Friday, January 23, 2015

Residential Market Collapsing

The U.S. residential market is slowing down FAST even in the hottest U.S. markets, relatively speaking of course.  This is a fact despite record low interest rates for years now and supposedly endless demand from buyers which is not materializing.

I don't need to write much here.  You can follow the links which speak for themselves.

Home Sales Market Slowing

Nothing is Going to Save the Housing Market

End of the Suburb Myth

High Housing Prices Dampen Sales

I could go on and on but what is the point?

The bulls have retreated into the woods and the bears roam with claws ready.

Saturday, November 22, 2014

Real Estate Guru Rick Koerber Escapes Prosecution For Now

The Federal crackdown against real estate gurus has taken a stumble recently.

The Feds indicted real estate guru Rick Koerber on twenty-two fraud, tax evasion, and money laundering charges but the case was dismissed with prejudice after prosecutors failed to move forward with the case in a timely manner.

Koerber turned to the Internet to proclaim his innocence, despite the fact there had been no such vindication by the U.S. District Court.  He escaped prosecution on a technicality, albeit an important one.

But Federal prosecutors have appealed this decision and the ultimate decision on whether to try Koerber is still outstanding.

Rick Koerber was charged in the indictment with running a $100 million Ponzi scheme in Utah.  He is best known for this get-rich-quick real estate radio show (hosted through YouTube) The FreeCapitalist, and The FreeCapitalist Project where he promoted free market economics and real estate investment as the key to all personal wealth.

So far at least six real estate gurus have been successfully prosecuted by the Feds in the last eighteen months with this effort being the only one not successful, either resulting in a plea bargain deal or outright conviction.

The Feds have a pipeline of new indictments coming against real estate gurus.  Stay tuned.

Saturday, November 15, 2014

Real Estate Guru Tanya Marchiol Pleads Guilty

Real estate guru Tanya Marchiol has pleaded guilty in Federal court to a wide variety of charges including tax evasion and money laundering.

Of particular note in this case is Marchiol was accused by Federal prosecutors of laundering money for drug traffickers through her real estate guru operations.  This is a new twist on an old scheme for me.  For example, one very famous real estate guru actually paid for their rental properties by selling cocaine out of their management office.

Marchiol was a high flyer in real estate guru circles over the last few years.  Based in Phoenix, she is best known for her book and the speaking tour surrounding it where she appeared on all types of media including CNBC and Fox Business spouting her version of get-rich-quick real estate riches.

She is at least the sixth real estate guru to be indicted or convicted by the Feds in the last eighteen months.  The Federal probe of real estate gurus by the U.S. Department of Justice and other law enforcement agencies rolls on.

More indictments are going to follow.  I have it on good information a grand jury  will be convened to investigate this entire corrupt industry.  As part of plea deals and sentencing reductions these convicted gurus are squealing on each other, once again proving the old axiom there is no honor amongst thieves and giving the Feds lots of information about the rampant corruption in this industry and the major and minor players behind it.

Wednesday, October 22, 2014

Federal Guru Probe Widens

All these facts come from a reliable and informed source.

The current Federal law enforcement probe of the real estate gurus and the bogus home study courses and seminars they sell has led to "at least" three arrests and indictments including guru Randy Poulson who was arrested in June 2014 on a variety of fraud charges.

The probe is now "widening" due to "new evidence" being discovered "fairly easily as more people cooperate."  Gurus themselves are turning on each other to "cut deals" before "their information goes stale."

A grand jury is "almost certain" to be empaneled to investigate the get-rich-quick real estate information industry with "at least a dozen or more" gurus targeted for scrutiny.  "There is fraud everywhere" is how the industry is being described.

"At least two" real estate investment associations ("REIAs") have voluntarily turned over documents to Federal officials.  REIAs are "likely" targets for "collusion" as part of this investigation.  Some REIAs are suspending operations and at least one REIA linked to a real estate guru has ceased to exist in recent months in part due to this ongoing Federal probe.

I use the term "guru" to describe these charlatans.  The official Federal term is "self professed real estate investment experts."  I like the Fed's description better.

More later.

Wednesday, July 16, 2014

Bubble Valuations

I can't open a newspaper or read the news online without seeing INCONTROVERTIBLE evidence of real estate bubbles nationwide.  In Seattle, it is so obvious I wonder who is making financial decisions at some of these firms, especially on the buying side.

For example, a nice luxury hotel in downtown Seattle called the Hotel 1000 was just sold for $63 million.  This works out to be a city record of $525,000 per room.

So let's look at the valuation here.

You can rent a room on for $339 per night at the Hotel 1000.

What is the average gross profit margin on each room?  The number is extremely volatile but is now about 26.8%.  (During the recession of 2008-2009 the margin was NEGATIVE 8%.)

This means the Hotel 1000 earns about $90.86 per room per night.

What is the average occupancy rate of an urban hotel like the Hotel 1000?  About 62.9%.

365 days per year x ,629 is 230 days of occupancy per year.

So the new owners of the Hotel 1000 will earn $90.86 x 230 days per year or $20,897 per year per room.

At this rate they will earn their $525,000 purchase price back in twenty-five years.  Or the year 2039.

The average investment yield on these number is a paltry 3.9%.

Of course these are rough estimates based on averages but they are solid numbers.  These statistics do not assume room rates will rise over the next quarter century but so will taxes, maintenance and labor costs, and the need to do at least four complete hotel renovations over these same years.  Hotels do sell things other than rooms but they usually lose money selling them.  A great example is hotel gift shops which exist for the convenience of guests at most places.

You can juice the yields with leverage to raise them a bit but the results are still essentially the same.  A high price without leverage is still one with it.

The purchase price here is just too high.  You can make more money taking the original $63 million and earn four hundred basis points more by purchasing shares in the average hotel REIT.  Current average yield is 4.3%.  Plus you don't need to run a hotel and have complete liquidity over your investment to earn a higher yield.

To earn a 4.3% comparable yield on $20,897 per year the owners would need to pay a maximum of $485,976 per room.

In other words, the purchase price viewed from this perspective is $39,024 per room or 7.4% too high.