The U.S. Treasury Department announced Wednesday that it is expanding its investigation into certain residential real estate purchases after initial findings pointed to possible criminal activity by wealthy buyers.
In March, the Financial Crimes Enforcement Network (FinCEN) began requiring U.S. title insurance companies to identify the principals behind shell companies used in all-cash purchases of homes priced at more than $3 million in Manhattan and $1 million in Miami-Dade County.
The measure, FinCEN said in a release, was meant to address concerns about “individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures.” It was to expire on Aug. 27.
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Now, the government has expanded the temporary rules to the remainder of New York City, as well as to Broward and Palm Beach counties in Florida; San Diego, Los Angeles, San Francisco, San Mateo and Santa Clara counties in California, and Bexar County in Texas, which includes San Antonio.
“The information we have obtained […] suggests that we are on the right track,” FinCEN acting director Jamal El-Hindi said in a statement. “By expanding the [Geographic Targeting Orders] to other major cities, we will learn even more about the money laundering risks in the national real estate markets, helping us determine our future regulatory course.”
The new rules will take effect Aug. 28 and run through Feb. 23, 2017.
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Under the new order, title insurance companies will have to reveal the identity of individuals behind shell companies that purchase properties worth more than $1.5 million in the New York City boroughs of Brooklyn, Queens, Bronx and Staten Island; more than $1 million in the two Florida counties; more than $2 million in California and more than $500,000 in Texas.
Florida is the most popular market for foreign buyers in the United States, representing 22% of international home sales from April 2015 to March 2016—more than any other state—according to a report released this month by the National Association of Realtors (NAR). California and Texas are the second and third favorite most popular states among foreign homebuyers, with 15% and 10% of all international sales, respectively.
Cash sales are preferred by many foreign buyers looking to invest in U.S. real estate. More than 70% of international purchasers paid cash for residential real estate in the 12 months that ended in March, according to NAR, and 10% bought properties worth $1 million or more.
Home sales paid in cash accounted for 31.6% of all transactions in April, 1.6% fewer than in March, when the initial probe began, and a 2.8% decrease from the same month last year, according to data released by CoreLogic on Wednesday. Between January and April, the share was 33.9%, the lowest start for cash sales since mid-2008.
But Leonard Steinberg, president of real estate firm Compass in New York City, doesn’t foresee much fallout from the growing federal investigation.
"I don't expect that the expanded LLC disclosure laws will have a great impact on the overall luxury housing market,” he said. “These disclosure laws have already been in effect for some time in NYC and in Miami, and people continue to purchase in LLCs at all sorts of price points, especially celebrities and high-profile buyers who have legitimate privacy concerns."