We have previously dedicated several posts to the emerging trend among South Florida developers of financing new condominium projects by requiring purchasers to deposit 70-80% of a unit’s purchase price up front.
Although the 70-80% deposit approach may seem off-putting, or at least unorthodox to domestic buyers, the large initial deposits have proven attractive to foreign buyers looking to expatriate money from South America, among other places, with few questions asked. According to the Miami Association of Realtors, nearly 90% of condo buyers were foreign in 2010, and in the first half of 2013, 73% of condo resales by dollar volume were cash sales.
Illicit Use of Anonymous LLCs
Even though the vast majority of these buyers are looking for second homes or making legitimate investments in the future of the Miami market, a recent South Florida Business Journal article highlights the apparent ease with which an anonymous LLC can be utilized to deploy drug money and other ill-gotten gains into real estate. Purchasers that are more focused on laundering money than on the features of the property are more likely than other buyers to drive prices beyond the reach of domestic purchasers. While some blame money launderers for driving up prices, others, including some developers, suggest that pre-construction prices simply reflect a forecast of higher future values.
Determining Legitimacy of Potential Buyers
Developers are required to run company and managing member names through a list maintained by the Office of Foreign Assets Control, however, no other steps are required to determine the source or legitimacy of potential buyers. Although sellers, developers included, are not otherwise required to actively investigate potential purchasers, sellers are potentially exposing themselves to liability should they choose to ignore red flags that emerge from reviewing the buyer’s application and source and method of payment.
Avoiding Future Liability
Red flags suggesting a need for further diligence may include payments from unrelated third-party sources not taking an interest in the property, cash purchasers paying in actual cash, or cash buyers that have occupations raising questions about their ability to afford the unit (such as the UPS manager that paid more than $2 million to purchase several condo units referred to in the South Florida Business Journal article). Although asking fewer questions may be easier in the short term, it could lead to headaches later if a payment source or unit purchaser gets embroiled in a bankruptcy or criminal forfeiture proceeding.