Wednesday, September 07, 2016

Recognizing someone who is overleveraged

It is well known that most people who dabble in real estate tend to be asset rich and cash poor. This comes with the territory so to speak, when you invest in land you are always investing long term and the ROI tends to be small. Just ask anyone who flips property for living. When the house sells it is a big bonanza, but until then you are house poor.

In this situation (like any other kind of "farmer") you are living by borrowing money from others. And in that situation it is extremely easy to get in over your head. Essentially for a real estate person this means borrowing significantly more than your asset structure can directly support.  When you see a real estate developer shopping their brand - then you know they are overleveraged, they need to raise money but can't afford to add to their debt, so they let others use their brand to court investors but then don't hold any of the actual risk. Their only reward in this transaction is a small brand fee.

From the perspective of the lender, loans to real estate developers are extremely high risk. No real bank wants to lend money to such people. This creates a unique market opportunity for underworld financiers who seek to launder drug money through real estate channels. From the perspective of the underworld lenders, they are not interested in the success of your business venture, you are merely a bank account to shelve the illegal profits of narcotics and arms trading in. Their whole objective is to screw you out of as much interest as possible and move as much money as possible via your bank accounts. The bigger and more grandiose the project - the better off the underworld lenders are.

I was not aware of this kind of thing until the murderous cycle in 1992-1993 in Bombay. A real estate price fluctuation shook the foundations of the city and in the ensuing melee thousands lost their lives. On the outside this exercise in mass murder took on the accouterments of a religious war but deep down inside it was a battle between real estate mafias that literally bled out of control. I would not have known about it had it not been for a chance conversation with a relative who was a police officer at the time, what he told me - opened my eyes to what was really going on. Since then - I have never seen the world in the same way. That was a true visvaroopa darshana if ever such a thing can happen.

When a candidate does not release his tax returns, uses front organizations to move money around, has a lot of LLCs, carries numerous allegations of fraud, and has a history of failing audits - the natural thought is - where is the money coming from. When you add real estate partnerships with people who have criminal convictions and a history of fronting money for underworld channels - you get a sense of what this candidate is really about.

Such a candidate is usually up to their neck in debt (i.e. massively overleveraged), and the collectors are close by with very sharp knives. This deep knowledge of the personal risks that one is carrying is so disturbing that the candidate flips between totally sane and completely insane in the blink of an eye. No position is held for any length of time as the candidate constantly shifts to align with whichever way the wind is blowing.

To such a candidate the election is merely a cash-cow. Money is to be taken from the hands of the stupid, and funneled into ones' own pockets. And what enters the pockets from one side usually leaves the carefully constructed hole in the bottom where the underworld moneylender's hand stands ready to pick up what it is owed.

Beware the candidate who seems to be too well-off - for chances are - things are the opposite of what they seem.

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