Friday, February 16, 2007

Boom Turns to Bust

Another sad example of a crazed real estate market and buyers and investors who are uneducated about the risks of investing in real estate…

By Alex Frangos From The Wall Street Journal Online
The condominium boom that ended last year made a lot of developers very rich. Aleem Hussain, a journeyman property salesman with a winsome personality, wanted to be one of them.
He formed his real-estate company in 2004, calling it Main Street USA, after a nearby Disney World attraction. He bought a complex of 27 aging, two-story apartment houses in Orlando and set out to convert them into condos. His timing looked favorable. That year, for the first time, the average price of a condo in the U.S. exceeded that of a single-family home, and in the Orlando area, condo and house prices jumped 15%.

But not much has gone as planned for Mr. Hussain, 42 years old, nor has it for his hundreds of investors, who include a bunch of local sheriff's deputies. Today, Mr. Hussain's company is being liquidated by a federal bankruptcy court, and he is residing in the Seminole County jail, charged with 23 counts of federal mail and wire fraud.

Mr. Hussain's rise and fall illustrates one of the hazards of a frothy property market: inexperienced developers get in over their heads and drag unsophisticated investors down with them. "Schoolteachers, cops, doctors, priests, everyone thought they were Donald Trump," says Lewis Freeman, the court-appointed trustee administering Main Street's bankruptcy proceeding. Mr. Hussain's company, he contends, was a "microcosm of the total market. You had a lot of unqualified people getting easy money and able to go into businesses in which they didn't know what they were doing."

Mr. Hussain's 300 or so investors face potential losses of up to $400,000 apiece. Alan Cayo, 76, a retired Army officer who says he invested his "entire life savings" of $280,000 with Mr. Hussain, conjectures that the developer crossed the legal line only after financial problems began mounting. "It was incompetence, fraud, plus the market going down -- a triple whammy," he says.

Mr. Hussain's lawyer, James Lenihan of White Plains, N.Y., describes his client as "someone with good intentions who made bad judgments and got overextended." He says others at the company were also responsible for what went wrong. Mr. Hussain has pleaded not guilty.
Mr. Hussain was born in the South American nation of Guyana in 1964, according to a résumé recovered from his computer by investigators. In the 1980s and 1990s, he worked in real-estate sales in Pennsylvania, New Jersey and Costa Rica.

When he settled in Orlando about three years ago, the city was the epicenter of a national boom of conversions of rental apartments to condominiums. In 2005 and 2006, 24,550 apartments in the Orlando metro area, or 18% of the total in 2004, were taken off the rental market to convert, a greater number than in any other metropolitan area in the U.S., according to Reis Inc., a New York real-estate information firm.

The converters were attracted by rising prices. Between 2001 to 2004, the median resale price of existing condos nationwide jumped 57%, compared with a 25% increase for single-family houses, according to the National Association of Realtors. Real-estate experts say demand was boosted by baby boomers downsizing their homes upon retirement, and young people who were moving to cities. In addition, investors who had soured on the stock market had begun buying and selling condos.

Mr. Hussain envisioned Main Street USA, which is located south of Orlando near Gatorland amusement park, as a residential real-estate conglomerate. Its main business would be condo conversions. He and his partners formed "No-Fee Realty" to broker condo sales, and two subsidiaries, "USA Mortgage" and "Main Street USA Mortgage," to broker mortgages and home-equity loans, in some cases to enable property owners to invest in condos.
Former associates describe Mr. Hussain as charismatic and beguiling. He would demonstrate for employees his formidable sales skills by buttonholing potential home-financing customers at supermarkets and persuading them to fill out applications, which involved disclosing their Social Security numbers, recalls former employee Michael Lombardo.

To build trust with the local real-estate community, he took on a partner, Alan Randel, a real-estate broker who had worked in the area for several decades. Mr. Randel, the company's president, hasn't been charged in the case and declines to comment.

First, Mr. Hussain had to raise money to buy apartment buildings. His pitch to investors: Main Street would buy properties, convert them into condos, then sell them at a profit. He said he would set up a private real-estate investment trust to help finance the deals. Investors in the REIT, he said, would get steady, attractive dividends. Those who wanted higher, quicker returns, he said, could co-invest directly in the conversion projects.

In early 2005, he recruited Bernard Presha, who was retiring as public-information officer for the Orange County Sheriff's Department, to join as a vice president in charge of recruiting investors. Mr. Presha and others persuaded at least 10 sheriff's deputies to invest, according to bankruptcy-court documents. Jim Hanton, one of the deputies who invested, was put on a $25,000-a-year retainer. Bryan Margeson, a sheriff's department employee who taught criminal justice at a local community college, introduced Mr. Hussain at investment seminars and talked about how he thought Orlando's boom would continue for years.

Mr. Presha, who has filed a bankruptcy-court claim to recoup $305,000 he invested, says he quit after a couple of months because he wasn't good at persuading investors. Mr. Margeson, who says he lost $100,000, says Mr. Hussain "used me for some credibility, which I didn't realize they lacked."

"Jim [Hanton] said being a drug-enforcement cop, he was super skeptical when his wife suggested they invest," says Mr. Cayo, the retired Army man. "But after a luncheon with Aleem, he was convinced." Mr. Cayo says Mr. Hanton's involvement reassured him. "He was Anglo -- excuse me, but Aleem Hussain could be cousins with Saddam Hussein, so having Jim involved" was comforting.

Mr. Hanton, Main Street's vice president of operations, says he wasn't involved in condo sales or in company finances. He says he lost $130,000, and calls the situation "embarrassing."
In August 2005, Mr. Hussain held a dinner for prospective investors at the Citrus Club, an elite private establishment. According to several who attended, he projected a 100% return in 120 days or less for those who invested directly in a Main Street project.
Magic Marketing Deal

That summer, Mr. Hussain cut a deal with the Orlando Magic, the National Basketball Association franchise. For $350,000, Main Street secured the right to use the team's name in advertising, and to use head coach Brian Hill in a marketing video. Fans could register on the Magic's Web site to attend Main Street investment seminars at the team's practice facility. Attendees could spin a raffle wheel for a shot at free game tickets.

An Orlando Magic spokesman describes the pact as "a traditional team marketing agreement," and says the video was one of 20 the head coach recorded one day for various sponsors. He says the team conducts reference checks on its marketing partners and has never had a problem before.

Mark Pilkington, a counterterrorism official at the sheriff's department who invested $300,000, says the Magic marketing deal reassured him. "We realized there was a frenzy in condos. They were selling like crazy," he says. "I figure, why would he rip me off for $300,000 if he's involved with the Magic?"

In September 2005, with $10 million from about 200 investors, Mr. Hussain moved to buy the 27 apartment houses known as Waldengreen. The complex contained 278 units ranging in size from 517 to 1,079 square feet. His $18.5 million winning bid, financed by a private lender, was a "damn good price for the seller," says Hal Warren, senior director with brokerage Cushman & Wakefield Inc., who represented the South Florida investors who sold. Nevertheless, Mr. Hussain figured he'd turn a substantial profit. He paid $67,000 per unit; he intended to sell them for an average of $150,000.

Mr. Hanton, the sheriff's deputy, alerted him to an 18-acre lakefront estate for sale in Winter Garden, which county records show was owned by Khalil bin Laden, a brother of Osama bin Laden. Mr. Hussain planned to refurbish the Spanish-colonial-style mansion and to add houses, condominiums or stores on the grounds, company documents indicate.

Before Mr. Hussain and a business partner left for Dubai, where the two sides planned to finalize the deal, the company had lined up financing for a $5 million bid, says Jim O'Neil, a former Main Street mortgage processor. In Dubai, after being persuaded by the seller that values had risen, Mr. Hussain agreed to pay $7 million. "We gave Aleem a line not to go over and he jumped over it," says Mr. O'Neil.

Mr. Hussain began renovating the apartment complex, which he renamed Villas at Waldengreen, and his sales team began peddling the planned condominiums. Prospective buyers were invited to seminars conducted by Messrs. Hussain and Margeson of the sheriff's department.

Anthony Cortes, an airline mechanic and father of two, says Mr. Hussain and a retired sheriff's deputy made him an attractive offer: If he put 10% down to buy a condo at Waldengreen, Main Street would make his mortgage payments for two years during the renovations. In February 2006, Mr. Cortes put $14,000 down for a $140,000 unit and took out a mortgage for the rest.
Linda Paralitici, a 50-year-old mother of five who worked for Main Street as a sales broker, bought one unit and persuaded her brother to buy one. "We were not allowed to see the property," she says.

Lack of Experience

Inside the company, Mr. Hussain's lack of experience was showing. Former employees say the operation was disorganized from day one. "The whole thing was a disaster," says Mr. Lombardo, the former employee, who was hired to originate mortgage loans even though he had no experience at it. Piles of mortgage applications by condo buyers who had put down $5,000 deposits, he recalls, languished on the desks of co-workers who were supposed to find financing.

In 2005, signs began emerging that the flood of new condominiums was more than the market could bear. That July, price appreciation for condos nationwide slipped below that of single-family homes. Converters stopped purchasing new properties and smart speculators got spooked.

Main Street sold only 100 of Waldengreen's 278 units. Renovation was haphazard, former employees say. Rather than try to move renters out of one building at a time to allow for the conversions, Main Street tore apart single apartments all over the complex. Several contractors quit because they weren't paid.

Buyers who were told that Main Street would cover two years of mortgage payments began hearing from their lenders that they were in danger of default. Mr. Cortes says he took a second job as a home inspector to take on the $1,200 monthly payment on his unit.

When Colleen Sharkey joined Main Street as a senior vice president in mid-2006, she says, Mr. Hussain told her: "I need to hire you because we've grown so fast and I have no credibility with the bankers and business community." It took her three weeks to understand the books, which were a mess, she says. She says she concluded the company was nearly bankrupt.

By August, the company was out of cash, bankruptcy-court documents indicate. It had lost $3.6 million in deposits on two other apartment complexes it had tried to buy. Dividend payments to the REIT investors, which had been steady, stopped. On Sept. 23, several of those investors confronted Mr. Hussain at Main Street's offices, according to a claim one of them filed in bankruptcy court, and Mr. Hussain responded by writing on a legal pad: "It is our intention to repay all principal investment and interest promised to the above referenced clients at such time as we refinance or sell our assets to provide the necessary funds to accomplish this."
On Sept. 29, Main Street sought bankruptcy-court protection in Orlando. By then, several investors, including some sheriff's deputies, had contacted federal prosecutors to report that REIT dividend payments had stopped and that Mr. Hussain had refused to return their original investments, as promised by the investment documents.

In October, Mr. Hussain rented a car and drove to Atlanta to catch a flight to Costa Rica. U.S. Marshals, alerted by federal investigators in Orlando, met him at the gate and arrested him.
A federal grand jury indicted him on 23 counts of mail and wire fraud. Among the accusations: He falsely represented to investors that their money would be kept in the REIT, when in reality there was no REIT and the money sat in a checking account. And he told investors their dividend payments came from investment profits, when he actually was paying them from money invested by others.

Investigators also say Main Street sold condos at inflated prices to Mr. Hussain's friends or relatives to generate misleading appraisals that justified the higher prices paid by outside buyers.

Mr. Hussain's lawyer, Mr. Lenihan, says his client wasn't trying to flee the country, but was going to Costa Rica and Nicaragua for business and charity purposes. He argues that prosecutors have singled out his client, in part because of his Middle Eastern sounding name, when others at the company were also responsible. "This thing was not set up as a scheme to defraud people," he says. "This is what happens to good people with a good idea and lousy timing who get into trouble." Mr. Hussain's trial is scheduled for April.
Investors and others have filed $19 million of claims in bankruptcy court. Mr. Cayo says he has defaulted on the three condos he bought because broken pipes have made them unrentable. Mr. Cortes continues to make payments on his unit.

The Waldengreen complex, which fell into disrepair last fall, has been taken over by the group that financed Main Street's purchase of it. A new manager has been hired and the units are once again for rent.

The company's remaining assets are being liquidated by the court. It is unlikely that investors will recoup much of their money, according to several people involved in the case.
Mr. Margeson, the sheriff's deputy, refers to the affair as his "$100,000 lesson." He notes that he "never saw people strong-armed to invest. The sad part is people lined up to invest their money. It was the whole furor of the real-estate market."

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