Feds: "We Come Across Real Estate Being Purchased With Illicit Funds Once Every Other Case"

The latest note out of real estate expert Mark Hanson points to something we have discussed since 2012: the use of US real estate to park "hot" and in some cases illegal foreign capital in US real estate courtesy of the NAR's exemption from anti-money laundering regulations. Some of the highlighted observations are stunning.

Higher-End REAL ESTATE TROUBLE Worsens (From New York to Florida to California), by Mark Hanson of M Hanson Advisers

In Feb. 2016, the Treasury's FinCEN enacted "GEOGRAPHIC, ANTI-MONEY-LAUNDERING, TARGETING ORDERS of 2016".

Apparently, the program worked out so well, in August '16, it was expanded to cover the rest NYC and SoFL, in addition to the LA, San Diego, San Fran Bay Area, and San Antonio regions. Regarding the expansion, on July 28, 2016, I put out a note entitled "7-28 Hanson...Higher End Real Estate's Coup De Grace...Heads-Up,." copied at the bottom of this note, highlighting what I perceived to be the fall-out.

Everybody assumed this program would end organically last month, but it was renewed for another year, which wasn't widely reported.

THESE STATEMENTS BY INVESTIGATORS ARE OMINOUS, especially considering that "foreign and domestic fraud and money laundering" was one of my "four pillars of unorthodox housing demand", over which I have pounded the table for the past several years.

"We don't come across [money laundering in real estate] once every 10 or 12 cases," John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida, told the Miami Herald in January. "We come across real estate being purchased with illicit funds once every other case." 


"FinCEN said that 30 percent of reported transactions across the nation were linked to buyers who had been flagged by banks and other financial institutions for suspicious activity."

Well, this is one way to narrow the ever-increasing divergence between higher and lower end real estate prices...blow-up the higher end.

I don't find it any coincidence that the era of ASPIRATIONAL PRICES in the middle-high to luxury segment ended abruptly in early 2016, in lock-step with this program ramping up, as evidenced by headlines of 20% to 40% list price haircuts reported constantly - most recent is Mickey Drexler's $35M to $19.95M haircut -- in exactly the markets, which the program targets.

There is such a thin pool of demand for middle-high to luxury real estate, that if one demand cohort goes away (fraud, or suspicious purchases by LLC's, for example), and some "innocent others", who simply don't want the Treasury tracking them, "move to the sidelines", it will create a massive hole in demand and pricing power.

It only takes a few real estate transactions to "reset" entire markets, higher and lower, and establish new trends before most everybody else (headline readers) without access to real-time, transactional data even realizes it.

Region's being tracked now are listed, as follows. The price triggers aren't too high. Heck, $2mm may not even get you a quarter-acre dirt in Palo Alto.

  • New York: Manhattan with a threshold at $3 million; Brooklyn, Queens, Bronx, and Staten Island at $1.5 million.
  • Florida: Miami-Dade County, Broward County, and Palm Beach County, all at $1 million.
  • California South: San Diego County and Los Angeles County;
  • California North: San Francisco, San Mateo County, and Santa Clara County, all at $2 million.
  • Texas: Bexar County (San Antonio area) with a threshold of $500,000.

Small leaks in large bubbles can turn into rips very easily. Which makes it critical for high end owners, investors, and speculators, that the remaining "three pillars of unorthodox demand", which I am tracking closely, don't fail (some already are).

The article referenced is by Miami Herald covers the renewed GTO for 2017: