Monday, August 26, 2013

Updated Guide to The International Appraiser’s Most Popular Posts



The two posts still drawing in the most readers, the post about the failed New South China Mall and the post about the mass marketing of Costa Rican teak farms to international investors, are two years old now.

The New South China Mall seems to be a source of endless fascination for journalists all over the world, having opened as the world’s largest mall in 2005 and going bankrupt soon afterward. I posted about my visit to the mall and my assessment of the reasons for the mall’s failure in May 2011. (http://www.internationalappraiser.com/2011/05/new-south-china-mall-worlds-largest.html)

I published “Costa Rican Teak Farms for Gringo Investors” (http://www.internationalappraiser.com/2011/08/costa-rican-teak-farms-for-gringo.html) in August 2011, and received more e-mails about this post than any other one, discovering that thousands of American, Canadian and British Investors had already invested in such teak farms or were considering investing. My post focused on the misinformation and deceptive marketing used to sell such farms and the perils of real estate and/or development done to satisfy investor demand rather than consumer demand.

The third most read post is one of the first posts from 2010, “Appraisal in Costa Rica” (http://www.internationalappraiser.com/2010/03/appraisal-in-costa-rica.html), which examined the feasibility of a tourist medical hospital project in a remote coastal area without paved roads.

The fourth most read post, about La Riviera Maya (http://www.internationalappraiser.com/2012/11/la-riviera-maya-ruins-from-post.html), was a farcical post on the modern ruins left by speculative real estate developers in this area of ancient Mayan ruins.

The fifth most read post has been the recent post on Ronan McMahon, International Living, and Real Estate Trend Alerts (http://www.internationalappraiser.com/2013/02/ronan-mcmahons-real-estate-trend-alert.html). I subscribed to both publications and found the investment advice (as opposed to travel, relocation, or retirement advice) offered by this publisher to be of questionable value, particularly the continued promotion of raw land parcels in failing subdivisions. Most of the recommended investments or brokers appeared to have already been repeatedly advertised in International Living.

I apologize to readers for rehashing old posts because of a lack of new international work in the last few weeks. I have recently bid on appraising an affordable housing project in Santo Domingo, Dominican Republic and a tourist development in Scotland, so I hope to have something interesting to report soon.

Wednesday, July 17, 2013

Appraisal of an Industrial Property in San Jose, Costa Rica


Urban real estate appraising sometimes yields pleasant surprises, as the shortage of land in growing or geographically constricted cities can create situations in which a property’s land value can exceed its value as currently improved. I appraised a similar situation in San Francisco, California immediately before flying to San Jose, Costa Rica to appraise the property of a bankrupt boatbuilding company.

I stayed at the charming Hotel de Bergerac in the Los Yoses barrio of San Jose while making a two-kilometer walk to and from the subject property, located in the rapidly urbanizing suburb of San Pedro in the canton of Montes de Oca. Vacant lots were few to be found, and new, upscale retail stores were often built next to dilapidated, corrugated steel structures, as often occurs in Latin American cities concurrently experiencing prosperity and land shortages. Moreover, much of San Pedro had been upzoned, permitting building heights of up to 7 stories and site coverage of up to 85%.

Montes de Oca has a particular attribute contributing to its growth. It is also known as Costa Rica’s “Cradle of Higher Education”, including the Universidad de Costa Rica, Universidad Latina and Universidad Fidelitas, all located in or near San Pedro.

Arriving at the subject property, I was initially disappointed to see the physical deterioration of the various structures, most of which were aging metal buildings with rusting steel roofs. This is one of the common letdowns of foreign appraising – traveling many hours and thousands of miles to find a property that is far less than as described. It makes me anxious that someone is going to be angry with my report. The remaining physical life of these particular buildings was rather limited, although San Jose’s 96% industrial occupancy rate does prolong the usage of older buildings.

What was encouraging to see, though, were two neighboring industrial sites that had already been redeveloped with attractive new multifamily housing. San Pedro has a housing shortage and has been encouraging multifamily development.


In one of my posts last year, http://www.internationalappraiser.com/2012/07/appraisals-of-view-land-in-costa-rica.html, I described my lunch with a Costa Rican appraiser in which I asked what Costa Rican appraisers use for comparable land sales. He said that because of the lack of publicly available land sales data, the San Jose provincial government has created a map system for appraisers known as La Mapa de Valores de Terrenos, which sets a baseline value per district, which is then adjusted by appraisers for site factors such as size, zoning, commercial street frontage and terrain. The base rate for this section of San Pedro is 180,000 colones per square meter, equivalent to $358 per square meter (or $33.25 psf) at today’s exchange rate. These land values are comparable to CBD land values in many U.S. cities.

When the comparable improved property sales and listings and land sales and listings were compared, it became clear that the subject property was no longer improved at its “highest and best use”. The land value of the site, even adjusted for demolition and remediation costs, still exceeded the “value in use” of the current improvements, and there seems to be enough collateral value to support the requested loan, which, ironically, is going to be used to restart boat production.

More later, when the loan is funded.

Friday, July 12, 2013

A Warning to Chinese EB-5 Visa Applicants about Investing in Real Estate through U.S. “Regional Centers” 警告通过美国的“区域中心EB-5签证中国投资房地产申请人”


Advertised as "suitable and qualifies for multiple EB-5 applications"

Twenty years ago the U.S. government began a program to grant permanent resident visas, or “green cards”, to immigrants who invest at least $1 million to create an enterprise in the U.S. that creates or preserves otherwise-lost jobs for at least ten Americans outside the immigrant’s family. The threshold investment was reduced to just $500,000 in “targeted economic areas” of unemployment; 50% above the national average or in metropolitan areas of less than 20,000 inhabitants.

While the EB-5 visa program was slow to gain popularity, the number of applications has gone way up in recent years in response to the following three forces:

1. The proliferation of “regional centers”, private projects that pool the resources of multiple EB-5 investors,
2. The explosion in the numbers of Chinese applicants for the EB-5 visa, which now exceed all other countries combined, and
3. The desire of the real estate industry to find new sources of low cost capital, particularly “dumb capital”.

The EB-5 visa program is administered by USCIS (U.S. Citizenship and Immigration Services), who approves applications from visa applicants as well as projects wishing to be approved as “regional centers”. An approved regional center is allowed to solicit investments from EB-5 investors, but the USCIS continually issues the following caveat regarding investments in regional centers:

USCIS approval of an EB-5 Regional Center application does not in any way:
• Constitute USCIS endorsement of the activities of that Regional Center;
• Guarantee compliance with U.S. securities laws; or
• Minimize or eliminate risk to the investor.

In other words, “Investor Beware”. This is particularly problematic since USCIS states that more than 90% of EB-5 applicants are choosing to invest through regional centers rather than opening their own businesses. These are typically immigrants without entrepreneurial backgrounds, possessing more money than business skills.

I asked my Chinese associate who accompanied me in 3 of my last 4 business trips to China why there are so many Chinese millionaires choosing the regional center route rather than opening their own businesses.  How did they become millionaires in China without being businessmen? What was their source of wealth?

His answer was disarmingly simple – they became rich through real estate speculation. Being early in buying new condos in Beijing and Shanghai made many ordinary Chinese people rich without needing to learn the skills of starting and running a business. And having made their money through real estate, they are particularly attracted to regional centers which are real estate developments.

Although real estate developments have been approved by the USCIS as regional centers, they face a challenging task of proving that they have created 10 permanent jobs per investor, and there has been a lot of confusion as to what can be counted as qualifying jobs for purposes of earning the visa. Here are some of the misunderstandings:

1. Construction jobs to build the project are not considered eligible permanent jobs unless they are full time (35 or more hours per week) and provide 2 years of continuous employment for U.S. citizens. 

2. From the time of initial EB-5 visa application, the investor has two years to demonstrate that 10 jobs were created. Larger real estate developments can take sometimes take 2 years to start, beginning from the concept stage, then soliciting government approvals while ordering and submitting costly studies relating to traffic impact, environmental impact, and economic impact before finally being able to start construction. Finding protected animal and plant species or Native American burial grounds can indefinitely postpone the project.

3. Once complete, commercial real estate itself is not always labor-intensive enough, with the exception of hotels, restaurants and senior care centers, to produce 10 jobs per investor.

4. Normally, the jobs produced by tenants moving into the commercial property, such as a shopping center or office building, cannot be counted as jobs created by the EB-5 investment, unless it can be proven that there was such a shortage of space in that area that these jobs would otherwise not have been created or else that other qualifying jobs were indirectly created.

What about the people hired by the restaurant that moves in? Those are normally considered jobs created by the restaurant, not the real estate project, unless it can be shown that the restaurant would have never opened in that community unless this particular shopping center was built, and the standard of proof would require an expensive economic study. Restaurateurs usually have a selection of locations to choose from.

In response to a Freedom of Information Act (FOIA) request, USCIS delivered 895 pages of I-829 requests (the final application for the visa) that had been challenged or denied. The most prevalent issue was job creation, occurring in 65% of all cases. USCIS places the burden of proof of job creation on applicants. In many cases, the visa applicants had only created ineligible part-time jobs or had created an insufficient number of permanent jobs.

What is most concerning, however, is the data published by USCIS on May 31, 2017, indicating that only 61 out of the current 866 regional centers had actually gained I-829 approvals for their investors allowing them to get permanent residency.  In other words, only 7% of regional centers have been effective so far in getting their investors permanent green cards. 

Real estate developers applying to be regional centers

According to USCIS statistics, more and more of these developers are being turned down for regional center status, but some applications have gotten through, possibly due to the vagaries of USCIS staff, who are typically not trained in real estate economics, or else due to the persuasiveness of the developers who applied, and real estate developers can be very persuasive people. I meet one almost every month. Some fraudulent regional centers have been approved. See http://www.internationalappraiser.com/2013/05/over-250-chinese-investors-defrauded-in.html.

Exploitation of Chinese investors

Also troubling is the proliferation of seminars and services on how to finance real estate development with money from Chinese EB-5 investors. The focus is not on how to gain visas for these investors, but on how to fund a project that has been turned down by all the banks and private lenders. This is a risky environment for EB-5 investors.

The top photo, for instance, is an intersection next to a 320-acre agricultural property in Imperial County, California, being marketed as “For EB-5 regional center…currently suitable and qualifies for multiple EB-5 applications”. It was once approved for mixed-use development and is advertised as having been appraised for over $15 million in 2006 “as is” and close to $26 million if development approvals were granted. What isn’t said is that the project never started and the current owners purchased it at foreclosure auction for $5,565,000 in 2007. The asking price is now $12 million, or $37,500 per acre in a county where irrigated farmland sells for $7000 per acre.

Farms do produce jobs, I must admit, but in this part of California, just across the border from Mexico, the likelihood is low that most of the farmworkers are U.S. citizens or permanent residents, who refuse to work in the 115-degrees-Fahrenheit heat of a summer day in Imperial County. Once the farm is up and running, investors will then have to prove to the USCIS that the workers are legal residents of the U.S., and that will be hard to achieve.

The recruiters

Situated on both sides of the Pacific Ocean is an industry of recruiters, most of whom are also ethnically Chinese, for EB-5 regional centers. They have been paid commissions up to $125,000 (A Chicago Convention Center) to land one of these Chinese millionaires, and they often make extravagant promises in China, promises that they wouldn't dare to make in the U.S.


Wednesday, June 19, 2013

The International Appraiser is Threatened with a Libel Lawsuit from the UK, a “Land Called Sue”

Her Majesty's Libel Judge

Ironically, the legal threat has nothing to do with anything I said, but what one of my readers commented on in the open forum that follows each blog post. On my “Costa Rican Teak Farms for Gringo Investors” post from August 2011, http://www.internationalappraiser.com/2011/08/costa-rican-teak-farms-for-gringo.html , a commenter named Dave Anderson stated:

Dave Anderson said...
Just to let everyone know Living Investments uk are now under investigation for fraud. Anyone affected by this should contact Actionfraud on 0300 1232040. Thanks for your advice especially explaining conversion bft to cu.m which allowed me to challenge their projections and realise their scam. January 24, 2013 at 2:19 AM

On Monday morning, June 17th, almost 5 months after this comment was recorded on my blog, I received an e-mail from Steve James of Living Investments UK with a request to remove Mr. Anderson’s remark, which he deemed to be false. My response was as follows:

"Mr. James,

You're welcome to publish a rebuttal to his comment. I do little to censor the commenters."


Most of the commenters on my blog do so to promote their own web sites or products, any way; my favorite one is the cat furniture guy. What does the cat furniture guy expect to happen when my readers click on his link? “Honey, forget buying the Costa Rican beach property. Let’s upgrade Fluffy’s scratching post instead!”

Here is the response from Mr. James that I woke up to on Tuesday morning:

"Hi
Your response is disappointing. The statement written is a lie and you are implying by refusing to take down the offending statement that you agree with the lie. The libel laws in the UK are quite easy to interpret, you can publish comments on the basis that to the best of your knowledge they are true; however once it has been brought to your attention that the statements are not true then by continuing to run the offending article you lose that particular defence. In short in court you will have to prove that we are under investigation for fraud (we are not and never have been) and if you cannot do this then you will (if you lose) have to pay substantial damages; as we will prove that your actions have damaged our business and you may have to make good the profits that we have lost in the process.
...…............ I would rather not go to court as the costs for both sides will be in excess of £ 100,000 and even if we win we will only recover 70% of that from yourself so it will cost us at least £ 30,000 and a lot of time to prove this.
…...............I have already spent considerable time on this matter but I have done so, to try and save us both a lot of money and time (especially the time) some companies would just sue you today as you have responded once you were made aware of the falseness of the claims and have continued to “republish” the offending comments. I have taken a different approach to try and explain things fully however once I start the legal process we will go all the way as we don’t settle. To start the ball rolling costs £ 20,000 but the time element is massive so paying the costs will not be enough for us, we would want substantial compensation for loss of business (we can prove this).

The decision is of course entirely yours, I await your response but if I hear nothing by tomorrow (19th June 2013) I will place the entire matter in the hands of our lawyers.

Regards
Stephen James
"

I once again invited Mr. James to tell his side of the story on my blog. But would you want to do business with a guy like this?

So it took 5 months for this man to find a 3rd party comment on my blog, but he then claims proven loss of business. As I checked my site traffic statistics (maintained by Google) I found only 72 page views in the UK in the last month, and that covers an entire blog with 89 posts; most UK readers were probably looking at my recent post featuring Fawlty Towers.



In my part of the world, such a defamation lawsuit is called “pulling a Streisand”, a counterproductive legal strategy in which most of the damage to the plaintiff’s reputation comes from the plaintiff’s own publicizing of the alleged defamation or similar act. Barbra Streisand once sued a coastal photographer for invasion of privacy when he accidentally photographed her house on the Malibu shore. When she filed the complaint, many media outlets republished the photo and it was ultimately determined that she was the most responsible for the loss of privacy that she was suing about. Suing gets publicity.

My first reaction to Mr. James's e-mail was how does he know that he is not being investigated? In my training as a Certified Fraud Examiner, I was never told that I should first inform the fraudster that he is being investigated. I have no way of knowing if Living Investments UK, a company I never heard of and never criticized, is being investigated for fraud. Nor have I ever claimed such.

An Internet search of Living Investments, though, makes me uncomfortable about this company, such as their claim on YouTube that they can turn a £5,000 teak tree investment into a £32,087 investment in 15 years, suggesting a return on investment of over 13% per year, and that investors start getting returns as early as 4 years for a 4-year-old tree (sold for what -- pulpwood?).  If the returns are this good, why are they selling? I would load up as much as possible with financing from my private lender clients and keep the secret to myself.

I also found the following comments at qfak.com:

"I keep getting calls someone at Living Investments UK in Dec 14 at 5:55
They apparently have a teak plantation in Costa Rica and they asked me to invest £25,000. I personally think it is a scam, but im not sure. Has anyone else had any experience with them. I dont like how persistent they are. They were definately using boiler room tactics."


Answer _ Page 1
"Smithmeister, I think I remember you, I started with you for the training week thing. I stayed a little bit longer than you, I have a less sensitive bull**-o-meter and I stayed for 8 days. It is the most rediculous company I have had the pleasure of working for. They have a virtual office at 14 Grenville street, but it is simply a decoy for all their letters to go there. They actually operate from 6-8 st. John Street EC1 in Farringdon.
No They are not regulated by the FSA and companies like this make me sick because they don't know the impact they have on peoples lives. They don't deal with any fund managers or pension managers. They get all the prospects from an investors list with mainly elderly pensioners and harrass them for money. Its not even a limited company, its sole propreitor with some guy who no one knows. If someone calls from LIUK, Tell them to stick the phone up their arses
"

And the following is a recent job advertisement for Living Investments UK:

• Company Living Investments UK
• Job location London (United Kingdom)
• Contract type Permanent
• Closes on April 19, 2013

Basic Comm 55K-85,000 City based private client brokerage is interviewing for the above positions for an immediate start. We are looking for individuals who are proven in introducing investments to private clients and IFA’s. If you have an extensive and highly successful experience of dealing with building client portfolio’s within a broker style environment we will be interested in hearing from you. You need to be driven and money motivated and with a strong professional work ethic and furthermore you need to be articulate and able to think on your feet. Our top earner earns over 130,000 p.a.


They have the appearance of being a telemarketing boiler room operation. Is this legal in the UK? Probably. Did I say this was a fraud? No. Would I want these "money motivated" brokers selling Costa Rican trees over the telephone to my parents? Never.

I have also noticed that a disproportionate number of investors scammed in Florida and Latin American real estate developments (based on my observation of the sales contracts) are British.  Could it be that British libel laws prevented British subjects from learning the truth about dodgy real estate projects?  There's good news at least; the UK libel laws are already being changed.

Monday, June 10, 2013

Chinese Housing Bubble



The chart below may explain the reason for seemingly contradictory reports of housing shortages vs. reports of ghost cities of empty new apartments in China. The chart, published on www.newgeography.com , shows a long-term misallocation of capital towards construction of luxury apartments, whereas affordable housing is in short supply.



In my previous post two years ago on the Beijing housing shortage, http://www.internationalappraiser.com/search?q=beijing+housing , I had spoken to a recent college graduate who described how 6 to 8 recent graduates would have to share one apartment because of the lack of affordability, yet there also media reports, including Leslie Stahl’s 60 Minutes visit to China and interview of Wang Shi, China’s biggest real estate developer, indicating thousands of empty condos in places such as Zhengzhou, Urdos and Tianjin. One memorable irony of this 60 Minutes episode was the sight of poor villagers in Zhengzhou salvaging bricks from the rubble of their modest homes, razed to build new condo towers, while empty condo towers loomed in the background. It was explained that these villagers couldn’t possibly afford the newly built high-rise residences.

In the U.S.A., the sight of so many empty condo towers was the precursor to the bankruptcy of such lenders as IndyMac Bank, whereas it is surprising to learn that in China, these empty towers are actually sold out to small investors. Middle class Chinese investors have very few investment options:

1. Put the money in the bank and earn a very low interest rate.
2. Invest in Chinese stocks traded on the Shanghai and Shenzhen exchanges, in companies that Chinese investors consider to be dodgy and dishonest. (They are restricted from investing in Chinese companies listed on the Hong Kong exchange, which are more trusted because they have to meet higher financial and reporting standards.)
3. Invest in real estate, which has always gone up in value in their lifetime.

This has led to massive investment in residential real estate, and the Chinese government has already taken steps to curb speculative demand for housing with restrictions on loan-to-value ratios for investor-owned housing and the number of units that can be owned.

Nevertheless, when so much money is sitting in empty homes with no renters, the fundamental economic law of supply and demand ultimately forces home prices lower.
Future investors will be dissuaded from investing in these homes with no prospect of income, and sales prices will decrease as a result. This is an inexorable economic law, much as the physical law of gravity, which no society can escape.

The potential result is that millions of middle class Chinese families will lose much of their wealth in an inescapable housing crash, similar to events that have already transpired in places such as the U.S., Spain and Ireland.

Saturday, May 18, 2013

Avoiding Cultural Gaffes while Appraising Abroad

British innkeeper Basil Fawlty [actor John Cleese] is confronted with an "ugly American"
 
 
One day in Perth, Australia, my Australian hosts and I had some time to kill between property inspections and we settled at a pleasant riverfront café at about 11 am.  Not quite ready for lunch, but having already had breakfast, I asked only for orange juice.  Then I immediately asked if it was “fresh-squeezed”.
 
My hosts immediately asked if I was trying to re-create a classic scene from the BBC sitcom Fawlty Towers, the famous 1979 “Waldorf Salad” episode in which an obnoxious American comes to visit.  I even remembered that episode, particularly since it was the first time I had seen Americans parodied in foreign media. This American from California was portrayed as demanding and belligerent, finishing his demands with the phrase, “or I’ll bust your ass!” And he and his wife insisted on fresh-squeezed orange juice. That episode was hilarious, but it did make me feel uncomfortable wondering if that was how the rest of the world perceived Americans.
 
As a southern Californian, I perceive one dividing line between better-quality and lower-quality restaurants is whether the orange juice is fresh-squeezed.  God knows we have enough oranges in this state, so when the waiter pours the orange juice out of a carton that says “Florida” I judge the restaurant to be “not really trying”.  Traveling in Mexico, I have found that restaurants there would never even think of not squeezing oranges. Naturally, I do not expect oranges to grow in England, but Perth, Australia looks so similar to a California city, with its palms and eucalyptus trees and waterfront, similar to San Diego or Long Beach, that I was disarmed into thinking that fresh oranges would be present.

We had a good laugh, but it was not the only cultural gaffe I’ve made while traveling in Australia.  On one hand, I have found Australians to be refreshingly down-to-earth and approachable, but have mistakenly assumed that this informality extended to attire. Last year, for instance, I again found myself in Perth on a 40 degree Celsius day (104 F), wearing a tank-top, and I spied a lively bar with a t-shirted crowd across from my hotel and tried to enter, but I was refused admittance by the doormen.  At first, I couldn’t even understand what they were talking about, as they use an Australian slang word for tank top, but then I realized that I had seen no one wearing a tank top that day and that I was underdressed for summertime Australia. Bear in mind that I live in a city (L.A.) in which I can dine at a $100 per person restaurant and not have to wear socks.  (We have a surreal culture which has adapted to the demands of imperious Hollywood stars.  If Rob Lowe doesn't have to wear socks at a 5-star restaurant, why should the rest of us?)
 
Likewise, I have been glad that I packed a business suit on my Australian trips, as there are more situations requiring it over there than here in the U.S. I even did a couple of guest lectures at an Australian university and noticed that the Australian faculty wore suits and ties.  If only they could see how California college professors dress – not much differently than their students.
 
Mexico
 
There are many Americans who misunderstand Mexico.  Despite negative portrayals of Mexico in our news media, the concept of courtesy is stronger there than it is in America.
 
Even the poor people practice courtesy.  Once, when I was inspecting a contested property with a Mexican appraiser and his colleagues, we were greeted by residents of a local ejido, a commune composed of agrarian peasants, who politely asked why we there.  When we explained that we were performing a valuation for the owner of the property, they courteously explained that the property belonged to them instead.  No shouting or cursing was involved, unlike the last time I inspected a trailer park in Bakersfield, California.
 
Another time I was traveling in Mexico with another American (not my employee) and three Mexicans, and I felt like my American colleague was raising their eyebrows with his bossy behavior, calling the shots on when and where we would meet and eat and pause for souvenir shopping.  We met for breakfast on the second morning, and although I ordered bistec ranchero (steak ranchero), I received huevos rancheros (eggs ranchero) instead.  My American companion was outraged for my sake and thought I should have had the meal returned to the kitchen, but I was satisfied to eat huevos rancheros to avoid an international incident and any unfavorable impression of Americans, all the while understanding that he came from a city where it is acceptable behavior to stand up and shout “Where’s my f***ing cheese steak?”

Every culture has its blind spot, including our own. Once I was with an American who expressed his moral indignation at the sport of bullfighting. A Mexican responded with "We Mexicans find it strange that you Americans treat your house pets better than you treat your own children."  Touche'.

Traveling abroad, I am sometimes offered food that could be considered strange to Americans, particularly when traveling in China, where I’ve been served snake, dog and donkey meat, but I cheerfully eat it and say “Thank you.  It’s delicious.  I consider respect for other cultures to be part of appraiser professionalism.  It is also keeps an appraiser's mind open to differing concepts of value in other cultures.

 

 


Tuesday, May 14, 2013

Tropical American Tree Farms Update and Other Teak Farm Promotions

Latest update: https://www.internationalappraiser.com/2019/07/tropical-american-tree-farms-update.html

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

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

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

Continued teak farm investment promotions

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

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

What are current teak prices?

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

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

Final analysis

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

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

Sunday, May 12, 2013

Down Payment Fraud – in the Perpetrator’s Own Words

 

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

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


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

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

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

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

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


Saturday, May 4, 2013

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


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

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

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

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

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

$156 million EB-5 fraud in Chicago

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

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


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

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

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

Willfully Blind Accomplices

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

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

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

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

Monday, April 15, 2013

The Important Synergy of Being Both a Certified Fraud Examiner and a Commercial Appraiser



Harry Markopolos, CFE, testifying before U.S. Congress

Some readers have noticed the CFE credential placed after my name. It stands for “Certified Fraud Examiner”, a designation earned from the Association of Certified Fraud Examiners requiring testing in accounting, law, criminology and investigative techniques. This once-obscure designation became better known with the media attention on Harry Markopolos, a Certified Fraud Examiner who tried for 8 years to alert the SEC (US Securities and Exchange Commission) to the fraudulent Bernie Madoff Ponzi scheme and who later testified before the U.S. House Financial Services Committee on the negligence of the SEC. He was interviewed on CBS Sixty Minutes by Steve Kroft and has his own book, No One Would Listen: A True Financial Thriller.

Most CFEs are also CPAs (certified public accountants) and thus concentrate on forensic accounting matters not related to real estate. I know of no other CFE who is also a commercial appraiser, which is a shame, because it would be foolish to think that fraud is not present in the commercial real estate industry. I specifically pursued this credential because I witness so much fraud in the commercial real estate business, and I also work with attorneys pursuing fraud complaints.

Most of my work, though, is for private lenders, and the emphasis is on fraud prevention. Private lenders are usually lenders of last resort and therefore attract some desperate loan applicants. My job is to not only value the property, but also detect misrepresentations and verify essential facts about the property and the borrower before a loan is made. This is how I got involved in appraising internationally, because international transactions bear a higher risk of fraud, and some private lenders are brave enough to venture into this area.

I also perform pro bono consulting work for swindled real estate investors, mainly because they've already lost all of their money and can't afford to pay me, but asset recovery is elusive when the swindlers are allowed to declare bankruptcy while hiding assets.  The victims are all senior citizens, which saddens me when I pause to consider how many thousands of people employed in the financial services industry work towards cheating people who spent their entire lives in honest careers and expected secure retirements.  Nevertheless, I continue to explore asset recovery strategies for these aggrieved investors.   

My CFE education has also improved my real estate valuation practice in several ways:

1. Greater ability to detect inaccurate financial statements,
2. Knowing resources for investigating buyers, sellers and borrowers, including hidden relationships,
3. Knowing how to interview buyers, sellers and borrowers in order to spot contradictions and obtain more honest information, an area of knowledge I call "deception science",
4. Learning how to better serve attorneys,
5. Learning how to testify in court, and
6. Understanding the psychology of deceit.

Let me provide some examples relating to each:

1. I easily determined that an Indian hotel owner had provided false income and expense statements because all line items had been increased at the exact same percentage over the previous year, which is a statistical impossibility.

2. I am constantly preventing commercial mortgage frauds in which properties are being purchased at inflated prices by supposedly independent parties who are actually the sellers themselves or related parties. These inflated prices were being used to request loans which were greater than the values of the properties serving as underlying collateral.

3. I like to get the property owner to confirm essential facts just in case their representation of facts changes. In Mexico City, I confirmed a property’s zoning with the managing co-owner, by saying “I see from the zoning that you can build up to 100 homes on this site” to which he responded “Yes, but even after considerable site development we would only be able to build about 80 because of the topography”. Not surprisingly, I was contacted by the lender-client several months later to be asked why my estimate of value was only 5% of the value estimated by the Cushman and Wakefield Valuation and Advisory office in Mexico City. Their appraised value was based on zoning that allowed 1500 homes to be built there. Forced into a conference call with the Mexican appraisers and my client, I asked, “What made you think that this site was zoned for 1500 homes?” Their answer was “The broker told us so.” A recheck with the zoning office confirmed that zoning had not changed, only the borrower’s story. This further confirms my low opinion of Cushman and Wakefield appraisers. See http://www.internationalappraiser.com/2011/05/warning-about-international-real-estate.html and http://www.internationalappraiser.com/2011/06/gibson-v-credit-suisse-mother-of-all.html . Are they about to become the Arthur Andersen of the real estate valuation profession?

Being a CFE has also gained me access to the scholarly research in the area of deception, including research done by Harvard Business School.  Researchers, for instance, have catalogued linguistic differences between liars and truth tellers, much like some of the lessons taught in the former Lie to Me television series, starring Tim Roth, which was based on the real-life research of Paul Ekman, a University of California professor.  For instance, liars tend to be more loquacious than truth tellers, as they require more words to make their deceptions convincing.  This is called the Pinocchio Effect, as the number of words grows longer as does Pinocchio's nose does. They also use more third person pronouns, a phenomenon known as distancing.  They also use more profanity in their oral communications.  For instance, "I swear to God, Vern -- this project has generated more excitement than any other in the history of my country."  (The phrases "excitement is building", "poised to sell out" and "potential for explosive growth" are all phrases I consider to be evasive.  I prefer to hear real numbers such as "90% pre-sold with 50% down payments" or "number of households has doubled in the last decade" and then receive documentation supporting these statements.)

4. For instance, I encourage the attorney to get me the opposing side’s supporting appraisal reports right away so that I can prepare insightful questions for them to ask in their subsequent deposition of the appraiser. When the dishonest appraiser crumbles in the deposition, the case can be settled more quickly.

5. Some of the things I’ve learned from ACFE about testifying include a) always tell the truth, b) try to provide only ‘yes’ or ‘no’ answers when being questioned by the opposing attorney, because the more one speaks, the more one can have his words used against him, and c) do not pretend to know more than the facts and analysis have revealed to me. Opposing attorneys, for instance, like to ask me “What if?” questions that would take me from the realm of what really happened to the realm of conjecture and hypothesis.

6. Fraud criminologists contend that fraud starts with a financial burden being experienced by the fraudster. In real estate, that often means a property experiencing negative cash flow or a property that is failing to attract interested tenants (in the case of developed properties) or builders or buyers (in the case of land). The fraud then happens when there is a perceived opportunity to relieve this burden (such as a naïve lender or a naïve group of investors). The final step is to rationalize the fraud, which in the real estate industry, is often the simple bromide “Everyone’s doing it”.

In discussing the problem of fraud with my professional peers, I find them divided into three camps:

1. Those who deny that it is happening.
2. Those who know it is happening, but do not think it is their responsibility to stop it.
3. Those who think it is also a problem, and make some efforts to prevent it.

An appraisal or valuation is worthless if it is based on false information.  It disturbs me that there are high-level members of the appraiser/valuer profession who think differently, people who see an appraisal analysis as an academic exercise based on suppositions.  These are people who think that an appraisal report is a good report even if the estimate of value proves to be erroneous.  They can justify faulty reports with a section entitled Assumptions and Limiting Conditions.

In summary, some instruction on fraud prevention should be part of every appraiser or valuer’s professional education. Let me also take this opportunity to plug my book (published by the Appraisal Institute), Fraud Prevention for Commercial Real Estate Valuation. See sidebar.