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 Hotels.com 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.

Saturday, July 12, 2014

Other People's Houses



Most real estate books I read leave me uninspired.  The bad books fall into one of three categories:

1.  Jargon and citation dense unreadable tomes.  A CPA's wet dream.  Lots of quotations from the Internal Revenue Code and court cases but really little practical information for investors.  Mostly an exercise in microscopic documentation over useful information.  Imagine reading an encyclopedia for fun.

2.  Nothing new.  The same real estate advice and information I have read in 10,000 books before.  Old wine poured into new bottles.  Boring.  Lazy authors write these books to earn a quick paycheck.

3.  Opinions, motivational speeches, and other claptrap which fills two hundred pages.  The author means well but I'm reminded of the old Clara Peller line, "Where's the beef?"  Readers of these books leave the table hungry, wanting more, but nevertheless with bellies empty.

OTHER PEOPLE'S HOUSES by author Jennifer Taub is NOT one of the above.  This is a fantastic book filled with the perfect mix of facts and figures, anecdotal stories, and advice for investors shrewd enough to read between the lines.

Taub explores the causes of the 2008 real estate and financial market crash and how the same people and factors are still in control today.  Little has been learned since the crisis and few changes put in place to avoid another one.  She's absolutely right.  Nero is still fiddling while the new Rome is being rebuilt as flammable as the last one.

What makes this book so good is her careful balance from being too wonky or preachy.  This book is filled with many pages of citations but does not need them to drive the story.   She tells the tale of the 2008 crash almost like a detective explaining a crime, fact-by-fact leading to a dismal outcome.  Readers of this book can learn from history and avoid reliving the same personal disasters even if policy makers simultaneously ignore the very same words.

One of my standards for whether I like a book is simple.  Do I want to read more by this same author?  Are they that good to make me an instant fan of their work?

OTHER PEOPLE'S HOUSES is such a book.  I really really want to read more of her words.

HIGHLY RECOMMENDED BOOK.  A must read.

Here is an interview with Jennifer Taub discussing the 2008 financial crisis and her book.


Sunday, June 29, 2014

Real Estate Guru Drug Dealer



The depravity of real estate gurus should not shock me.  After studying them for more than thirty years I thought I had seen and heard it all.

A guru banned for life from the real estate industry due to court convictions selling home study courses on how to become a successful property investor.

A guru selling seminars on how to make a fortune with foreclosures who lost their own home in a foreclosure because they could not afford the mortgage payments.

A guru who gets young underage girls drunk at their seminars for the purpose of seducing them.

I could go on and on and on and on.  Trying to find an honest real estate guru is the equivalent of searching for a virgin in a whorehouse.

But this new story was unbelievable until I saw the evidence.

The facts run this way.

A major real estate guru was actually a genuine property investor.  In fact, they owned so many rental properties they opened a property management office where they handled their own rental units but also expanded into managing the properties of other investors.

Unlike what they said in their books and course materials, their properties were financed conventionally with normal down payments and regular mortgages.  No creative real estate hanky-panky or other nothing down nonsense.

So far, so good.  Congratulations I would have said.

But there was a catch.

The guru raised the down payments to buy their rental properties by selling cocaine out of their management office.

No, this wasn't some nice person selling grams of blow for his friends on the weekend.  This involved quantity and lots of it.  LOTS.

The only reason I'm not posting the guru's name and some of the documents I've seen is this guru stopped selling dope when they started peddling get rich quick real estate home study courses.  There is also no evidence they are still selling drugs.

Imagine that.  You can make more money selling nothing down courses and seminar tickets than cocaine.  At least this guru did.

Just amazing.  And despicable.

Thursday, June 5, 2014

Real Estate Guru Randy Poulson Arrested for $3 Million Fraud



Real estate guru Randy Poulson has been arrested by the FBI in New Jersey for swindling $3 million from more than fifty of his own students and other investors.

Watch the video above from a local news station announcing his arrest and you can see Mr. Poulson teaching his students all about subject-to "Get The Deed" and other foreclosure rescue investing.

Then read the criminal complaint filed in the U.S. District Court of New Jersey against Poulson.

In the world of creative real estate and get-rich-quick gurus, this is nothing new.

Deja vu all over again.

Wednesday, June 4, 2014

Next Recession Due



Here are some interesting statistics to think about.

According to the National Bureau of Economic Research, the official organization which keeps records of such facts, the Great Recession which began in December 2007 ended in June 2009.

Historically, the two longest recessions in American history lasted 16 months (1973-1975 and 1981-1982).  The Great Recession was 18 months.  A person predicting the end of the really bad Great Recession at its start would have been nearly correct, off by just two months.

Historically as well, the average economic expansion since the end of the Second World War has been 57 months.

If the current economic expansion began in June 2009 and is 57 months in length, the next recession can be expected to begin in March 2014.

What happened in the first quarter of 2014?  US GDP declined 1%, the first contraction in U.S. economic growth in three years.

Food for thought.

Friday, March 14, 2014

Fordlandia


In 1927, Henry Ford was one of the richest men on Earth.  His factories pumped out automobiles and his revolutionary production methods were changing the industrial world.

But his empire had a problem, an Achilles' heel, and he knew it.


Ford's cars were built of American steel and American wood.  But the tires of his cars were rubber and the cartels which sold the essential material upon which his automobiles literally rested were Dutch and British.  His company was at their mercy and these foreign monopolists were not in any mood to be generous.

But, true to form, Henry Ford decided he had the ultimate solution.  He would build his own 25,000 acre city in the Brazilian rainforest and grow all the rubber trees he needed to keep the entire United States literally rolling along.

Of course, he named his new real estate venture after himself.  He called the world's newest city Fordlandia.


By 1929, Ford bought a piece of Brazil the size of the state of Connecticut four hundred miles from the Atlantic Ocean deep in the Amazon jungle.  And he started to plant rubber trees.

But this was not going to be any ordinary rubber plantation.  Henry Ford believed in his Midwestern vision of America and he would transplant it to his city, no matter how far Fordlandia was from the suburbs of Detroit.


Fordlandia was as American as the proverbial apple pie.  Cape Cod homes, ice cream parlors, band shells for concerts in the summer, baseball diamonds, a golf course, all connected by roads and Ford motor cars, the ultimate suburban dream.  Ford built modern hospitals with the latest medical technologies and cafeterias serving hamburgers and the best all-American fare.  Workers would be well paid but also punch time cards, wear ID badges, and, true to Ford's American idealistic and puritanical vision, never gamble or drink alcohol, even when off the clock and on their own time.


No one asked the 4,000 Brazilian local natives and the roughneck imported laborers who built the city and worked the rubber plantation if any of these prudish American rules worked for them.

They didn't.

Fordlandia was a dismal failure from the start, with one error piled on top of another like cordwood.  Ford never hired anyone who knew anything about actually growing rubber trees.  Most of the trees planted quickly died. The local workers were accustomed to sleeping during the brutal noon summer heat and thrived on parties where sobriety was not part of the mix.  There were riots, sabotage, and nothing but frustration.  The rains turned Ford's roads into quagmires.  Very little rubber was ever produced.  Henry Ford never bothered to visit the city named after him.


By 1945, synthetic rubber made the entire purpose of Fordlandia obsolete.  Henry Ford's grandson sold the entire property back to Brazil at a loss of more than $200 million---on just the land alone.  The whole history of Fordlandia was forgotten, until recently one great author decided to write a book.


FORDLANDIA:  THE RISE AND FALL OF HENRY FORD'S FORGOTTEN JUNGLE CITY by author Greg Grandin is one of the most fascinating real estate development books I have ever read.  On top of that accomplishment, his work gives you a glimpse into the brilliant but also twisted mind of Henry Ford like no previous biography ever has.

How could a legendary entrepreneur like Henry Ford with so many grand ideas come up with this one so horribly wrong and insane from the start?  Real estate wonks will love the discussions about the building and (mis)management of Fordlandia.  This stunning book reads like fiction because, quite frankly, you can't make up stories so bizarre like these in a novel.  I devoured this book page after page, simply mesmerized.


This book also takes you to the ruins of Fordlandia which still exist.  Locals still live in Henry Ford's Cape Cod homes and drive along his crumbling suburban streets.  The legacy of his rubber dream is now fodder for adventurists who cruise the rivers of the Amazon jungle in search of rusting dreams.

I can't praise Greg Grandin's book enough for telling the story of this forgotten chapter of American capitalism, likely one of the worst and most doomed real estate developments ever to take place in human history.

A must read book.  Don't miss this one.  Here is an interview with author Greg Grandin and the legacy of Fordlandia.  Watch both parts of the interview.  The second part has documentary footage from 1944 of what Fordlandia really looked like in its day, at least what the Ford Motor Company wanted the world to believe it was.  Absolutely fascinating vintage footage.



Tuesday, February 18, 2014

Home Builder Sentiment Falls Hard



The home builder sentiment index produced by the National Association of Home Builders fell in January 2014 by a whopping ten points, the largest drop in the history of the index.

(Incidentally, the reporter in this CNBC piece is wrong when she says the NAHB/Wells Fargo Housing Market Index or the HMI began in 2006.  It was started in 1985.)

Think of how dramatic this decline was.  Even in 2007-2008 there was not such a loss of confidence so sudden or so hard.

I have been warning readers of this blog for years problems in the home building sector are coming.  The gains since 2008 have been little more than the result of the Fed's easy money policy and cash driven investors---especially Asian investors with money to burn.  There have been no fundamental reforms since the real estate crisis of the industry or the two drivers crippling the industry.

Skilled labor shortages and poor land use laws.

The sentiment will improve in the spring with warmer weather and more retail buyers but the underlying problems remain.  Look for a dead cat bounce in the index by mid-2014.

Instead of reform, we are seeing the return of subprime lending by Wells Fargo, the largest mortgage lender.  Other mortgagees will soon be following suit.