Death of Korea's 'apartment king' leaves 100s in property purgatory
January 21, 2023 3:19 PM Subscribe
An audacious gamble using a real estate trick possibly unique to Korea failed to pay off for one man, leaving hundreds of tenants in legal limbo and unable to get their hands on massive deposits they put down for the privilege of living rent free for two years. Anthony Lee Zhang (Assistant Professor of Finance at the University of Chicago) explains the jeongse system on Twitter and Substack.
"It all works if real estate prices keep rising"
Right.
posted by Marky at 5:57 PM on January 21, 2023
Right.
posted by Marky at 5:57 PM on January 21, 2023
How dead is this guy, I wonder?
posted by Countess Elena at 7:02 PM on January 21, 2023 [3 favorites]
posted by Countess Elena at 7:02 PM on January 21, 2023 [3 favorites]
Some further background on jeonse from KoreanLII.
This puts an exclamation point on the ongoing Korean real estate crisis, and is obviously very scary and potentially tragic for a lot of people. But on a more trivial level I'm sad that this is how this distinctive Korean legal institution gets introduced to the world.
Anyway, the Joongang Daily article seems to be a bit confused/confusing. The term is actually "villa king" (빌라왕) (I guess the readers of a English-language Korean newspaper can't be expected to have any familiarity with Korean real estate terminology?) And also there are a number of them, more than one of whom has recently died. And also there is apparently a substantial organized crime angle and many of these "villa kings" may have just been front people. This Korean-language article on NamuWiki has a somewhat better overview, although I'm still not quite sure I understand what's going on.
posted by Not A Thing at 7:08 PM on January 21, 2023 [13 favorites]
This puts an exclamation point on the ongoing Korean real estate crisis, and is obviously very scary and potentially tragic for a lot of people. But on a more trivial level I'm sad that this is how this distinctive Korean legal institution gets introduced to the world.
Anyway, the Joongang Daily article seems to be a bit confused/confusing. The term is actually "villa king" (빌라왕) (I guess the readers of a English-language Korean newspaper can't be expected to have any familiarity with Korean real estate terminology?) And also there are a number of them, more than one of whom has recently died. And also there is apparently a substantial organized crime angle and many of these "villa kings" may have just been front people. This Korean-language article on NamuWiki has a somewhat better overview, although I'm still not quite sure I understand what's going on.
posted by Not A Thing at 7:08 PM on January 21, 2023 [13 favorites]
It's almost as though any system that allows you to leverage the value of the thing you're buying AS COLLATERAL FOR THE LOAN FOR THE THING, should be outlawed entirely. (Unless you're planning to live in the thing you're buying; that feels different)
There. Now we've solved the Great Depression, this Korean property clusterfuck, and Elon Musk's Twitter shitfuckery, all in one fell swoop.
posted by Mayor West at 8:07 PM on January 21, 2023 [10 favorites]
There. Now we've solved the Great Depression, this Korean property clusterfuck, and Elon Musk's Twitter shitfuckery, all in one fell swoop.
posted by Mayor West at 8:07 PM on January 21, 2023 [10 favorites]
This KBS World article may give a better overview: Key Figure in 'Jeonse' Rental Scandal Arrested
The Seoul Central District Court issued an arrest warrant on Friday for the man in his 30s, surnamed Shin, on fraud charges, citing the risk of flight and potential destruction of critical evidence.posted by Not A Thing at 8:24 PM on January 21, 2023 [2 favorites]
[....]
The police have secured testimony that there are a number of such landlords dubbed “villa kings” who have engaged in similar fraud schemes on orders from Shin, who investigators believe has managed some three-thousand units across the country with these landlords working for him.
I'm guessing the ability to continue living rent free while things are figured out is not worth not getting the deposit back.
This creates an interesting comparison with the French viager. It's interesting seeing how other cultures deal with property rights.
posted by ockmockbock at 8:42 PM on January 21, 2023 [1 favorite]
This creates an interesting comparison with the French viager. It's interesting seeing how other cultures deal with property rights.
posted by ockmockbock at 8:42 PM on January 21, 2023 [1 favorite]
This is a real serious problem for the people stuck it in; renting in Korea is not like renting in the US. 90% of rental housing works on schemes like this requiring a huge upfront payment. The benefit is that the landlord invests the money and gets the dividends for the time of the rental period. Whole families put their savings into getting a rental housing for a family member who needs it to attend college or do an entry level job or get established as a family, on the idea that the family gets it back after a set number of years and can reinvest in another member or use it for granny’s retirement, and that the person who benefited will add to the family kitty as they make their way in the world. One guy in the article is owed $192,000 USD from his dead landlord (237 million won). If a person does not have $190,000 additional dollars to obtain a new place while this is legally worked out they are likely unable to be able to find anywhere else to live. I do disagree with this economic Ponzi scheme , am kind of amazed that it’s taken this long for someone to exploit it like this and have such a failure, but also sympathize with those trapped.
posted by holyrood at 9:38 PM on January 21, 2023 [18 favorites]
posted by holyrood at 9:38 PM on January 21, 2023 [18 favorites]
Wow, I love metafilter.
posted by Jody Tresidder at 4:17 AM on January 22, 2023
posted by Jody Tresidder at 4:17 AM on January 22, 2023
A shame this scheme isn't explained in this thread yet, because it's genuinely quite interesting, I'll summarize from one of the links.
Basically as a tenant in Korea you have two choices.
- pay $10,000 in rent per year for the period of your stay
- lend the landlord $200,000 for the period of your stay (aka refundable deposit)
At an average interest rate of 5%, both these options are mathematically equivalent - if you had $200,000, you could put that money in the bank and it would earn $10,000 and you could use that to pay the rent, or you could just lend that $200,000 to the landlord in exchange for living rent free in their building.
However, I suspect this scheme exists because it allows renters and landlords to cut out the bank's middleman margins. Banks aren't going to issue a mortgage for 5% and also have a savings deposit pay 5%. Banks usually have 3-4% spread, so they'll lend money on a mortgage for 7%, but only pay 3% for a savings account or term deposit.
This means that normally the landlord would need to pay 7% interest to get a mortgage to buy property, and a saver (renter) would only get 3% interest from the money they put in their savings account.
By using this scheme, both the renter and landlord improve their position by 2% by cutting out the middleman...
I've been somewhat tempted to do this with family, say if I had $200,000 cash, which would only earn 3% in a high interest savings account - and worse, it gets taxed, so more like 2%, and my family member was paying a mortgage of 6%, well, I could just "lend" them the money for a few years and we'd pocket $8,000 per year by cutting out the bank, split that $4,000 each way.
But as they say, you rarely get money for free. You get higher returns, but also higher risk... as these renters and landlords found out as property prices began to fall.
posted by xdvesper at 4:53 AM on January 22, 2023 [11 favorites]
Basically as a tenant in Korea you have two choices.
- pay $10,000 in rent per year for the period of your stay
- lend the landlord $200,000 for the period of your stay (aka refundable deposit)
At an average interest rate of 5%, both these options are mathematically equivalent - if you had $200,000, you could put that money in the bank and it would earn $10,000 and you could use that to pay the rent, or you could just lend that $200,000 to the landlord in exchange for living rent free in their building.
However, I suspect this scheme exists because it allows renters and landlords to cut out the bank's middleman margins. Banks aren't going to issue a mortgage for 5% and also have a savings deposit pay 5%. Banks usually have 3-4% spread, so they'll lend money on a mortgage for 7%, but only pay 3% for a savings account or term deposit.
This means that normally the landlord would need to pay 7% interest to get a mortgage to buy property, and a saver (renter) would only get 3% interest from the money they put in their savings account.
By using this scheme, both the renter and landlord improve their position by 2% by cutting out the middleman...
I've been somewhat tempted to do this with family, say if I had $200,000 cash, which would only earn 3% in a high interest savings account - and worse, it gets taxed, so more like 2%, and my family member was paying a mortgage of 6%, well, I could just "lend" them the money for a few years and we'd pocket $8,000 per year by cutting out the bank, split that $4,000 each way.
But as they say, you rarely get money for free. You get higher returns, but also higher risk... as these renters and landlords found out as property prices began to fall.
posted by xdvesper at 4:53 AM on January 22, 2023 [11 favorites]
Prof. Zhang has lots of interesting and erudite things to say about jeonse, but it feels like a bit of a mismatch given what we know now -- this wasn't a matter of some ambitious investor getting over their head, but a wide-ranging criminal conspiracy using these "investors" as fall guys. This Korean-language article from early January, although already somewhat dated, has some useful info on the mechanics of how this worked.
If I'm understanding the gist of the scam correctly, it goes a little something like this:
1. Scammer forms real estate brokerage company.
2. Scammer finds some mortally ill and intellectually disabled guys to "buy" and "own" some low-rise apartments ("villas") (which being smaller and cheaper than high-rises, will tend to attract less scrutiny).
3. Through the real estate brokerage, Scammer inflates the required deposit to as much as 150% of the purchase price, and finds people desperate for housing who are able somehow to come up with those payments. Because of the high deposit-to-value ratio, these deposits don't qualify for insurance (thus again guaranteeing little scrutiny or recourse).
4. Scammer pays the builder for the buildings and walks away with the remaining cash.
5. The dying guys (who are legally on the hook as the "owners") die before any of the jeonse deposits come due, leaving everyone in legal limbo and creating a sufficient cloud of confusion that Scammer can keep on scamming.
Minus the particulars of jeonse, this is a pretty familiar type of scam, except that in most other places I would expect Scammer to use a shell company (and perhaps a fall-guy manager) rather than an actual shell person. (I believe this may have to do with the skepticism of the Korean courts about shell companies, but I don't know for sure.)
posted by Not A Thing at 8:21 AM on January 22, 2023 [7 favorites]
If I'm understanding the gist of the scam correctly, it goes a little something like this:
1. Scammer forms real estate brokerage company.
2. Scammer finds some mortally ill and intellectually disabled guys to "buy" and "own" some low-rise apartments ("villas") (which being smaller and cheaper than high-rises, will tend to attract less scrutiny).
3. Through the real estate brokerage, Scammer inflates the required deposit to as much as 150% of the purchase price, and finds people desperate for housing who are able somehow to come up with those payments. Because of the high deposit-to-value ratio, these deposits don't qualify for insurance (thus again guaranteeing little scrutiny or recourse).
4. Scammer pays the builder for the buildings and walks away with the remaining cash.
5. The dying guys (who are legally on the hook as the "owners") die before any of the jeonse deposits come due, leaving everyone in legal limbo and creating a sufficient cloud of confusion that Scammer can keep on scamming.
Minus the particulars of jeonse, this is a pretty familiar type of scam, except that in most other places I would expect Scammer to use a shell company (and perhaps a fall-guy manager) rather than an actual shell person. (I believe this may have to do with the skepticism of the Korean courts about shell companies, but I don't know for sure.)
posted by Not A Thing at 8:21 AM on January 22, 2023 [7 favorites]
Interesting! This sounds similar to the way people rent apartments in Bolivia. There it is called Anticretico. In Bolivia the tenants probably would be legally entitled to keep the apartments.
posted by EllaEm at 11:07 AM on January 22, 2023 [6 favorites]
posted by EllaEm at 11:07 AM on January 22, 2023 [6 favorites]
Oh, super neat! Now I really want to read a comparative analysis of jeonse and anticrético.
A thread on Proz leads me to the now-obsolete concept of the "Welsh mortgage", which appears to be an implementation of a very similar concept under the common law tradition, and which enjoyed a brief vogue (maybe mostly in Irish law?) in the 19th century, but was almost entirely obsolete by the 20th.
I wonder if all of these arrangements might share a common historical background of a period in which housing was scarce and landowners were extremely cash-poor (in Korea's case maybe two such periods, as there are cases on jeonse going back to at least 1912 but it seems to have really taken off after the Korean War). Exactly what caused it to stick around in some places and not others would be an interesting question.
posted by Not A Thing at 2:11 PM on January 22, 2023 [4 favorites]
A thread on Proz leads me to the now-obsolete concept of the "Welsh mortgage", which appears to be an implementation of a very similar concept under the common law tradition, and which enjoyed a brief vogue (maybe mostly in Irish law?) in the 19th century, but was almost entirely obsolete by the 20th.
I wonder if all of these arrangements might share a common historical background of a period in which housing was scarce and landowners were extremely cash-poor (in Korea's case maybe two such periods, as there are cases on jeonse going back to at least 1912 but it seems to have really taken off after the Korean War). Exactly what caused it to stick around in some places and not others would be an interesting question.
posted by Not A Thing at 2:11 PM on January 22, 2023 [4 favorites]
So here's what I don't understand. If I can afford a $300,000 deposit to rent a $400,000 house, as in the substack example, why can't I just get a mortgage to make up the difference and buy a similarly priced house? Or find a somewhat cheaper house to buy outright? Is there something about the South Korean housing market or banking situation or something that makes that impossible?
posted by nebulawindphone at 3:09 PM on January 22, 2023 [2 favorites]
posted by nebulawindphone at 3:09 PM on January 22, 2023 [2 favorites]
The paper linked from the Substack (PDF) sheds some light on that:
posted by Not A Thing at 4:14 PM on January 22, 2023 [2 favorites]
Chonsei arrangements are popular partly due to the fact that the residential mortgage market in Korea is unusually underdeveloped: mortgages have very short terms, and loan-to-value ratios generally below 40%. It is common for tenants to fund Chonsei deposits by borrowing from banks; thus, Chonsei arrangements essentially involve tenants making interest-free loans to landlords in lieu of paying rent.In other words, if you're a typical jeonse tenant, you probably can only "afford" a 300k deposit by virtue of taking out a loan with a very short (probably two-year) repayment term, which wouldn't work for purchasing. You might get that loan from a bank, but banks want insurance and you aren't going to get insurance on >70% deposit-to-value, so if you're like the victims in this case you're probably getting it from other sources. Which could leave you in a pretty desperate situation if you can't get your deposit back.
posted by Not A Thing at 4:14 PM on January 22, 2023 [2 favorites]
Apparently this concept, which is also called "Antichresis", has ancient roots, and might be related to bans on usury in both Judaic and Christian countries?
Basically, this is a way of borrowing money/renting property for many thousands of years!
posted by EllaEm at 5:46 PM on January 22, 2023 [2 favorites]
Basically, this is a way of borrowing money/renting property for many thousands of years!
posted by EllaEm at 5:46 PM on January 22, 2023 [2 favorites]
Ooh, interesting:
posted by Not A Thing at 8:28 PM on January 22, 2023 [1 favorite]
A share of a house in the province of Roman Egypt was mentioned as one of the objects of antichretic loan (ἐνοίκησις) in the previously cited P. Lond. III 1168. Egyptian lands suited for agricultural purposes could be objects for antichresis, which is attested in a variety of documents ranging from early Ptolemaic times, such as P. Frankf. I (214-213 BC, Tholtis), until well into the Byzantine era e.g., P. Köln VII 322 (VI-VIII AD, Herakleopolis). In these instances the creditor was given the opportunity to use the land to σπείρειν καὶ καρπίζεσθαι (to sow and reap the fruits), during the term of the leaseBut even in a real estate context like that, it seems to me that there is a fundamental difference between an antichretic loan where the use of the pledged real estate takes the place of interest on the loan, and an antichretic lease (?) where the interest earned on the loaned amount takes the place of rent on the real estate. The first is ancient and still pretty widespread, the second seems to turn up in much more limited contexts. But maybe I'm not quite thinking about this the right way.
posted by Not A Thing at 8:28 PM on January 22, 2023 [1 favorite]
I wish I was another species so I could smugly remark how barbaric it was to charge a being just for shelter before I burrow underground and chill for 7 years, no rent or mortgage or property taxes.
posted by GoblinHoney at 8:57 PM on January 22, 2023 [4 favorites]
posted by GoblinHoney at 8:57 PM on January 22, 2023 [4 favorites]
I wonder how aggressively the Korean government pursues unpaid property taxes and whether that information is public? As it stands now it seems like even if the tenants got the properties they'd be stuck with a tax bill that was more than the entire value.
posted by BrotherCaine at 10:55 AM on January 23, 2023
posted by BrotherCaine at 10:55 AM on January 23, 2023
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