To The Operators, The Buildings Were Cash Cows, Not Physical Assets

A report from Click Orlando. “Regency Gardens Monthly HOA dues are projected to increase by approximately $900, in addition to flat assessments based on condo size. Jon Epstein, a concerned resident, questioned the feasibility of these assessments for working-class families. Epstein said if this continues to happen at condos around Orlando, there will be a mass exodus. ‘The lesson I’m learning is don’t buy property in Florida, don’t buy property in Orlando,’ he said.”

ABC Action News. “Floridians continue to fight through the state’s fractured insurance market. Marisa Borgia bought her Pinellas Park home in 2018 and said since then, her insurance rates have doubled twice. As a single mom, Borgia had to take on two part-time jobs on top of her career as a nurse. ‘That’s more than 400%,’ Borgia said. ‘How do people afford it?’ We’ve also spoken to retirees, like Venice condo owner Karen Shipman, who got her nursing license here in Florida – ready to come out of retirement to afford rising rates. ‘Sometimes I’m not sure this will be our last home because our condo fees have gone up, and mainly insurance is a big factor,’ Shipman said.”

Business Insider. “As I stood in my newly renovated bathroom, watching water spill over the shower edge and flood the room, I alternated between rage and exhaustion. Even with my untrained eyes, I could tell that the lip of the shower was improperly leveled, which led to water cascading to the floor instead of swirling toward the drain. If it was left unchecked, the long-term water damage would be disastrous. What was supposed to be a yearlong $140,000 renovation ballooned into three excruciating years that cost us more than $500,000 — and the work is still not finished.”

“Our story is not unique. Homeowners nationwide have grappled with similar construction calamities wrought by unreliable and often unscrupulous contractors. The surge in home renovations post-health emergency, fueled by hit TV shows such as ‘Property Brothers’ and ‘Love It or List It’ that make renovations look like a breeze, exacerbated the situation. When our family bought our 130-year-old property in Northern Michigan in September 2020, we thought we’d be moving in by June 2021. We hoped to use the small cottage as a summer getaway and rent it out for the remainder of the year. A project that several contractors told us should take a year, give or take. Things started out well, but by fall 2021, it became apparent that our contractor had no intention of adhering to the agreed-upon timeline. Our descent into renovation purgatory had begun.”

KVVU in Nevada. “A federal judge last week signed off on an anti-trust settlement reached by the National Association of Realtors (NAR) and a group of home sellers. We invited six real estate professionals to give us their opinions on what this means. KARINA SILVA, REALTOR: ‘What we’re going to also see is sales price being negotiated. If the buyer is paying for earned compensation that could come off right off the top of this sales price.’ JOHN HUCK: ‘Okay, so there is a way of baking it into the sales price.’ STEVE HAWKS, REALTOR: ‘Yeah, that the sellers can say, here’s $20,000 for closing costs, do it with you want with it. So now the loan officer and the buyer’s agent will be competing for the contribution that the seller gives towards the closing cost of the buyer.’”

“STEVE HAWKS, REALTOR: ‘That FHA now allows the real estate buyer’s agent also to be the loan officer on the transaction. So this is a big change right now. That nobody would ever have. If someone had said that two or three years ago, they said, no, that’s never gonna happen. But now FHA, which is predominately first time homebuyers is now allowing something that no one ever thought would happen. So now that loan officer can be the realtor and the realtor can be the loan officer, which is going to help first time homebuyers obtain that goal.’”

The Journal Sentinel in Wisconsin. “New nationwide changes in how real estate agents are paid commissions are coming. Tom Zellner, retail sales manager for Nicolet National Bank, said mortgage bankers across the United States want to see if mortgage underwriters Fannie Mae and Freddie Mac adjust their lending rules to allow buyers to include agent fees in their mortgage. Zellner said it could ease some of the financial pressure on buyers. Agencies like the Veterans Administration and Federal Housing Authority that also back mortgages to veterans or families with lower incomes would have to change their rules, too. ‘I think Fannie and Freddie are working on this. We cannot lose sight of the fact our buyers need to be in a strong position in order to buy a home,’ Zellner said.”

The Real Deal. “Norman Fuchs inked the deal of a lifetime. In Cincinnati in 2019, Fuchs bought a sprawling, nearly 1,000-unit rental complex for $70 million and flipped it for a 30 percent profit a week later. But Fuchs never saw the money. In fact, he had zero involvement in the deal. The fast, profitable flip was evidence of a bigger scheme, a crack in the system quickly expanding into a giant loophole. It started with small-time landlords looking for easy cash and spiraled into nearly every part of the real estate ecosystem: title insurers, brokers, appraisers and possibly lenders, who knew more than they are letting on. The Department of Justice and the Federal Housing Finance Agency are running investigations.”

“What actually happened was that three investors — Boruch Drillman, Fred Schulman and Mark Silber — had allegedly stolen Fuchs’ identity, forged his signature and bought the apartments for $70 million. Then the fake Fuchs flipped them to the real Drillman for $96 million, according to the Department of Justice. With the higher price, Drillman was able to score a $74 million loan from JLL, meaning the investors were putting in essentially no money of their own, since the loan and actual purchase price were close to the same amount. The JLL loan was quickly offloaded to Fannie Mae.”

“It wasn’t an isolated scam. Savvy real estate investing relies on loopholes. Every sophisticated developer maximizes depreciation benefits or 1031 exchanges. Other loopholes foster perfect conditions for fraud, industry sources say. In deals like Drillman’s, owners could ‘self-certify’ rental income: Property owners tell lenders, ‘trust us.’ These loans were then sold to Fannie Mae or Freddie Mac. Lenders often rely on title insurers to report a flip, but — critically — title companies have no legal requirement to do so. Apartment owners could also fail to note bad debt, such as unpaid rent, in loan applications. To be sure, the agencies mandated other safeguards. Freddie Mac required audits and inspections on apartment units. But in-person inspections were halted during Covid, and some owners found workarounds.”

“Congress established Fannie and Freddie, which are quasi-public entities, to provide liquidity to the market by guaranteeing payments on certain loans in the event of default. Fannie alone provided more than $52 billion in financing to the multifamily sector last year. Now the agencies suspect some of the loans they purchased are fraudulent, meaning that the public is not just subsidizing Drillman’s zero-equity, 30-percent-upside flip in Cincinnati, but also giving lenders every incentive to make risky loans, knowing they won’t be on their books for long.”

“The DOJ alleges that Drillman ran a similar scheme in Michigan a year later. There, he partnered with the father-son team of Aron Puretz and Eli Puretz to buy an innocuous office complex for $42.7 million. That purchase was flipped for $70 million back to Drillman and the Puretzes. Riverside Abstract, a title insurer, performed both closings. Here is where the game gets fuzzy. To the operators, the buildings were cash cows, not physical assets. Drillman had only seen the Columbus site once before purchasing it in 2021, he said in court. The approach left hundreds of tenants in the Ohio cities living in squalor.”

The San Francisco Chronicle in California. “For six months, the man who lived upstairs in the garden-style apartment at 403 Gonzalez Drive terrorized his Parkmerced neighbors. Erick Rosemon banged on one resident’s door and threatened to shoot his wife, according to interviews with tenants and police reports. Armed with a knife, he allegedly threatened two other residents and a letter carrier. When an ambulance showed up on an unrelated call, he allegedly vandalized the vehicle with his knife and stole an iPad from the front seat. When Sara attempted to bring the problem to the attention of Parkmerced’s management, they said they couldn’t do anything and ‘ping-ponged me back and forth to the police,’ Sara said.”

“‘They kept saying, ‘Call the police, keep us in the loop,’ but they were not very helpful,’ Coni said. ‘They really dropped the ball. Sara would call. I would call. There were emails. It finally raised up to the level of what happened on the eighth — it was terror on Gonzalez Drive.’”

“While the disturbances represent an extreme example, residents of the 3,221-unit complex say the ordeal, and the handling of it, reflect a financially strapped property owner who seems to have cut back on security and maintenance. Regular complaints include broken elevators, lack of lighting in public areas, mold and mildew, leaks, car break-ins, rodents, overflowing dumpsters, and squatters taking over vacant units, according to tenants and public records. On April 16, the Chronicle reported that the ownership group is at risk of defaulting on its nearly $1.8 billion mortgage. The owner has requested the transfer of the mortgage to special servicing, a move that often leads to foreclosure, according to a report by the financial services firm Morningstar.”

“The loan originated in 2019 when Maximus sought to start construction on a long-approved redevelopment of the property, which would expand it to 8,900 apartments, from 3,221. Instead, the pandemic decimated the property’s revenue stream. Many of the tenants, young workers and students at San Francisco State University, left the city as classes and work went remote. Meanwhile, rents fell more than 25%. At one point, the property had close to 40% vacancy rate. Morningstar said the current occupancy rate is about 83%, and cash flow is ‘well below’ what is needed to cover debt payments.”

The Globe and Mail in Canada. “In January, 2021, American law enforcement agencies surveilled a suspicious box truck and a Lexus SUV through the streets of Queens, N.Y. Their hunch was that a criminal ring was out to launder drug money. Starting in a supermarket parking lot, a man and a woman got in the truck carrying three bags, then they drove to a bank parking lot where an Lexus SUV pulled up. Bags were exchanged between the vehicles, and the box truck left.”

“Shortly afterward, the woman, Yunqin Liu, took a bag from the SUV and walked into the bank, where she made a large cash deposit. Then she drove to another branch of the same bank and did it again. And then deposited even more at yet another branch. Four months later, the U.S. authorities charged six people with money laundering, which resulted in the lead defendant, David Sze, pleading guilty. Throughout the proceedings, the authorities never named the Queens bank, merely referring to it as FI-1. But on Thursday The Globe and Mail reported that the financial institution is Toronto-Dominion Bank, and the revelation shed light on a years-long investigation that has haunted Canada’s second-largest lender.”

“‘I regret that there were serious instances where the Bank’s AML program fell short and did not effectively monitor, detect, report or respond,’ TD’s chief executive officer Bharat Masrani said in a statement Friday. ‘This is unacceptable and not in line with our values.’ Although TD is not the only financial institution tied to the money laundering operation, the sum of money involved is stunning. U.S. authorities believe the criminal ring conducted more than US$2-million worth of transactions on that single day in January, and that it laundered US$653-million between 2016 and 2021.”

The London Free Press. “The annual spring fever that hits the London real estate market is more like a seasonal chill, as home sales remain sluggish, a lingering hangover from higher interest rates, say industry observers. The industry has taken note of the slower market this season, and a drop in the current five per cent Bank of Canada rate may be all that is needed, said Troy Couwenberghs, a broker and manager of Re/Max Advantage Realty Ltd. Brokerage in London. ‘It is slower than what we anticipated. The first half of last year was very busy, average prices went up about $100,000. The Bank of Canada raised interest rates and everything slowed down. I think that is still having an impact. People are waiting to see what happens in June.’”

“‘It has been slow for a year and continues to be; there is no spring ramp up,’ said London realtor Marcus Plowright, who owns the A Team brokerage. ‘The market is continuing to be slow and below historic averages. If interest rates come down, the belief is it will bring buyers out. It suggests buyers have the power, it is a buyers’ market.’”

Scoop Business. “Increasing costs of living, high interest rates, and recessionary pressures all impacted the New Zealand property market in April. New data from realestate.co.nz indicates a nationwide downturn in property demand, a trend that extends across most regions. Sarah Wood, CEO of realestate.co.nz, notes: ‘This indicates a cooling of buyer interest amid economic uncertainty. It is a significant shift as most regions have experienced year-on-year demand growth during 2024 until now.’ Roughly 59% of New Zealand’s existing mortgages (by value)are up for renewal within the next 12 months. ‘Those who fixed two years ago might soon move from interest rates of around 3.0% to around 7.0%. This is likely pulling liquidity from the market and dampening demand,’ says Wood.”

“Contributing to this waning demand, stock levels were notably high last month – echoing figures from 2015. Up 18.1% on April 2023, there were 33,815 total homes available for sale. New listings were also up nationally by 34.9% year-on-year. Since January 2023, the national average asking price has remained stable. At $868,877, it is down a marginal 0.6% on April last year and down 1.8% month-on-month. Wood notes that the national average asking price has remained below $900,000 since December 2022, a significant decrease from the market peak in January 2022 when it exceeded $1 million.”