How To Launder Money in Real Estate

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Warning: if you’re intending to read this post in full, you’re going to want to get comfortable — 4,000 words worth of comfortable. Let’s get started.

When you think of money laundering, what do you immediately think of?

Pictures of North African Dictators wearing a sash across their chest, chock full of medals and medallions?

Miami Vice, and go-fast boats?

The recent Panama Papers release?

What about…

The National Association of Realtors®?

If you’ve not clutched your pearls in horror yet, and you want to see where this show goes, you’re going to want to keep reading.

What Drove Real Estate Values (2003-2008)

Back in 2003 the country was heeling from the unprecedented events of September 11, 2001 and the bursting of the dot com bubble.

Then Chairman of the Federal Reserve, Alan Greenspan, brought rates down to just about 0% in an effort to prop up asset prices. It was widely believed that the implicit driver behind this was to bolster asset prices, namely the stock indices under the banner of patriotism.

However, the corollary inanity that followed was a housing market that was a beneficiary of low interest rates and loose lending requirements. President George W. Bush promoted an ownership society, and Americans – who had little to no savings whatsoever – were now buying new construction single family homes just months after being evicted from their apartments.

Consequently, apartment values fell and vacancies rose as many people were lured out of multifamily. Operators and owners of multifamily saw their NOIs plummet and the equity investors got stressed, but that’s a subject of a whole other blog post… (Keep an eye out!)

Self-employed and no assets and no credit?

No problem.

Subprime lending took care of this inconvenience for you. We saw that someone who was in foreclosure could get a cash-out refinance loan to pull them out of foreclosure – only to go back into foreclosure again.

Fresh out of jail and want to buy some new construction investment properties in Gilbert, AZ? No problem.

All you needed was a shady mortgage broker and pay some extra points on your loan.

The docudrama, The Big Short, does a great job explaining this in an easy-to-understand way that any layman can grasp. But to summarize it here: the low interest rates Greenspan pioneered here in America — that his world had never seen before — had caused a scramble for yield.

Investors buying these mortgage backed securities didn’t really care if the cocktail waitress in Reno bought an $800,000 home, they wanted the yield, the coupon payments.

Real Estate investors speculators lost it all when the 4 homes– that their Realtors promised would increase 25% each year – lost value and they couldn’t sell. The lowest common denominator of the housing bubble, the single family home investor, lost it all.

A Rising Tide Floats All Boats

Hairdressers became Realtors® and made 6-figures per year, but would never make that kind of money again after the credit bubble.

I remember running the Big Sur Marathon in 2005. I was struggling to find investors who believed my thesis that trees didn’t grow to the sky and some well-known banks were hiding non-performing assets.

During that beautiful, but very long and boring run, I would strike up conversations with many fellow marathoners. Almost all of them were…

  1. Mortgage brokers
  2. Realtors®

This is when it became quite apparent to me that America was no longer a manufacturing economy, but now an economy based on easy and cheap debt in the housing sector.

Our main export was at this point the debt based financialization of just about everything – from expensive student loans to 0% credit cards to anything housing related.

What was the catalyst of this? Well, I’d say it was a combination of things.

Bear Stearns was probably the catalyst, and perhaps the worst kept secret on the “Street”, but it came down to this: you can’t give someone who has no credit and no money a 110% LTV loan and expect them to hold true to their promises and commitments when they lied in the first place to get the loans they needed to overpay for these houses.

It was pure speculation fueled by the availability of cheap debt.

What Drives Real Estate Values (2010-Present)

Who’s to blame for the housing crash that wiped out the savings credit of Americans?

Greedy bankers of course!

After all, it was the CEO of JPMorganChase who came to your house in Temecula, put a gun to your head and forced you to lie about your income, assets and “job” for you to get that mortgage on an adjustable rate, interest only loan.

Politicians being politicians escalated their witch hunt.

Now tax evaders were targeted and the US started to scorch the earth looking for those who held their money off shore. The US Treasury had its foot on the back of Switzerland’s neck forcing those 400-year-old institutions to give up the names of people who kept accounts there.

What’s a Russian Oligarch, Chinese Businessman or an American Congressman to do now?

Enter high-end residential real estate and your local, friendly Realtor®.

(NOTE: Want access to The Commercial Investor business vault? Right now we’re offering access to systems, strategies, templates, trainings, and recordings. It’s all included in The Investors Syndicate, and is available to you here.)

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In 2012, America’s ever vigilant law enforcers had taken to task not one, but two foreign (domestic bank lobbies are sufficiently large to make Congress perfectly eager to look the other way as noted previously) banks: HSBC and now Standard Chartered, for money laundering.

Yet, when it came to the true elephant in the room, which is not foreign and is fully domestic, they continue to ignore events such as this one just described by the Wall Street Journal:

“A Florida home that originally listed for $60 million has sold for $47 million, a record for a single-family house in Miami-Dade County. The home, in Indian Creek Village, had been on the market since early 2011, when construction was still being completed. The asking price was reduced to $52 million this year.” And the punchline: “The identity of the buyer, a foreigner who purchased the home in the name of a U.S.-based limited-liability company, couldn’t be learned.” In other words a foreigner who may or may not have engaged in massive criminal activity and/or dealt with Iran, Afghanistan, or any other bogeyman du jour at some point in their past, and is using US real estate merely as a money-laundering front perhaps?

Well, let’s find out.

How It’s Done

While New York City, London and Vancouver are already well known as top destinations for shady, foreign-money laundering oligarchs who often attain untold riches by thieving from their own people, the Los Angeles area has likewise morphed into a criminal real estate hub.

An article featured on December 15, 2015 in the (always last to the party) New York Times, titled, A Mansion, a Shell Company and Resentment in Bel Air, sums up so much of what is wrong about the U.S. economy and society as we reflect on how far we’ve fallen in 2015…

A culture in which not only are the rich and powerful above the law, but where foreign criminals also can do whatever the heck they want and get away with it as long as they have billions to throw around.

The fact that no one seems to be doing anything about any of it tells you all you need to know.

What follows are a few excerpts, but you should really read the entire article.

From the New York Times:

Yet for all that, over four years of violation notices, inspections and hearings, efforts to hold someone accountable for the mess at 901 Strada Vecchia have repeatedly hit a legal wall. It is, as a judge said during an October session where once again nothing got done, “an extremely complicated case.”

That is because “themodernhouseofhadid” belongs not to Mr. Hadid but to an entity that keeps the actual owner at a legal remove — a shell company named 901 Strada L.L.C.

Fueled largely by the vast streams of wealth crossing the globe as never before, a new generation of hyper-luxury homes with stratospheric price tags is colonizing the most gilded hillsides and canyons of Los Angeles. In some areas, every third or fourth home has been torn down, leaving gashes of dirt and debris where new mansions will rise.

And more often than not, the people behind the purchases are hidden by shell companies.

Here, as in other roosting places of the super rich, the recent influx of foreign money has gone hand in hand with the rising use of shell companies — generally limited liability companies. Shell companies were used in three-quarters of purchases of over $5 million in Los Angeles over the last three years, a higher rate even than the roughly 55 percent in New York, according to a New York Times analysis of data from PropertyShark. What is more, in Los Angeles, where so many of the new palaces are spec houses — luxury magnets for global wealth — not only are the buyers shielded by shell companies, but the developers are, too.

Today in Los Angeles, as at 901 Strada Vecchia, L.L.C.s have provided insulation — some would say impunity — amid a gathering anti-development backlash.

Head up North Alpine Drive in Beverly Hills, for example, and on the right is a $14.7 million home owned by a shell company tied to Kola Aluko, a Nigerian businessman who is a figure in an investigation of that country’s former oil minister.

A block away is one of several local properties that have been owned by shell companies tied to a son of Suharto, the corrupt and brutal former president of Indonesia.

And back down the hill is Le Palais, a faux chateau — with a swan pond and a Turkish bath with hand-carved Egyptian limestone columns — that a shell company tied to Mr. Hadid sold to a shell company tied to Lola Karimova-Tillyaeva, a daughter of the president of Uzbekistan. The Karimov family faces corruption investigations in several countries, according to two people who have worked in law enforcement and have knowledge of the inquiries.

The property at 901 Strada Vecchia is the crystallization of all this — in its grandiosity, its 60 pages of violations and other notices, and the ire it has provoked.

Silver-maned at 67, Mr. Hadid, like many of his clients, is an immigrant. Born in Israel, he moved to Virginia as a teenager with his Palestinian family and spent his early business career in the Washington, D.C., area, developing office buildings and Ritz-Carlton hotels. Central to his success even then was his ability to woo foreign financiers — French and German backers, and in particular the SAAR Foundation, a group of Saudi investors.

Among his big-ticket sales was a Beverly Hills house, with a glowing pyramid in a reflecting pool, that was acquired in 2010 by a shell company tied to the stepson of the prime minister of Malaysia. (The prime minister is now a target of corruption investigations at home and abroad.)

No. 73 is a home owned by TBN Holdings Inc., which traces to a Saudi prince, Turki bin Nasser. As a high-ranking military official during the 1980s and ’90s, Prince Turki was involved in arms deals with the aerospace company BAE that led to allegations of bribery and large fines in Britain and the United States. According to reports by The Guardian, the BBC and “Frontline,” Prince Turki was a bribe recipient, but, as had long been their practice, American and British authorities prosecuted only the company.

Prince Turki did not respond to requests for comment.

At No. 58 is a home bought in 2004 by a shell company tied to another Russian politician, a former senator named Alexander Sabadash. Last spring, Mr. Sabadash was sentenced in Russia to six years in prison for attempted embezzlement of public funds, according to Russian news reports. A man who answered at the phone number listed for the shell company said the Sabadashes might be renting the house.

Finally, at No. 27, is a home owned by a shell company that has ties to the family of Bambang Trihatmodjo, long a contentious figure in Indonesia because his businesses amassed great wealth during the reign of his father, Mr. Suharto. Though Mr. Suharto died in 2008, his family’s fortune remains a focus of questions and legal action. Last summer, the Indonesian Supreme Court ordered the Suharto family to return $324 million that was embezzled from a foundation established with public money, according to news reports.

The money was to have paid for education for the poor.

In July 2014, the city said it intended to revoke the project’s work permits. That week, Mr. Hadid posted on Instagram, “The construction must go on.” It did, even after the permits were pulled. Neighbors documented workers on the site that Thanksgiving.

Mr. Hadid is not the only developer flirting with nine-figure price tags. His main competitor is Nile Niami, a former film producer building a Bel Air home he has said he hopes to sell for $500 million.

One of Mr. Niami’s past projects was a boxy, modern house at 755 Sarbonne Road. In April 2012, a shell company tied to Mr. Niami sold it to a shell company traced to Kola Aluko, the Nigerian businessman.

What followed was a tangle of events spanning two continents, involving oil and water, a host of shell companies and lessons in the difficulty of tracing responsibility.

Mr. Aluko, it turned out, was on a buying spree. In addition to purchasing the Sarbonne Road house for $24 million, shell companies tied to him soon bought another Beverly Hills house for $14.7 million and two others in Santa Barbara for $33 million.

Why Now? What’s The Rush?

As explained before, it is all thanks to the National Association of Realtors — those wonderful people who bring you the existing home sales update every month (with a documented upward bias every single time) — which just so happens is the only organization that actively lobbied for and received an exemption from anti-money laundering (“AML”) regulation compliance.

In other words, unlike HSBC, the National Association of Realtors® is untouchable, even if it were to sell a triplex to Muammar Gaddafi on West 57th Street or in Beverly Hills.

To be certain, this NAR is equal opportunity as it also services the lowest common denominator of “investors”. At our Las Vegas footprint is in a suburban office complex with a large, nationally known real estate brokerage.

One of the Realtors who used to work as a receptionist got her real estate license.

Why?

She found a niche. Her clientele are mainly cash-heavy wage earners, such as (but probably not limited to…) cocktail waitresses, parking attendants and strippers.

So if you’re sitting on $200,000 cold hard cash, which is not hard to do in Las Vegas, what are you to do with it?

You can’t deposit it, then it’s earned income and you’re accountant will ask you those pesky questions.

You put it into a briefcase and buy a house with it. Then you use your reported income to get a cash-out loan against the property. Or a hard money loan if you don’t report anything.

Now your money is secured into an insured asset where you can most likely write off the interest.

Then take that tax-free cash and buy a Porsche with it, or put it into another property.

Rinse, wash and repeat.

If you’re a wealthy Chinese businessman desperately looking to get your cash out of the mainland, you’re next stop is NYC, Miami, LA or San Francisco.

(NOTE: Want access to The Commercial Investor business vault? Right now we’re offering access to systems, strategies, templates, trainings, and recordings. It’s all included in The Investors Syndicate, and is available to you here.)

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Why The United States Government Looks The Other Way

So here’s the obvious question: Why does the NAR and the government ignore the fact that some of the biggest marginal buyers are precisely those people who some of the worlds notorious global banks such as HSBC and Standard Chartered are being punished for transacting with?

Why?

It’s simple.

Because by laundering their blood money, they are allowing the Fed and Congress to say that “housing has bottomed” and the US economy is now improving. The optics are 100% politically motivated.

Readers should now be quite clear why the various segments of the US regulatory and enforcement authority will perpetually turn a blind eye to the one true transgressor when it comes to encouraging money laundering on US soil — the NAR, and its massive lobby — and instead will scapegoat this bank in London, or that bank in Hong Kong.

Even Canada. Yes, you, Canada.

To be fair, China did attempt to stem the flow of funds out of the country in 2014, and the attached screenshot from a friend of mine living in Shanghai is proof below.

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However, there’s more than one way to skin a dead cat, especially if you can grease the palms of a decision-maker in your home country.

How did millions of Chinese “buyers” manage to get tens of billions of yuan or dollars out of the mainland — a country which as is well-known has strict capital controls when it comes to individual and corporate offshore outflows?

Under Chinese law, citizens are allowed take only the equivalent of US$50,000 out of the country each year: hardly enough to buy a storage closet in any of New York City’s Central Park West duplexes.

Today we learn the answer and it has to do with officially sanctioned “money laundering” services by not one, but two of China’s largest banks: Bank of China and also Citic.

Usually for 10% of the total amount you want out, you can make sure the regulators will look the other way.

And the biggest irony is that Citic is ultimately controlled by none other than the “State Council” or China itself. In other words, while China was prohibiting the outflow of hot money with one hand, with the other it was providing the very services it had previously forbidden!

There have been articles, like this one here, written that talk in stunning detail how the money leaves the continent. Of course, you’re not going to see stories about this on CNBC.

Why The Scramble To Get The Money Out?

Well, from the individual’s standpoint taking money away from China’s corrupt system and “investing” it in the US housing market certainly seems like far safer proposition.

But why would the PBOC agree to quietly bless this activity which it has, at least openly, blasted vocally in the past?

Simple: to keep inflation in check.

Recall that China is a country which creates nearly $4 trillion in bank deposits every year. Also recall that back in 2011 China nearly choked when inflation briefly soared out of control, leading to sporadic “Arab Spring” type riots in various cities.

And since China simply can’t reduce the pace of its loan creation at the macro level without crushing the economy, what it needs is to find outlets — legal or otherwise — that permit the outflow of funds.

The largest beneficiary of this? Vancouver.

While its brother Alberta is suffering due to the prolonged and suppressed price of oil, Vancouver on the other hand has been red hot.

Earlier this year, capital outflows from China were reaching a fever pitch, as companies and individuals scrambled to send money overseas last year in record volumes ahead of a feared yuan devaluation.

The Canadian dollar was also plummeting, making Canadian property relatively more affordable to yuan earners, and average detached house prices in metro Vancouver soared more than 40 per cent last year, hitting an average of C$1.8 million.

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(A representative listing from Point Grey)

As those who have been around me for years, I’ve often said capital moves to where it is treated best and so does fraud.

How Does This End?

Because without the Chinese bid in a market in which the Chinese are the biggest marginal buyer scooping up real estate across the land, sight unseen, and paid for in laundered cash (which the NAR blissfully does not need to know about due to its AML exemptions), watch as suddenly the 4th dead-cat-bounce in US housing since the Lehman failure rediscovers just how painful gravity really is.

Queue The Miami Condo Bust

Time, circumstance, and an appreciating US dollar will change all seller’s minds.

Just this month, the news out of Miami hasn’t been good… at all.

With the US dollar strong, South American investors who piled into the downtown Miami market after the real estate crash are now trying to unload their recently built condos, adding inventory to an area where 8,000 units are under construction and nine towers were completed since the end of 2013.

Some are offering homes at a loss as demand cools. Condo purchases from January through April slid 25 percent from a year earlier, while the average price fell 6 percent on a per-square-foot basis, according to according to South Florida development tracker CraneSpotters.com.

During this latest construction boom, projects required cash deposits of as much as 60 percent, and contract cancellation had stiff penalties. Due to this, some investors have been able to cover costs as they wait to sell by renting the condos out, but that isn’t a viable option for everyone either, as apartment vacancies have been on the rise as well.

The issue here, as you may have guessed, is that this places pressure on rental rates.

When most of the foreign investors sitting on the sidelines have to dig into their pockets and subsidize renters to cover any overages for taxes and insurance, that is exactly the catalyst that will lead to a drop correction.

Price-discovery occurs when over a period of time, prices of an asset drops to the point where a buyer steps in and closes the deal. This happens in thinly-traded stocks, illiquid bonds and of course, real estate.

For markets such as Miami, we are in a price-discovery phase and those listed prices for condos are a lot higher than what the market will bear.

A lot higher indeed.

A slide from a recent StatFunding.com presentation shows a snapshot of just how underwater some of these condos are at the present time.

It’s also worth noting, that from the same slide deck, Stearns shows that 22% of new units built since 2012 are for sale, and at the current sell-through rates there is a 126+ month supply!

 What About The Russians?

In NYC, the newly constructed legendary One57, a 75-story-skyscraper has had more than its fair share of Russian buyers cloaked in secrecy. Its marketing was epic, almost like a dog whistle for Russian Oligarchs.

In the circles I run in Manhattan, it’s called the “Russian Clawback Building”, meaning that when these buyers need to sell to bring funds back to their motherland to support their existing businesses, or when Putin the Patriarch demands it, these condos will be placed back onto the market (and I can’t wait…).

After all, trees don’t grow to the sky.

And before you can really take a bath, you need bubbles.

I mean, is this the face of a Realtor® who would tell you otherwise?

Tell me what you think! Drop me a line in the comments below.

(NOTE: Want access to The Commercial Investor business vault? Right now we’re offering access to systems, strategies, templates, trainings, and recordings. It’s all included in The Investors Syndicate, and is available to you here.)

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Salvatore M. Buscemi
A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.

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Salvatore M. Buscemi

About Salvatore M. Buscemi

A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.
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