By Ozzie Jurock
Our U.S. Land Rush on September 6 drew nearly 700 people to the Marriott Hotel in Vancouver to hear of the opportunities across the United States, and delegates quickly learned that most of the media reports surrounding the American housing meltdown are somewhat overstated.
The U.S. market is actually not doing that badly at all.
Some stable markets, such as Seattle, Portland, Houston and Dallas have seen moderate effects of the so-called mortgage crisis. A recent study showed that average housing prices rose this year in 35 major U.S. markets. Comparing the first quarter to the second quarter of this year, home sales are 21 to 26 per cent higher in Arizona, Nevada and California and 10 per cent higher in Florida. These are all areas that have seen the biggest price drops, in the range of 35 per cent, since 2006. Further, in nearly half the U.S. markets surveyed, new home prices are below the estimated cost of construction.
Another item to consider: there are an estimated 2.5 million first time home buyers in the U.S. eligible for a $7,500 tax rebate, which they have to use by June 30, 2009.
The U.S. National Association of Realtors reports that 11 per cent of all foreign buyers of homes in the U.S. in 2007 were Canadians, and Canadians accounted for nine per cent of sales in Florida alone last year. Florida, ground zero of the mortgage crisis, may already have seen the bottom. Large institutional investors are now active in Southern Florida, for the same reason small Canadian investors are: the potential of buying quality real estate below replacement value.
One investor, Peter Zalewski, started Condo Vultures Realty LLC. (www.condovultures.com) two years ago to target bargains in the Sun Belt markets. Zalewski tracks condominiums that stall on the market for more than 100 days and shed at least 10 per cent, or $100,000, in price. His database now lists more than 2,000 such condos, and many of the buyers are large fund investors. It is estimated that such funds have earmarked $30 billion towards South Florida real estate. Zalewski believes Florida is already bouncing back.
Yet, there are 11,500 new condos coming to the South Florida market this year, adding to an inventory of 30,000 new condos, so the vultures are still feasting.
Some fund investors have bought Miami condos in bulk sales from developers for $190 to $235 per square foot, half of the estimated construction cost. In many other cases, they are buying at 40 to 50 cents on the dollar. The apparent strategy is not to sell these condos right away, but to rent them out for two to three years and then sell into a rising market.
We believe, as these big investors do, that South Florida will recover, and while they wait, tenants pay the costs.
In the meantime, the rental market in Florida, as in most of the U.S., remains solid, partly and ironically due to the mortgage crisis that has forced many homeowners into renting.
The message is not to wait for the mythical bottom of the U.S. market, but to get ready for it. Now is the time to be looking at the American market for opportunities.
U.S. foreclosures: We have written extensively on this and the articles are posted on our web site (Jurock.com). I also recommend a new book Foreclosure Investing For Dummies by Ralph R. Roberts. It is available on www.amazon.com. The bottom line is that the U.S. foreclosure scene is complicated, frustrating and often not fruitful. Foreclosure laws vary from state to state and most areas with a high number of foreclosures (where you can find homes for under $25,000, such as inner city Detroit and the rural south) are not places where you want to invest.
There are three main ways to buy U.S. foreclosures: 1) pre-foreclosures (not used in Canada), where you deal directly with a distressed homeowner who has received a notice from the lender of a pending foreclosure; 2) from real estate companies, which is often the best route since you can inspect the property, demand a clear title and is the usual method that lenders use to sell foreclosures; and 3) real estate auctions. These can be fraught with problems, including an inability to inspect the property. Auctions also require cash, and there may be possession problems. Only attend auctions where there is no reserve price. There are cases where the reserved price is actually higher than similar properties in the open market.
When seeking U.S. foreclosures, always get a copy of the foreclosure notice, and get a 24 month history of the chain of owners, and a copy of the deed with the homeowner's name, plus a list of any liens or other mortgages against the property. Check for current comparable sales in the area. Have the property inspected. Also remember the fundamentals: only buy properties in areas with low vacancy rates, stable employment and good population growth.
Short sales: These are homes where the lender has agreed to discount the amount of money owed on the mortgage, because the buyer is in financial distress. It basically allows the homeowner to sell the home for less than the money owed. However, even if an agreement is reached between the owner and a buyer, the lender must agree to the terms and the price. If the lender doesn't agree, there is no sale. Often, the delays in finding the actual person to deal with at a large lender, and the time it takes to make a decision, can cause the buyer to walk away in frustration.
To start your U.S. property search, you should visit www.realtor.org, which is the official website of the National Association of Realtors. This site is packed with information, including state by state tax regulations, home prices and other market information. Another useful site is www.realtor.com, which is like our MLS.com on steroids. It not only carries listings for all homes listed with a realtor, but provides information on house values, sales, rentals, income and population trends in all major cities and even specific neighbourhoods. I also recommend www.craigslist.org, the worldwide bulletin board which carries for sale by owner listings in most major U.S. cities.
Financing in the U.S.: Most U.S. banks are not really interested in lending to Canadian investors buying American property, and in many cases, they will only allow 50 per cent financing, and may require that six months of reserves be placed in an escrow account. Often, it is possible and advantageous to work out financing directly with the vendor. About 53 per cent of Canadian buyers take out mortgages and 47 per cent pay cash for U.S. properties, according to figures compiled by Investors Group.
Whatever you do, go see the property. Financing is difficult and the U.S. dollar may go against you. Take your time, assemble a local team of professionals and remember, you are a foreigner in the U.S. You cannot collect rent, cut the grass or paint your rental property, and financing is difficult. If you are patient, however, you may experience a substantial capital gain, once the U.S. has (eventually) gone through the valley of the sub prime mess.
Published in West Coast Homes & Design, October/November 2008
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