A Venezuelan couple pulled off one of the boldest real estate frauds in American history. Today, you’ll get the background. On Thursday, you’ll hear the full story.
Lesson summary
Hi there everyone, I’m Jeff and this is Plain English, where we help you upgrade your English with current events and trending topics. Today’s lesson is a great example of how we take a story in the news and help you with the English vocabulary. The story is about a Venezuelan couple who pulled off one of the boldest real estate scams in recent history. But today’s lesson is going to help you understand the story.
Today, you’ll learn the vocabulary and concepts; on Thursday, you’ll hear the full story. So be patient with me today. You’ll be listening, thinking, “Why is he telling me this?” Trust me, you’ll want to know the background before you hear the full story later in the week.
At the end of today’s lesson, I’ll show you what it means to cook something up. If you think that has anything to do with the kitchen—you need to keep listening. You might be surprised what it means. We also have a quote of the week. Let’s get going.
Venezuelan real estate scam: the background
Most people who buy homes in the United States use a loan to help them make the purchase. The loans typically last between 15 and 30 years; the borrower—the homeowner—has to pay the loans back little by little, every month, until the end of the loan’s term.
But banks don’t just trust you’ll pay back the money: they insist on some security. Before they give you the money, they investigate you. Do you have enough income to pay the loan back? Have you met your obligations in the past? Is the home really worth what you say it is? And here’s the real security: the banks insist on a mortgage.
In simple terms, a mortgage is a legal instrument that says, if you don’t pay the loan back, the bank gets to take your house. A “title” is proof that you own an asset like a house. If you buy a house with a mortgage loan, the “title” has a little note attached to it, saying that the lender can take the title if the borrower doesn’t pay up.
Not everyone does it that way. Many homeowners pay the full price of the house upfront; they don’t deal with banks at all. If they do that, they own the house “free and clear,” meaning that no bank or other entity has any claim to the property. If you own a house free and clear, you have the option, later, of taking out a loan on the property. Let’s say you own a $500,000 house free and clear. You can later go to a bank and get a loan for, say, $300,000 and pay the loan back little by little if you want to.
If you do that, you still have to do a lot of paperwork, wait a long time, jump through hoops. But there is a small corner of the lending industry that serves people who want to get a real estate loan fast. They aren’t banks; they’re private lenders who offer what’s called “hard-money loans.”
A hard-money loan doesn’t require the kind of documentation that a traditional bank loan requires. There’s no credit check. No stacks of documents to sign. No waiting around, no lawyers. If you own a property free and clear, you can show up with your ID, prove you have the title to the house, and you can get a loan quickly.
Hard-money lending is legal, but I don’t recommend it. Interest rates are really high and there are fewer legal protections. But hard money lending is fast and easy and it doesn’t require a lot of documentation.
Here’s the second thing you need to know. American real estate is considered a safe asset for wealthy people in, say, unsafe or unstable parts of the world. Let’s say you live in China. Many people make vast fortunes in China quickly, by pleasing government officials. But if the government can help you make a fortune, the government can take it away. You want something safe, out of the reach of your country’s government.
Or let’s say you made a fortune in Argentina, where inflation is high and the currency is unstable. If you make a fortune today and put it in the bank, the value will drop quickly over time. You want something stable.
So many people decide to take millions of dollars of value from their home countries, and they buy American real estate with it—no loan required. They don’t need, or often even want, to live in the homes. Often, the homes sit vacant. The purpose is that this is a safe place to park assets. No matter what catastrophe befalls you in your home country, the real estate assets in America can’t be taken from you. It’s even safer if you put the property in the name of a family member, like kids or spouses.
New York has historically been a destination for this kind of money. I worked in New York real estate industry when investment from Chinese buyers was at an all-time high. The buyers wanted the most opulent, most luxurious units—the more expensive, the better . The purpose wasn’t to live in luxury. Sometimes, the buyers never even opened the door. The purpose was to store their fortunes in a safe place outside of China, just in case .
Miami is the same way. It’s considered a safe and stable place to store wealth, especially for people who have made their fortunes in Latin America. The dynamic is a little different, however. Speaking in generalities, Latin American investors like to also use their units from time to time ; being able to spend part of the year in Miami is a luxury and a status symbol to many in Latin America.
And a number of people connected to the corrupt and dictatorial Venezuelan government decided to store their own personal wealth in Miami real estate. Their money is safer in Miami than it is in the system these individuals administer in their own country, after all .
This didn’t seem fair to Carlos Castañeda and Genesis Martusciello. Like many Venezuelans, they fled their country years ago to settle in the United States. But they soon started learning about real estate, mortgages, and hard-money lending. And they cooked up a scam for the ages. I’ll tell you the details on Thursday.
Strange bedfellows
Living in New York at that time was strange. They were building these huge, supertall skinny skyscrapers full of luxury units. And you’d look up at them at night and they’d be dark. Even after all the units were sold, you’d only see lights on in half or fewer of the units. Nobody would be home—nobody was living there. They bought these apartments in—some say—the best city in the world, and they never walked through the front door. Or they would just go once in a while.
And it made for strange bedfellows, too. You’d have CEO’s of corporations, athletes, celebrities, investors, doctors, living in the same building as shady Russian and Chinese characters trying to shield their money.
Meanwhile, the people who were living in New York were searching high and low for an affordable place to live, surrounded by vacant units. It was weird.
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