meanwhile, there is a surprise third place in international rankings.

The U.S. ranks first, with $38.54 billion in gaming revenues, followed by China (Macau), with $28.04 billion.

In third place is Japan, with $12.845 billion in gaming revenues. This is a surprise considering that Japan just legalized casino gambling this year, but what I never thought of before is Japan’s Pachinko Parlors, which more resemble pinball arcades than casinos.  Nevertheless, each one is a place of gambling, and there are 1248 of them in Japan.