Letter to the Editor: What the Average Joe Competes with When Buying or Renting a Home, and One Thing You Can Do to Help

This is a little bit complex so I’d suggest grabbing a good cup of coffee or tea before reading. For those more visually inclined, one of the sources for this article is a documentary video called “Who can still afford to live in the city?” which outlines some of these complex processes world wide in far easier way to digest than I can; https://www.youtube.com/watch?v=NPloUxLWfB8

First some background. The Pandora and Panama Papers leaks opened up a treasure trove of information on large scale global money laundering in real estate. Some of the money laundered is from the theft of government funds by leaders of various countries such as Russia, Nigeria and Jordan, international organized crime and Chinese capital flight. Chinese capital flight is any citizen’s money valued over approximately $50K USD leaving China. This is illegal and stopped whenever possible but large amounts do leave the country much to the government’s chagrin. Some of the money is also from private billionaires or mega corporations which seek to avoid taxes, and some of that money is privately owned by owners of those companies- not corporately held, which is a very fuzzy area. Much of all of this money combined is hidden in anonymous offshore shell companies. The Paris-based Organization for Economic Cooperation and Development estimates $11.2 trillion in privately held wealth from all countries including China and the US is held in these shell companies10. They are based in small island countries, provinces and states that are known as tax havens and the shells are managed by firms which guarantee anonymity. The total amount is larger than the GDPs of many countries combined.

The part of this money that is invested in US real estate is one of the major competitors that ordinary people in the US are up against when bidding on a home. Currently, US citizens are subject to proving where their funds came from when buying a property while foreign and opaque shell companies are not. This acts as an open invitation to global money launderers looking to park their money in single family homes, apartment buildings, condos, land and even trailer parks. Not only that, as prices rise because of this enhanced competition it increases rents to the point that even workers must often move away from their communities or face homelessness. It destabilizes the fabric of communities.

The United States is one of the favorite targets for real estate acquisition with this offshore money. Global Financial Integrity recently came out with a study which finds more than US$2.3 billion was laundered through U.S. real estate over a  five-year period 1. Looking at the data available for total offshore money this amount seems severely underestimated perhaps because of the methodology or data sources used. All data on this money is estimated by one way or another- no one knows exactly how much is offshore or how much is invested in the US. However, the Paris-based Organization for Economic Cooperation and Development is probably in one of the best positions to estimate this as they state they directly compare raw data between countries, banks and  financial institutions. The GFI did find some other interesting things. According to their information; over 50 percent of the reported cases in the U.S. involved politically exposed persons, the use of anonymous shell companies and complex corporate structures continues to be the number one money laundering method, and that the U.S. remains the only G7 country that does not require real estate professionals to comply with anti-money laundering laws and regulations. Except when it involves it’s own ordinary citizens, internally, by way of the IRS.

Some of this enormous amount of floating money hidden in shell companies is often transferred to other shell companies within the US and registered in a state such as Nevada, Delaware or Wyoming which does not require full information on who the owners of that company really are. Another way of hiding ownership and funding is to have a family member or friend who is a US resident pose as a “straw buyer” who may then buy up dozens of properties. Then each property can be re-registered as it’s own shell company if needed for trades. This method can also reduce taxes on these now domestic LLCs. To make a long story short, when a house bought with an offshore shell company’s money is sold or traded, that money is now laundered.

A large portion of this money is used to purchase properties in popular cities. There is no firm data on this and again the funds floating around are very large indeed so it is reasonable to assume the range of most estimates given are low. However, when averaging several not backed-by-firm-data estimates we arrive at a 6.5% market share. Even half of that  figure nation wide would be enormous when considering how few houses have been built in the past decades. In a city of 30,000  6.5% would be 1,950 or almost 2,000 housing units. This is far more than almost any city’s plan for building affordable housing. When a city’s market becomes saturated with these buyers prices rise dramatically and locals are forced out. Locals then buy or rent properties in more distant areas. This creates a domino effect where the locals in more distant areas are also pressured out of their communities. The accumulative effect may also be greater; when these “investment” homes are taken off the market they are frequently lost to the market. When or if they change hands they commonly are traded between companies rather than going back on the local MLS. Overlapping and in addition to this are properties turned into Air BnBs by US companies and families large and small and those that are eventually bought by huge rental corporations.

When all property values rise it most often does not benefit people who own one single home. In some places in this country rising values equals rising property taxes which the original population can not afford. Anyone selling their home to move to another will find the value relative; the new home will cost much more as well which negates any gain in home value. Taxes may increase.

Another complication is that many of these “investment homes” remain empty and unmaintained. They are not rented, lived in or even vacationed in. It’s more common to see this in large cities and resort towns but as the properties are acquired there shell investors along with displaced residents start to move to more rural areas. As one woman explained “”One way of putting it, is this is not at all about housing. The buildings, they function as assets. You want those houses to be empty and unused. Because then you can play with them”12. It is unconscionable that working US citizens become homeless or have to migrate away from their jobs because foreign and hidden interests want to park their money in an empty rotting house! Others are rented at higher prices but not maintained, a quick example here; “In Cleveland, Ohio, a recently sanctioned Ukrainian billionaire Ihor Kolomoisky and his associates have become the biggest commercial real estate holders in the city. However, their negligence as landlords has contributed to the economic plight of Cleveland and other cities in Middle America”8. Apartment buildings are considered commercial real estate. There is no absentee landlord so distant to local communities as one who lives in another country.

Just as an aside, a common misunderstanding is that home owners were the overwhelming reason for foreclosures in the 2008 Great Financial Crisis. This not true as investors’ properties were far more likely to be foreclosed on. In a study of the crisis by the University of Pittsburgh the author Stefania Albanesi finds “The investor share of mortgage balances roughly doubled between 2004 and 2007 reaching a peak of approximately 30% and accounted for close to 50% of all foreclosures at the height of the crisis, even though their share in the borrower population peaked at 14%”3”. Following the crisis it was companies such as Blackstone and Invitation Homes which gobbled up huge amounts of foreclosed homes, both directly and from companies which bought and traded them. Blackstone alone is estimated to have spent $10 billion on its foreclosed-home-to-rental business5. It now raises money on the global stock market and there are few controls on where that money comes from. Another complication for home buyers was that in many areas all foreclosed homes were virtually unavailable for most ordinary people to buy as they required all cash sales. This was another huge advantage for offshore money as well as domestic giants.

Getting back to the original subject, in 2016 The US Treasury dept became more concerned with global money laundering. The branch of the Treasury called The Financial Crimes Enforcement Network or FinCEN created a pilot test program to collect real ownership (AKA “Beneficial Ownership”) information on real estate bought with offshore and opaque shell company money. FinCEN imposed temporary reporting requirements on title companies in New York City and Miami. It was later expanded to include all-cash sales in certain parts of Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas, Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco and Seattle areas.

They found that all cash sales in these areas went down, sometimes drastically when the real owners of properties were required to be reported6. According to a study by the University of Miami; “After anonymity is no longer freely available to domestic and foreign investors, all-cash purchases by corporations fall by approximately 70%, indicating the share of anonymity-seeking investors using LLCs as “shell corporations.”7. Granted, both Miami and NYC have reputations as having 2 of the most corrupted real estate markets in the US, but the entire US housing stock is prone to rapidly rising prices in good part from these opaque interests.