In Miami, home purchases cloaked in an LLC virtually disappeared after the Treasury Department implemented this disclosure rule, though buyers were able to hide their identity through other means.
For years, home seekers in the pricey King County real estate market have been outbid by all-cash buyers who make nearly one-fourth of all home purchases here.
Those buyers sometimes hide their identity behind shell companies, making it impossible to know who outbid you. Was it a foreign investor? A home flipper? Or perhaps something more nefarious, like a criminal looking to launder money gained through illicit means?
Now, the federal government is cracking down on those shadowy deals in an effort to root out “various illicit enterprises including foreign corruption, organized crime, fraud and narcotics trafficking.”
The Treasury Department’s financial crimes unit has announced a new rule requiring all-cash buyers of homes in King County and a few other pricey markets to reveal their true identities to law enforcement when the house costs at least $300,000.
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Still, the public likely will be in the dark in many cases. In cities where the rule has already been in place, homebuyer identities were made available only to federal law enforcement, and the government has stymied attempts by journalists to gain access to the data through public disclosure requests.
The number of home purchases affected could be large: About 1 in 10 homes bought in King County is purchased through a shell company, known as an LLC, according to Redfin (although not all of those LLCs necessarily hide the identity of the buyer). The rates are generally higher among luxury homes, and on the Eastside.
Treasury’s Financial Crimes Enforcement Network, known as FinCEN, had already made shadowy buyers in Manhattan and Miami unmask themselves starting in 2016, and later added the rules in parts of the Bay Area, Southern California and San Antonio. Along with King County, the latest batch of regions covered in the disclosure requirements includes counties covering Boston, Chicago, Dallas, Honolulu and Las Vegas.
The point of FinCEN’s plan is to root out criminals laundering money through home purchases. For example, someone could steal some money, buy a home with it, and then sell the home, and voilà – the proceeds from the sale can be put into a regular bank account.
That type of criminal activity doesn’t get as many headlines here as it does in places like Manhattan and Miami (or in nearby Vancouver, B.C.), but the Seattle area remains among the most lucrative real estate markets in the country – a potentially attractive place for criminals to park their money.
“I’d like to think that maybe in some small way this could put a dent in the notion of parking or laundering money,” said John Manning, a RE/MAX broker in Ballard. “How can a normal person compete with that?”
It’s unclear why exactly the Seattle area was added to the list of enforcement areas; a FinCEN spokesman did not respond to requests for comment Tuesday. But most of the cities chosen are in high-priced real estate markets.
Under the new rules, all-cash buyers must report their identity to the title company, which has to obtain documentation of the real buyer, such as a driver’s license or passport. The title company then sends a report to FinCEN within 30 days of the home sale closing, noting the buyer’s identity and the home’s purchase price.
The directive, which took effect Saturday, runs through at least May 15, but past “Geographic Targeting Orders,” or GTOs, as FinCEN officially calls them, have been renewed.
“Previous GTOs provided valuable data on the purchase of residential real estate by persons implicated, or allegedly involved, in various illicit enterprises,” FinCEN said in a statement.
Miami’s experience
After the rules were enforced in the Miami area starting in March 2016, home purchases from secret buyers virtually disappeared, according to a study in May by the Federal Reserve Bank of New York and the University of Miami.
However, the housing market there didn’t exactly crater – there was no drop in sales or prices, and realtors reported the number of cash sales didn’t seem to change, either (although prices of high-end properties did rise 4 percent less than expected). That suggested to the study authors that secretive buyers were merely changing tactics – like using straw buyers as stand-ins or taking out a small mortgage to avoid the disclosure requirement, according to the Miami Herald.
Manning noted he once got an offer on a listing from a man clearly involved in some sort of criminal activity – someone who came forward offering to buy the home for half the price and pay the other half under the table to save on taxes.
“They didn’t even use an LLC,” Manning said. “They just used a person” who wouldn’t be the actual buyer. (The spooked sellers said no; “they had all sorts of visions of being in ‘The Godfather,'” he said.)
In some cases, however, sellers and buyers might not know who exactly is on the other side of the transaction.
How LLCs work
Most people who buy homes use a mortgage and their real name – so anyone can look up who owns a home on the internet fairly easily.
Those who use cash and want to hide their identity usually use a limited liability corporation, or LLC, which typically exists only for the transaction. They’re often named after the address of the property sold – the buyer of 123 Main St. might appear only as 123 Main St LLC.
The LLC must be registered with the state, and sometimes, they leave a trail of breadcrumbs that make it possible to track down the real buyer. But often the only name or address associated with the LLC is a lawyer or other professional who isn’t the real buyer of the home and is sworn to confidentiality.
As a result, finding out who owns a property at times can be next to impossible, even for law enforcement.
An LLC in and of itself isn’t a sign of criminal activity – it’s often used for tax purposes or for privacy. At a $76 million Medina mansion widely believed to belong to Jeff Bezos, for instance, the Amazon CEO’s name appears nowhere in official records. And his neighbor’s waterfront estate, valued at $44 million, is owned only by “Aspen Ventures LLC.”
Over on Hunts Point, a luxury home next to Steve Ballmer’s house (he used his real name) is owned by “Water & Virtue LLC.”
Earlier this year, the buyer in the priciest home sale in Washington’s recorded history was revealed to be only “Steel Gear LLC.”
The FinCEN directive covers only homes – not sales of commercial property, like apartment or office buildings – which is where LLCs are most common, usually for business reasons. And it won’t cover any homes purchased with a mortgage, or compel the owners of past shadowy purchases to reveal themselves.
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