Buying U.S. Real Estate

The Proven and Reliable Guide for Canadians

Richard Dolan, Don R. Campbell, David Franklin

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118431207
• eBook ISBN: 9781118439784
• Edition: 1
• Topic: Business
• Subtopic: Real Estate
• Index: Business

"I would consider this the bible for any Canadians wanting to invest in US real estate."
— W. Brett Wilson, Entrepreneur, Recipient of the Order of Canada, and former Dragon

The thought of buying property in the United States has been on your mind. Perhaps family members or friends already own real estate in the Sunbelt and you've enjoyed the occasional visit. You sense the market isn't as frenzied as it once was but there is still very good value to be found. Whether you are looking for a vacation home or an investment property, you are certainly not alone.

Canadians continue to buy U.S. real estate at a record pace. But as the economy and laws change around ownership of U.S. property, Canadians need to have the most current information possible at their fingertips. Buying U.S. Real Estate: The Proven and Reliable Guide for Canadians is written by experts who own U.S. property and addresses the many cross-border issues and requirements, such as:

• How to begin your search and find relevant data
• Finding the experts you need on your side
• Knowing that a property meets your lifestyle needs and wants
• Knowing all of your finance options
• How to proceed with renovations or upgrades
• What you need to know about U.S. tax laws
• What type of ownership is best aligned with your strategy
• How to create an estate plan

For Canadians generally, and boomers especially, the right property in the right destination point is integral to their life-rich philosophy. Buying U.S. Real Estate: The Proven and Reliable Guide for Canadians puts all of the pieces of the puzzle together and is an essential guide to reaching one's ultimate destination.

Part I

The Decision to Invest

Insight 1

The Economics Behind the US Market

Much has been reported and written about the collapse of US housing market values. Villains have been identified, bail-outs have been negotiated, and banks have new, more stringent lending rules. Media reports have focused on banks foreclosing on homeowners unable to meet their mortgage obligations, and for families who have lost their homes, it has been a cruel time. There is no doubt that since September 2008, foreclosures of distressed properties have been one of the prime investment opportunities in the United States.

So what is the situation at the writing of this book? Those Canadian investors looking for opportunities in the US real estate market will find that they do exist. But how is the market different than three years, a year, or even six months ago? A lot of factors indicate that while there are still opportunities in this market, they are decreasing. The lesson for the savvy investor is to work fast before they dry up. But first, let's look at some of the fundamentals behind today's US real estate market.

What Trends Are Driving This Opportunity?

• Because of the economic crisis, people are defaulting on their mortgage payments and their homes are being foreclosed.
• Homebuilders, bruised by the faltering economy, were caught between slowing business and increased availability of vacant homes; in 2012, for the first time since 2005, US residential construction is expanding according to the US Census Bureau.
• While people have lost their homes, they still need somewhere to live, and because of that, the rental market in the United States is exploding.
• Baby boomers from Canada and the northern states are looking to migrate to warmer states like Florida and Arizona. To put this into perspective, 34.5 million people live in the northern United States and might soon be considering life without having to shovel snow!
• Global economic uncertainty acts as a catalyst for investors to look abroad for opportunities.

No Income, No Assets, No Worries!

The economic catastrophe we've endured over the last few years can be traced to several conditions that combined to make the “perfect storm.” One of these was the subprime mortgage crisis caused when lenders gave mortgages to home purchasers, many of whom who did not have the means to qualify. In some cases, no proof of income was required and mortgages were given for more than 100 percent of the purchase price (housing values were often inflated so the banks could lend out even larger amounts of money), giving rise to the infamous NINJA loan (no income, no job, no assets). To make it easier for people to get loans, banks offered forty- and fifty-year mortgages, negative amortization loans, and “no document” loans. In some cases, purchasers were encouraged to add the value of a new car or plasma TV to their mortgages. It didn't matter if the purchaser had a job—the bank was going to loan them the money anyway. Banks put anyone and everyone into a home, fuelling the “housing bubble.”

We all know that the sand that the housing and mortgage industry was built on shifted, and the market collapsed, leading to the merger of Bear Stearns with JPMorgan Chase, and the bankruptcy of Lehman Brothers and numerous small US banks. In addition, the US mortgage insurers, Fannie Mae and Freddie Mac, had to be bailed out by the United States government and remain under the conservatorship of the Federal Housing Financial Agency.

When the market crashed in 2008 and the banks came calling for their money, few people had the funds to pay. With house prices dropping up to 100 percent in some areas, the phenomenon of negative equity appeared—where homeowners owed more money on their mortgages than the actual value of their homes. Called the underwater mortgage, this term became familiar to the many mortgagors who borrowed money, bought houses, or refinanced during the housing boom.

Another consequence of the availability of cheap financing was that builders kept building homes. The end result was an oversupply of houses, especially in the states of Florida, Arizona, Nevada, and California. One of the main reasons for the oversupply in these particular states is that home builders expected baby boomers to move to these warmer states in droves. This over-building was another accident waiting to happen when the crash came, and contributed to the decline of housing prices.

How Big Is the Foreclosure Market?

From September 2008 to April 2012, there were 3.6 million foreclosures across the United States. People continue to default on their mortgages, and there are presently 1.6 million more homes in “shadow inventory”—homes that could be foreclosed because they are technically in default. Together, Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) now hold over 250,000 foreclosed properties.

At the beginning of 2012, more than 11.1 million US homes (or 22.8 percent of all mortgages) had negative equity, and an additional 2.5 million borrowers had less than 5 percent equity, or were considered near negative equity. The total mortgage debt outstanding on properties in negative equity is $2.8 trillion; Nevada has the highest percentage of properties with negative equity at 61 percent. According to CoreLogic, Arizona, Florida, Michigan, and Georgia round out the list of the top five states with negative equity.

From an investment standpoint, you may be wondering how long this situation can last, and you would be right to wonder. Foreclosure filings for 2012 are decreasing at a rate of 1.45 percent, down from 2.2 percent in 2010, the lowest point since 2007. In addition, the shadow inventory of 1.6 million homes represents a five months' supply, down from 1.9 million last year. What's important for the investor to remember, though, is that prices have dropped by 50 percent and still haven't recovered to pre-recession levels—presenting an opportunity, for now. And while it may sound like there is a lot of inventory around, it is important to identify the “good” foreclosures, where the market fundamentals add up to a good investment.

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Key Insight

Foreclosure filings are on the decrease, which means that this boom can't last forever. With housing prices still below pre-recession levels, now is the time for investors to act.

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The US Economic Recovery

For the last three years, we've watched as the Federal Reserve printed money as fast as it could in an effort to boost the economy. By introducing more physical currency in the world money supply, the net effect is that the value of each dollar is diminished, and the number of physical US bills worldwide has tripled in the last three years. Why would a government do this? Because it forces the value of its currency down while the actual numerical amount of debt owing on the ledger remains the same. The end result is that the government ends up paying off its debt with money that is worth less. And despite the current downward trend in unemployment, and a growing economy that has avoided a double-dip recession, there remains a protracted economic recovery. The constant politicking by both the Republicans and Democrats, exacerbated by the fact that this is an election year, is distracting the politicians from creating real and sustainable economic growth.

Some positive events are in the forecast too. Some elected representatives are trying to help the public, and a bill was introduced at the end of January 2012 to forgive $100 billion in mortgage debt. There is opposition to this proposal, however, and it is uncertain whether it will ever pass. In addition, Fannie Mae is trying to get Wall Street back into the property market by offering 2,490 foreclosed homes for sale to larger investors. (At printing, news reports indicate that the first auction has been held and raised approximately $330 million.) And finally, the Federal Reserve is trying to stem the flow of foreclosed homes coming to market by proposing new regulations that would allow banks to hold and rent foreclosed properties, instead of selling them and depressing prices further.

For Canadian investors, all these factors mean that the door on the foreclosure market remains open for now. But what if any of these solutions, or even new ones, come into play? The market could change overnight.

New-Home Construction

The economic recession has shaken US consumer confidence, but more fragile than consumer confidence is builder confidence. In order for construction companies to build homes, they need customers who can borrow money—and that number has dropped. Builders are also competing with the glut of available homes that are facing foreclosure—they can only build when there is demand. What we are seeing now, however, are builders, who had been on the sidelines waiting for the foreclosure market to evaporate, starting to come back into the marketplace.

The US Congressional Budget Office reported that the annual number of housing starts required to house the growing US population is approximately 1.5 million. Because of the housing crisis, family formation dropped to 600,000 for 2009 and 2010, resulting in less demand for builders' homes. In 2011, family formation increased to 1 million, still below normal. While the drop has caused the “doubling up” of families, it does not mean that the actual demand for housing has dropped—it is just delayed. With the demand being short by nearly 1 million units over the last couple of years, how long will it take until supply and demand come back into balance? We estimate a minimum of three years, and realistically five to seven years...

Table of contents

• Cover
• Praise For Buying US Real Estate
• Title Page
• Copyright
• Foreword
• Introduction
• Part I: The Decision to Invest
• Part II: The Distressed Property Market
• Part III: Renovations and Management
• Part IV: Cross-Border Tax Planning
• Part V: Legal Planning
• Part VI: Cross-Border Banking and Financing
• Part VII: Insurance and Investments
• Appendix: Considerations for Buying a Second Home
• Index
• About the Authors