Eddy Kauffmann, a recently retired banker from Zurich, Switzerland, read about South Florida’s foreclosure crisis at the peak of the U.S. recession and saw foreclosure signs planted on lawns when he and his family regularly vacationed in Miami.
He never imagined the foreclosure crisis could one day be his ticket to becoming a U.S. resident.
Two weeks ago, the U.S. Citizenship and Immigration Services approved his application to become an investor in the Miami-based TSG Capital Group, which buys foreclosed homes in Miami and Broward counties, fixes them up, rents them out and then flips them.
In exchange for his investment, he, his wife and two young children could be on their path to citizenship.
“It is mostly an investment that gives you the opportunity to hopefully receive a green card,” said Kauffman, who waited nearly a year for immigration regulators to approve the TSG project as an EB-5 investment opportunity for foreigners and his visa.
Since the recession, many developers have tried to use the EB-5 visa program to attract foreign capital to compensate for the lack of construction financing by banks. But this is one of the first South Florida cases where EB-5 capital is going to finance a company’s business plan to buy and flip distressed homes, according to several sources.
TSG plans to buy 40 homes — ranging in value from $30,000 to $50,000 — a month for the next two years, said RJ de Varona, chief operating and financial officer and managing director of The Solution Group, which owns TSG.
He estimates banks will continue to dump distressed houses onto the market for at least two more years, clearing a backlog of properties now in the foreclosure or short sale process.
He is targeting properties in struggling areas like Florida City, Goulds, Naranja, Miami Gardens, Hialeah Gardens and Opa-locka.
It looks TSG would have plenty of properties from which to choose. Miami-Dade has about 4,500 homes in various stages of foreclosure, up from 2,715 a year ago, according to RealtyTrac. Broward has about 2,700 distressed homes, up from about 2,000 a year ago.
Coral Gables real estate consultant David Dabby agrees the inventory of distressed houses will remain high and prices low in communities with lots of foreclosed properties for the next couple of years. He also expects appreciation of those properties will be almost nonexistent in the next several years. Yet, TSG’s strategy to sell the homes with a tenant in place makes financial sense, Dabby said.
“The only way to make money in this environment is a combination of buying below market and renting them out for a respectable return on the investment,” he said. “That’s where the money is: the rent. People are getting like 15 percent, 10 percent return on their cash-on-cash investment.”
Varona said The Solution Group often buys distressed homes for under $60,000 and rents them for at an average monthly rate of $1,050.
Since the Solution Group was created in late 2008, the company has bought about 1,200 distressed homes and flipped nearly 1,000. The company now provides management services for most of the buyers turned landlords.
12 investors sought
Varona wants 12 EB-5 investors to loan $500,000 each to TSG, which would return the money in five years at 5 percent interest.
So far, Kauffmann is TSG’s first and only investor, with a few others going through the approval process with immigration regulators, Varona said.
“We are raising $6 million,” he said. “It is cheap money.”
If TSG were to get traditional financing from a bank, it would have to pay a lot more in interest.
“We provide very inexpensive money for them,” Kauffmann said. “They would never get this kind of money from a bank at such low interest rate. These are risky programs so banks wouldn’t lend money to them below 12 to 15 percent.”
Kauffmann said he looked at other EB-5 projects that involved building a hotel and other commercial properties. He decided to go with the program that looked less risky.
“One of my prime interests is the safety and preservation of capital because you don’t get much return on those investments, anyway,” he said.
Kauffmann is betting his future in this country on the success of TSG, which is required by immigration regulators to create and maintain 172 jobs within the next two years. If TSG does it, Kauffmann and his family’s temporary U.S. residency would become permanent and in a few years the family could apply for citizenship.
Immigration attorney Enrique Gonzalez III, who is not involved with TSG, said he hasn’t heard of any other similar EB-5 program that targets distressed residential real estate.
“Most of the EB-5 programs you see are tied to construction,” said Gonzalez, a partner with Fragomen, Del Rey, Bernsen & Loewy in Coral Gables. He represents foreign investors looking for EB-5 opportunities across the country.
One of South Florida’s most prominent projects using this type of financing is the planned Margaritaville Hollywood Beach Resort. However, developer Lon Tabatchnick is struggling to raise money from Chinese investors quickly enough to meet deadlines imposed by the city of Hollywood, which owns the land. In that project, foreign investors are to become equity owners, instead of providing a loan like Kauffmann is doing.
The downside of dealing with EB-5 investors is the long time it takes for a developer or a company like TSG to have access to the investors’ money, Gonzalez said.
First they have to line up investors; then, the investor has to go through a lengthy immigration approval process, he said.
“You are usually looking at about a year,” he said. “So not every project can wait a year to start” unless they get a bridge loan until the foreign capital arrives.
TSG recently hired Aventura broker Philip Spiegelman to help find EB-5 investors as well as buyers for the repositioned houses.
Spiegelman, founder and chairman of the International Sales Group, said the task isn’t hard because his company has tapped into a new group of South Americans that was absent during the housing boom.
One of those groups consists of Argentine farmers who have become wealthy exporting soy beans and other crops to China and other large world economies.
Spiegelman and his team has begun to go to some agricultural trade shows in Argentina to establish relationships.
“The economy in Latin America has created new wealth to a whole new group of people,” he said. “Some have more money than they know what to do with.”
Spiegelman said farmers understand numbers, so when he tells them they can buy a rented home in the U.S. that would generate more return than money in the bank, they listen.
“They get it,” he said. “The math is not that hard. For example, they buy a turnkey home with a tenant in it for $84,000 and after subtracting the expenses to the rental income, they make between 6 percent and 8 percent in annual return.”