What Isn't Said About Living and Owning Real Estate in Costa Rica

 I have been appraising in Costa Rica since 2009, and have usually found myself appraising failed residential subdivisions meant for affluent immigrants from North America.  Then there were teak farm scams, too. 

There is a huge industry aimed at selling Costa Rican real estate to North Americans, exemplified by such publications as International Living and Real Estate Trend Alert [Ronan McMahon]. It is important to remember that these are sales organizations which present only the positives of living in Costa Rica, a land of natural beauty sometimes described as "the land of rainbows and unicorns". And it is not true, despite what Ronan says, that Costa Rica is running out of land.

Yet many Americans return disappointed from Costa Rica.  There are no official numbers.  Unofficially, I have heard estimates that between one-third and one half of American immigrants return home from Costa Rica. There are an estimated 120,000 Americans living there now.

Yesterday I watched a podcast on MSN.com by Kristin Wilson, an international realtor who lived in Costa Rica for 8 years and only recently came back home, and she compiled a list of 8 reasons why Americans return, and some of these reasons I have also observed, but I haven't actually lived there so I encourage you to watch the podcast. You can find her full report at: 

https://www.bing.com/videos/riverview/relatedvideo?q=kristin+costa+riica&mid=9D793F3EED243527C1269D793F3EED243527C126&FORM=VIRE

Here are some added comments of my own on the reasons Americans leave:

1. Cost of living. First of all, living in tropical lowlands requires year-round air conditioning if one wants to live in American-style comfort, costing several hundred dollars per month. Most goods also have to be imported and Costa Rican tariffs are high. It will cost more to own a car in Costa Rica than in the U.S. If wants to live the US standard of living, there may be no cost savings and perhaps even some cost surprises.

Costa Ricans often live a lot more cheaply by living in small homes at higher elevations.  Below, for instance, is a realtor ad for a "Tico Home" in the uplands of Guanacaste, perhaps the physically hottest area of Costa Rica (temperatures near 100 degrees F when I visited in February).  These are simpler homes that are built from local materials and don't typically have air conditioning or heating, but at higher elevations, such utilities might not be necessary. But it might be a long walk to the beach, and where will you find a Wal-Mart?

2. Crime. Official crime statistics suggest that Costa Rica is a nation with a low crime rate, but one forgets that being a rich gringo can make one a target. Reading expat forums, I sometimes read alarming things like "I got robbed at gunpoint in broad daylight on the National Highway!", police shakedowns of tourists, and there have been many reports of how gringos are followed by robbers after renting their car at the airport, particularly after dark. Kristin also chronicles her many car break-ins and one or more home burglaries, and carries around a decoy wallet.

3. Health issues.  This seems surprising when one sees the number of hospitals near the Liberia and San Jose airports, hospitals built for North Americans wanting to save money on medical or even dental procedures, and I have been assured that most of the doctors are English-speaking and U.S.-trained. One notices, though, that these hospitals often focus on elective surgeries, those not covered by insurance, such as cosmetic surgery.

Considering that many of the expats are retirees, though, one has to plan for increasing health problems in the future.  U.S. Medicare is not available down there, and end-of-life health issues can force Americans to return home for seriously expensive situations such as cancer, heart surgery, etc.  I went through cancer last year and was glad for my Medicare here in the U.S.. 

4. Unstable infrastructure.  This may include power outages, cable outages, water outages, and impassable roads during rainy months.

5.  Property scams.  The first time I heard about this, it was a friend of mine who sold his business and arranged to purchase a cliffside home and restaurant through a local lawyer. The lawyer was corrupt and was working a scam with someone who didn't even own the property. In another instance, I had an American absentee landowner find his properties occupied by squatters, and he spent several years fighting to get his property back in the Costa Rica courts, which often honor squatter's rights over the rights of foreigners who are not even using the land. The squatters' lawyer was allegedly building and renting billboards on the land.

Get a title insurance policy if you possibly can, too. My friend lost over $100,000 and had to go back to work in the U.S.

6. The climate speaks for itself. These are the tropics and there can be plenty of heat, humidity and rain which some Americans don't care for. Costa Rica is outside the hurricane region, however.

7. Finally, some expats just feel the isolation from family and loved ones living so far from the U.S. and reprioritize what they find more important in life -- family or beaches?

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 fantasyartdesign.com . 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:

1. 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.

Related posts:

 http://www.internationalappraiser.com/2013/11/critical-thinking-skills-needed-for.html

http://www.internationalappraiser.com/search?q=purchase+scam

http://www.internationalappraiser.com/2013/05/down-payment-fraud-in-perpetrators-own.html

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. 

Shelf corporations in international real estate transactions

Grand Cayman's famous Ugland House, the address of 19,000 corporations

Most readers know what shell companies are. Many offshore locations, such as British Virgin Islands, Cayman Islands, and Cyprus are known for harboring shell companies because of their privacy laws, and shell companies are sometimes used for illicit purposes, tax evasion and money laundering.

But wait! This Wyoming office building houses 60,000 corporations.






A “shelf corporation” is an aged shell company that has a multiyear history of being in business and may also have a credit history and bank account, but no other assets or income. Shelf corporations are created by third party vendors to sell to buyers seeking a misleading history of credit and longevity for their own new enterprises. These shelf corporations are offered for sale on the Internet. Just do a Google search of “shelf corporation for sale” and you will find many shelf corporations that are legally created in the U.S., in states such as Nevada, Wyoming and Delaware, which promise privacy, secrecy, and protection from litigation. Named directors of these corporations are often down-on-their-luck individuals who consented to sell their names just like they would sell their blood to blood banks.

There are legitimate uses for shelf corporations, too, such as the ability to rapidly start up a business in a state that has a lot of red tape for start-ups.

Since most of my work is for lenders, though, I see the seamier side of this business. If the lender has made a loan to a shell or shelf corporation, and the loan defaults, the lender ends up trying to recover their money from a corporation which has no assets, no income and no accounts receivable.

I am sometimes confronted with purchase contracts in which the seller or buyer, or both, are LLCs, shell corporations or shelf corporations, leaving me unable to judge whether the purchase is an arm’s length transaction (a sale to unrelated parties). As an appraiser, however, I can only estimate a value supported by market data, and if the transaction is not arm’s length, it will become obvious. Many other appraisers will try to “hit the purchase price”, any way, with strange selection of or adjustment to comparable sales.

Every state in the U.S. has either a Secretary of State office or Department of Corporations office from which one can obtain names of the principals of LLCs and corporations, and it is helpful in determining whether a purchase transaction is arm’s length (different names on each side of the transaction), unless those entities are located in Nevada, Wyoming or Delaware.

Working in the United Kingdom last year, I was thrilled with the functionality of the UK Companies House web site – one web site for all of the corporations in the UK, so much easier than working in the U.S. It provided addresses, directors’ names, and dates for and changes of company names or directors. It also allowed me to easily establish that the sale contract I was looking at was for the sale of the property from one shelf corporation to another shelf corporation sharing the same directors — in other words, a completely bogus transaction.

The ICIJ, International Consortium of Investigative Journalists, has been documenting known offshore shell companies and their addresses. If in doubt about an address, one can check it out on their web site, https://offshoreleaks.icij.org/ They also have a list of the nations having the most offshore shell companies, which is helpful in its own right. For instance, a few weeks ago I was looking at a deal in Mexico in which the developer was a company in Cyprus. Red flag. Cyprus is not known for its real estate developers, just its reputation as a haven for shell companies.

Clues that you’re dealing with a shell or shelf corporation include:

1. No web site.
2. The principals of the organization have only hotmail, gmail or yahoo e-mail addresses.
3. The web site is “Under construction”. Sometimes there is verbiage about “amazing things to happen”.
4. No present location for company staff.

For example, in a situation I encountered in 2012, in which a piece of raw desert land was being purchased for $1.6 million above the price it had been listed at for two years, the buyer claimed to be looking for a location to build a 100,000 square foot corporate headquarters building for an unknown high-tech company. They had a web site under construction with the words:

“Company is in stealth mode while we develop the team, the infrastructure and the technology. Details to follow in Fall 2011.”

The corporation had no current location. A search of LinkedIn showed about 4 employees scattered all over the country, hardly enough for a 100,000 square foot building. No plans, specifications or blueprints were presented for the building, only artists’ renderings.

When he was unable to show established business operations, the CEO then talked about “secret government contracts”. Suspecting that my client had not performed due diligence on this loan applicant, I ordered a simple $25 on-line background check on the CEO and found:

1. Two criminal convictions, one for check fraud
2. Two bankruptcies
3. Two legal judgments against him
4. No background in high technology, but a bachelor’s degree in political science.

I could go on and on, but I quickly came to the conclusion that his company did not exist and his lack of recent accomplishments suggested that he may have been the kind of person typically recruited as a “straw buyer” in a fake purchase scam. If you participate in certain LinkedIn real estate groups, for instance, you may sometimes see offers of up to $50,000 to participate as a front man in a commercial real estate purchase. This is called “nominee fraud” by the FBI.

ACFE Asia Pacific Fraud Conference and Observed Patterns of International Real Estate Fraud

I have been a member of the Association of Certified Fraud Examiners for 11 years now, and last week I attended their annual Asia Pacific Fraud Conference for the second time. I found it surprising that this year’s conference was held at the Marina Bay Sands casino hotel in Singapore, considering that gambling is a popular form of money laundering in Asia, but perhaps ACFE wanted us to see it firsthand.

I received useful knowledge from this conference, even if it did not directly relate to real estate. To this purpose, I thought I would summarize here the types of fraud and attempted fraud I have been encountering in my own international real estate work.

One of the things I learned early in my career at Jones Lang Wootton was that the dodgiest deals often had to travel the farthest in securing investors or financiers, so one must consider that international real estate transactions already present an elevated risk for fraud. Here are the types of fraud or misrepresentations I have personally witnessed:

Common scams:

1. Puffery regarding the quality of the distant real estate assets. “Resort land” is often no more than a sugar plantation or a mangrove swamp with or without development approvals. What is represented as “next door” to a prime area is often more distant than represented. Leaseholds about to expire have no value without documented proof of renewal in place. “Rental yields” often fail to stand up to scrutiny. “Substantially sold out projects” sometimes hang by a thread in the form of a minimal 5% deposit from would-be buyers (which buyers are willing to forfeit if the value of their lot declines by more than that). In this line of work, I am sometimes placed in the uncomfortable position of asking myself “they made me fly thousands of miles to see this?”

2. Bait and switch. One property is advertised or being pledged as collateral for a loan, but documents submitted to me are for another property. One particular ploy to watch for in Latin America is when documents refer to “Lote S/N”, which is an abbreviation for “Lote Sin Numero”, or “Lot without a number”. It may not be the same property, and professionals will need to be consulted to establish its proper identity.

3. No valid purchase contract. A foreign loan applicant must submit a valid, executed contract to purchase a property he does not yet own in order to receive purchase money financing. The purchase contracts I often receive are often submitted as a draft document in MSWord, with many blank fields, without proper signatories, and sometimes the seller is not the same party as the present property owner. These flaws do not allow me to consider the purchase contract to be valid, and they only arouse suspicion instead. Think about it -- how did you close on the purchase of your first home without a binding purchase and sale agreement? Yet these foreign buyers will tell me of impending purchase closing deadlines without even having ratified agreements in place.

There are two different scenarios in which I’ve seen this done:

a. There is another real purchase contract for a lesser amount of money, or

b. There is no proof that the legitimate owner of the property consented to sell the property or even knows about the phony purchase contract. This latter scam seems to be increasing.

4. Misrepresentation of ownership (similar scam to 3b). Foreign loan applicants sometimes attempt to pledge other people’s properties as collateral for a loan. One common ploy is when they present excuses as to why I cannot contact the rightful owner, such as “he is a high government official who is hiding his assets”. These scams quickly fall apart when the borrower cannot produce documents that an owner would be expected to have, such as a property tax bill or the actual development plan that has been officially approved. Government officials’ secrets are safe with me, any way; my job is to perform due diligence on a particular piece of real estate, not judge the integrity of government officials or violate principles of confidentiality. My job is completely apolitical.

5. Compromising the property inspection. Yes, I like to ride helicopters, but the proffered helicopter ride is often done to prevent me from discovering true ground conditions. Mangrove swamps can appear to be solid ground from the air, for instance, and rugged terrain can sometimes resemble terrain than it is flatter than it really is. In Fiji, I rented a hotel room a quarter mile’s walk up the beach from the subject property so that I could walk to the property that I was only allowed to see from a helicopter. It turned out to be a mangrove swamp. Likewise, after insisting in Belize that I be taken to the property’s edge, only then did I find out that the property could not even be reached by 4-wheel drive vehicle. I would have had to rent a tractor.

6. Tricking the appraiser by showing him or her the wrong property. I have seen MAIs from famous international real estate firms fall for this trick, which should not happen to any appraiser or valuer who has the ability to identify a property on a map or the ability to read a legal description. When will this skill be taught in real estate valuation courses?

7. Attempting to influence the lender or appraiser with biased feasibility or valuation reports from “experts”. Despite what is sometimes a long list of credentials of the expert, the biases are usually evident in the reports themselves, which are often revealed through disclaimers or “extraordinary assumptions”. I hesitate to be convinced by an expert who is being paid to be an advocate for a particular real estate transaction, especially if they are being paid to meet me or travel with me or pretend to be my new best friend.

Even scientific and engineering reports from other countries can be biased. I remember one environmental report that conveniently removed one legally protected mangrove location in between the first and second editions of their report, thereby reducing the number of mangrove locations from 3 to 2. Luckily, I saved a photo of the problematic mangrove location.

I used to be challenged by clients for rejecting reports from famous firms, but the reports from these firms provide all the ammunition I need to discredit them, such as disclosures of pre-existing conflicts of interest, mandatory indemnification agreements in the valuation of questionable projects, and other disclosures indicating a lack of due diligence or verification of borrower-submitted data.

Ronan McMahon’s "Real Estate Trend Alert" is Put to the Test in Costa Rica

I’ve been a reader of International Living for a few years now (I only subscribed for one year, but since they have my credit card number, they keep on renewing without my permission), and IL is just one spoke in a real estate advertising and publishing empire that includes such affiliates as Pathfinder International and Real Estate Trend Alert. Many of the IL articles are written by or about ecstatically happy expatriates who escaped dreary lives in Rochester, West Virginia or Minneapolis (December 2012 issue) to find low-cost, gringo-loving paradises without mosquitoes, muggers or muddy roads. A typical testimonial might sound like this: "Every morning we eat fresh tropical fruits on our patio while Juan Valdez roasts our coffee.  Unicorns come to us from out of the jungle -- and we can actually pet them!"

Nothing bad ever happens in Latin America in International Living. Crime? Never heard of it. Try reading expat forums to learn the downsides of living in Latin America.

A subscription to IL gets one signed up for complimentary Pathfinder Alerts, an on-line newsletter featuring foreign real estate deals. A recent e-mail from publisher Margaret Summerfield to a “select group of readers” presented a “For Your Eyes Only” audiovisual presentation from “an international businessman” with a “shockingly powerful wealth-building secret” which we, the "select readers" on their spam list, are urged to keep secret. "Secrets of the wealthy" is getting to be one of the most tired lines of the investment scam business, and this script has all the other standard vernacular of phony get-rich-quick schemes, including the requisite “what would you do with that kind of extra money!” and “You need to be serious about making money – fast!” -- except for the slight Irish accent.

The "international businessman" turns out to be Ronan McMahon, her business partner, promoting a premium IL product, Real Estate Trend Alert, featuring his alleged prowess in spotting amazing real estate deals and sharing “insider information” from his “millionaire friends”, a service normally priced at $999 per year, but temporarily reduced to $499 per year if one “acts now”. The price can even be broken down into quarterly payments of $124.75, and there is a 30-day money-back guarantee if not delighted with his service. I found myself intrigued when he said that his most recent finds are in Costa Rica, a country where I also appraise real estate. 

This presentation has many of the typical features of the Sleazy Investment Promoter's Playbook, such as:

1. Playing on our dreams.  “What would you do with all that extra money?” is a standard investment promoter’s psychological ploy that takes the listener out of the realm of reason and prudence and into the realm of dreams.  
2. Exaggerated claims of investment expertise.  Mr. McMahon’s own resume shows that he was not employed in the real estate industry prior to being hired as Pathfinder/International Living’s “real estate expert’. If he is indeed a successful real estate investor, he should give us evidence.  As for RETA's claims of profits made my its members, they use the dishonest technique of calculating profit by taking the lowest original purchase price in the development and then comparing it to the highest current listing price in the development, misleading readers into thinking that Ronan McMahon provided 100+% profits for his readers. Aren't there any resales to calculate actual profit?
3. Claims of “insider secrets” and “millionaire friends” and heavy use of investment promoter buzzwords, such as “confidential” and “insider”. This "fake exclusivity" is how many so-called real estate and advice gurus sell their expensive seminars and publications.  Truly successful investors have no need to sell seminars and publications. Most of today’s real estate and investment gurus, even Rich Dad himself, make their money from marketing books and seminars and not from investment.
4. Calling us “select”.  This is also a "fake exclusivity" trick. Twenty years ago I often received mass-mailed letters addressed to “Select Area Single” from Great Expectations, an overpriced and scammy dating service.  They didn’t even know my name or marital status.  Likewise, the only thing International Living/Pathfinder knows about me is that I was a sucker who gave them my credit card number.  For that I should be labeled "naïve" rather than "select", unless I've been selected for being stupid.
5. Special discounts if you “act now”, thus engendering a sense of urgency.

Despite suspecting a hoax, it is to protect and inform all of you, my “select readers”, that I acted as a guinea pig in subscribing to his Real Estate Trend Alert service, authorizing a payment of $124.75 on my credit card and relying on a 30-day money-back guarantee. Little did I know that the scam had already begun.

Although I chose the $124.75 (3-month) option, their server automatically upgraded my request to the full $499 subscription. An hour later, my credit card company contacted me about this mysterious $499 charge. I contacted IL and asked for this charge to be corrected.  Four days later I requested a full refund, but only received a credit for $124.75, leaving me with a balance of $374.25.  I have since asked for and received a full refund on March 7, three weeks later, after several dealings with their flaky customer service department (with excuses such as "our computer is programmed to give only one refund, and we can't get it to refund the remainder"). Remember that Pathfinder is an Irish company and might not play by (or even know) the same rules as American companies.

Two days after ordering, I started receiving the daily Real Estate Trend Alerts, which turned out to be recycled (and free) Pathfinder Alerts and International Living classified ads. Nothing secret or "insider" about these, thus contradicting his claim that his selections “truly are insider investments, not available to the public.” Some of these properties are getting shopworn after being repeatedly advertised in these publications for two years or more. And if Mr. McMahon is such a real estate investment genius, why are most of his recommendations his own advertisers? When McMahon uses the word "insider", it really means "advertiser".

Case in point is the last “Alert” I received the morning before I called to cancel my subscription. The title was “Last 2 Lots at this Low Price (Great Views)”. The project was “The Preserve at Lake Arenal”, a Costa Rican project I’m already familiar with as the result of a free Pathfinder Alert. This morning’s alert told of two remaining half-acre lots available to RETA subscribers at the low price of $25,000 each, with 10% cash down and interest-free monthly payments of $187.50 per month for 10 years. McMahon tells us “Arenal is facing an inventory crunch. Land prices have risen,” when the opposite is happening. It always amuses me when I'm told that Costa Rica is running out of land.

I had already recently communicated with owner Greg Coxon, who basically offered the same deal to me: “Our lowest price lots start at 25k.” and “Were [sic] offering no interest financing on short term loans,” thus contradicting McMahon’s promise of “off-market deals” and “massive discounts like 50%.” Moreover, the views from these lots are jungle views, not lake views, which makes a difference at Lake Arenal, also known as the "Lake Tahoe of Costa Rica".

A closer look at the sales history of The Preserve might make a buyer cautious. Having been marketed for over 2 years now (as determined from the date of the Facebook page), only 22 out of 57 lots have been sold. The pace of sales has slowed in the last year, with only 6 sales last year and one lot unsold (probably a payment default). http://mypreserveatlakearenal.com/html/lots_for_sale.html Only a model home and a clubhouse have been built. Described as a gated community, the fencing around the gate can easily be stepped over on foot. The lots are not yet graded, and this subdivision is “eco-friendly”, the euphemism for having no public water or sewers. The sewage treatment plant has not yet been built, but there is well water. In other words, this subdivision is still in mostly raw form 2 years later, and the longer development is delayed, the harder it is to sell the remaining lots as prospective buyers become skeptical about the project’s viability. I’ve also never seen slowing lot sales speed up again, as confidence wanes when sales slow down.  Subdivisions are my valuation specialty.

The viability of The Preserve also needs to be judged in the context of its milieu. It is adjacent to another struggling community known as Turtle Cove Lake and Yacht Club. Turtle Cove has a marina, boat storage, and 5 custom homes built so far (two of which are for sale). After 5 years of marketing, only 22 out of 47 lots have been sold, and now their developer is holding a fire sale, with discounts of up to 34%. This spells trouble for the neighborhood. Financing is 20% down and 5% interest. The current price list and site plan can be found via this link: http://turtlecovelakeclub.com/arenal-real-estate.html .

When lots get discounted like this, the stage is set for negative lot absorption -- many lots will become “unsold” as buyers who already put 20% down realize that all of their equity is gone and they are now “underwater” on their purchase loans, owing more than the lot is worth. Buyers like this are often litigious, too, but lucky for the developers, they will get nowhere in Costa Rican courts, and neither would you. Vacant lots in distressed subdivisions are among the worst real estate investments that can be made, because the investor could lose his entire investment. Why does Pathfinder and RETA promote them so much? And don't get me started on "Pre-construction pricing" on unbuilt condos.

In summary, this shopworn property is not a suitable investment to be offering to subscribers, is more likely to lose money than make subscribers rich, and Real Estate Trend Alert is no more than a marketing gimmick that repackages paid advertisements into recommendations from a fake expert (a young man who came to IL from the dot.com industry) while collecting hefty fees from gullible subscribers.

PS: April 28, 2013, ten weeks later --

Pathfinder Alert has become increasingly desperate to market these shopworn Lake Arenal properties, with almost daily alerts.  Today's alert reads: 

"Once word gets out about this place, and it becomes trendy or hip, it could explode. There's no reason for its low property prices, other than the fact that nobody knows about it....

A lake-view lot for $17,500 - and it's open to offers."

What?  Could Ronan's insider deal at $25,000 ten weeks ago have actually been marked down 30% since then? And still be open to offers? 

PPS: February, 2014, one year later: The Preserve at Lake Arenal now has 36 lots for sale vs. 35 lots one year ago, indicating a net loss of one sale during the past year, and they are still offering "pre-construction" pricing! I seriously doubt if this project will get built.

Nevertheless, I just received this "Pathfinder Alert" from Margaret Summerfield:

"How to make $1.1 million in Costa Rica

Last week, Ronan McMahon told RETA members how they could have made massive profits from a land purchase in Arenal, Costa Rica. If you’re looking for access to “insider deals”, RETA could be your most valuable membership. Join Real Estate Trend Alert to be briefed the next time an opportunity like this crosses Ronan’s desk."

This phantom $1.1 million profit would have supposedly come from subdividing a large residential estate that sold at half its original listing price, but what hasn't been mentioned is that permits are needed to subdivide the land and Costa Rica's rules for approving subdivisions are just as onerous as California's; approvals take years, not months.  Then you have to find buyers for the lots, and buyers have been scarce at Arenal over the last 2 years.  If someone made $1.1 million on this deal, I would like to receive proof.

The style of communication of Pathfinder also presents some concerns. I'm talking about the frequent underlining, highlighting, bolding and exclamation marks!!  Where have I seen this before?  Just about every piece of spam I get, such as ads for miracle weight loss or genital enlargement pills. It's just so transparently sleazy.

11/20/17: I have published an updated article on Ronan McMahon:
http://www.internationalappraiser.com/2017/11/five-years-later-reassessment-of-real.html .

When Extra Due Diligence on the Borrower Can Pay Off for Appraisers and their Lender Clients

Most of my work is for private lenders, and there are too many scam artists out there who think of private money as stupid money waiting for their taking. They also think of appraisers as stupid, perhaps based on previous experience.

An appraisal purist looks only at the property itself and not who owns it or wants to buy it, which is not relevant when the standard definition of market value is based on the price the property can be sold for on the open market.

Considering, however, that the appraiser or valuer is highly reliant on information from the property owner or buyer, it can help to know the background of the giver of the information. When the information source is known for being untrustworthy, it makes an appraiser revisit all of his assumptions. It also helps the lender-client and can save time for the appraiser.

If and when one of my appraisals comes in too low and a dishonest borrower wants to waste my time with falsehood-filled rebuttals, I used to spend hours reading their rebuttals, researching and attempting to verify their factoids and even reading appraisal reports from their “pet appraisers”.

To save time nowadays, I order a background check on the principal borrower and find enough dirt to stop the deal before more time is wasted. I learn of bankruptcies, legal judgments, criminal convictions and even incarcerations. It’s amazing what types of people are attracted to the commercial real estate business and are allowed to continue to practice in this business.

In my recent post on Puerto Rico I found that the buyer had been convicted of mortgage fraud just one year ago. Coupled with the fact that he could not show me valid, signed purchase contracts, presented me with a misleading appraisal report, and wanted to use his own private escrow company, this made it easy for me to make a judgment call for my client. This was probably a bogus transaction and he was “at it again”.

In another recent instance, the borrower was claiming to buy land in order to develop a 100,000 square foot corporate headquarters for an ultra-high-tech company I could not find any information on. He was paying well above the current list price of the land, putting no cash down and relying on seller financing, which I found suspicious. He had no construction plans and specifications, just artist’s drawings. The background check indicated 2 criminal convictions, 2 bankruptcies, 2 legal judgments against him, several known aliases, as well as no background in technology. He was a political science major.

My theory was that he was hired as a straw buyer to bail out the present property owner. (Such opportunities are sometimes offered on LinkedIn, which has sunk as low as Craigslist. A commercial straw buyer can make $50,000 in one transaction.)

I hope this will shorten rebuttal time, although he has complicated matters by ordering an MAI appraisal at a value higher than the inflated purchase price. The appraisal report repeatedly refers to entitlements, but I called several people in the county planning department and not only were there no entitlements, there has never been a development plan submitted for approval. How could there be, when all he has are artist’s drawings?

Some appraisers won’t do due diligence. I do, and my clients thank me.

Waterfront Land Appraisal in Puerto Rico

This was a 1000+acre combination of fee simple (freehold) and leasehold interests in land around a scenic bay in Puerto Rico, and the lease agreement also had an option to purchase. A developer was acquiring these interests for an already approved project to build hotels, villas, and a cruise ship port. This mixture of interests meant that I had three tasks to do:

1. Determine the market value of the fee simple parcel, whose purchase price had been set in year 2000,
2. Determine the market rental rate for the remaining parcels and compare to the contractual rental rate to determine if there is a positive leasehold value, and
3. Determine if the option price was above or below market value in order to determine if the option had any value.

In my background check on the borrower, I found that he had pled guilty a year ago to a criminal charge of mortgage fraud and was also being sued by the FDIC. This became troubling to me as he required a quick closing on the loan and was using an unknown escrow company, yet had no signed, valid contracts as of my visit or several days afterward. What was also suspicious was that the price kept on changing with each new contract version he sent, all of which were in MSWord and easily alterable.

The ground lease was to another unaffiliated LLC who was supposedly going to assign its interest to the borrower after the lease was signed, but despite my requests, I never received a document of this assignment of leasehold interest. Moreover, the lease had a clause which rendered it null and void if anyone in the tenant’s company had had a criminal conviction.

The fee simple parcel had an abandoned sugar mill, and there was no environmental report to inform me about possible contaminants. Common sugar mill contaminants include bagasse (from boiler fuel), pesticides from the sugar liquid and residue, and metal oxides from the rotting of the structures. This site had an estimated 50,000 tons of scrap metal, much of it rusting, placing iron and zinc oxides into the soil.

The bay’s water was as turbid as New York Harbor and unlike the clear blue water one would normally expect in the Caribbean. The problem was agricultural runoff from the farms upstream, making the bay very silty, compounded by incoming wave action from the Caribbean Sea. The waterfront of the fee simple site, moreover, consisted mainly of bulkhead and mangroves, making it unsuitable for a beach. Beaches are one of the principal attractions of Caribbean resorts.

Moreover, the bay’s maximum depth was only 29 feet, whereas most cruise ships have drafts (distance from waterline to bottom of keel) of more than 25 feet and need another 6 feet of depth for clearance. The bay would have to be dredged first and periodically thereafter until the continuing river silt deposits were under control.

Sales of large parcels of entitled land had not occurred in several years in this part of Puerto Rico, but a look at listings of property for sale indicated asking prices below the sales prices of several years ago. An adjacent, waterview parcel entitled for 100 hotel rooms and 50 villas is listed for sale at just $35,000 per acre or $10,000 per UBV (“unidad basica de vivienda” or “unidad de vivienda basica”, meaning “basic housing unit”, a unit of measure uniquely created by the Reglamento de Zonificacion de Puerto Rico, the zoning regulation for Puerto Rico). One UBV is equivalent to a 3-bedroom dwelling. A 2-bedroom dwelling counts for .8 UBV. A one-bedroom dwelling counts for .6 UBV, and a hotel room counts for .4 UBV.)

The purchase option was based on a price close to $100,000 per UBV, ten times as high as the neighboring property, so the purchase option was considered to have no value.

Because the ground rent was in steps leading up to a stabilized rent equivalent to 8% of the purchase option price, and no ground leases were found as high as 8% of value, the leasehold interest itself was also considered to have no value.

The only parcel that was considered to have value was the fee simple brownfield parcel, so there was insufficient collateral to support the large development loan requested by the borrower. Furthermore, he never showed the ratified, valid contracts that would show that he was really closing these transactions (with my client's funds) on the day he specified, with his chosen escrow company. (I always advise my clients to use nationally known escrow companies.) I suspected a scam.