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Wednesday, January 13, 2016

Crashing Real Estate: Feds To Target Secret Condo Buyers

The value of high-end residential real estate faces an imminent new threat: A curious federal initiative to investigate certain all-cash purchases of condos and other properties by entities which shield the individuals behind them from public disclosure. (Here is a link to the article which will run in Thursday's New York Times.)

Most real estate records do reveal information about property owners. It isn't easy to track down the individuals behind them. Government authorities, though, have access to entity records (e.g., corporations, partnerships, limited liability partnerships and so on), tax records and so on. The information is not easily unraveled, but the idea behind these entities is often anonymity which is important to those in the public eye. A second common motive is asset protection -- which is not illegal, although definitely frustrating to creditors and, sometimes, the government authorities. 

This action, however, threatens to have a serious and unintended consequence, one which I suspect will dwarf the government's reasons (whatever they are) for this initiative.

Not everyone who wants anonymity has a nefarious reason for it. The number of "bad actors" who buy real estate is certainly low compared to the overall universe of all-cash buyers.

The main reason buyers will pay in cash is that, when you have the wealth to buy a high-end property, you generally don't need to finance it, nor do you want to disclose personal information to strangers working in various levels of the banks. Sellers also prefer all-cash buyers because they want the comfort of a buyer who can close whenever they bring the cash. Sellers don't want the uncertainty of a mortgage contingency which can delay a deal for months or scuttle it altogether.

But why would our government be overly concerned with what I'll call "bad actors" (whatever the reason for that label)? 

After all, real estate is perhaps the least portable valuable asset. It is also probably one of the easiest to seize, encumber or control. As such, one would think that the government would want bad actors to put their money into precisely this type of asset class, and precisely in the United States. 

The unintended consequence? This will not increase demand for American real estate. It will reduce the demand pool for real estate. That will hurt current owners. 

So, exactly who wins here? That's my question.

What's yours?

Eric Dixon is a New York lawyer who handles business and investigative matters for a variety of clients, but none in this field.