Bid Lower than you think! “If the owner of a foreclosed property couldn’t make the mortgage payment, he probably didn’t have money for maintenance and upkeep either,” says Robb Mackett, a real estate broker and owner of Blue Heron Realty in Naples, Fla.
by Julie Cazzin
Attention, real estate shoppers: the entire U.S. sunbelt is now officially on sale. Prices in many areas of Florida, Arizona, Nevada and California have dropped 40% from their peaks of a couple of years ago, to the point where the deals seem nearly too good to be true. In Naples, Fla., a three-bedroom, two-bathroom home that sold for $350,000 in 2007 is on the market for only $200,000. A starter home in Sacramento, Calif., that sold for $215,000 in 2004, is on offer for a mere $129,000. And remember: these aren’t sale prices. They’re asking prices.
Are these apparent bargains really as attractive as they appear? Sandra and Pat Parente of Richmond Hill, Ont., scouted condos in Fort Lauderdale, Fla., in March of this year. Their eyes lit up when they saw a handsome two-bedroom, two-bathroom unit only steps from the beach. It had been listed this past October for $239,000, but had since been reduced to $199,000. “My immediate thought was, ‘Wow, this is fantastic,’” says Sandra, who works as an advertising executive in Toronto. “It needed a bit of sprucing up, but there wasn’t anything that needed urgent attention. It had a green area all around it, and a pool, and we saw it as a great way to get into the Florida market.”
The Parentes offered $175,000. The condo owner responded in a flash with a counteroffer of $189,000. As they pondered the counteroffer, the Parentes made further inquiries. The more they learned about the local market, the shakier it looked. “In the end, we let it go because we were worried that, even though prices had dropped, we were probably still overpaying,” says Sandra. “We began thinking that there may still be some downside in the Florida market.”
The Parentes’ wariness is justified, say real estate experts. Many believe we’ve seen just the beginning of a monumental real estate collapse. “The size of the U.S. real estate bust on the way down will be proportional to the size of the real estate boom on the way up,” says Robert Campbell, a real estate economist in San Diego, Calif., and author of Timing the Real Estate Market. “There’s no slowing down this train. The areas that had the biggest booms will have the biggest bust. Prices are heading lower — way lower.”
Campbell points to many negative factors, including the galloping rate of foreclosures, which are running at record levels across the U.S. Those foreclosures are adding to a glut of homes on the market. To put the situation into perspective, consider that a three- to six-month supply of homes for sale has historically been considered typical for most markets. But in the Miami-Fort Lauderdale area, the supply of single-family homes and condominiums for sale is enough to last for 34 months. The backlog is 21 months in Orlando, 18 months in Tampa and Las Vegas, and 14 months in Phoenix. Meanwhile, even more units are coming on the market as builders finish the projects they started in better times. “Builders are offering huge incentives and lease-back programs,” says Mark Dziedzic, president of Arizona for Canadians, a real estate firm that specializes in helping Canadians buy second homes in Arizona. “Here in Arizona, some will guarantee you rent of $1,500 a month for two years on any property you buy, while others offer huge discounts on sale prices. The competition is tremendous.”
For Canadians, all of this means that there’s absolutely no reason to rush into the market. “On a pure timing basis, Houston is the only place in the U.S. you want to buy right now,” says Campbell, who has spent 35 years following real estate trends in the U.S. He believes some states will bottom out in a year or two. Others, such as California and Florida, will have to wait three or four years before prices hit bottom. “I know Canadians will be saying to themselves ‘ look what we pay here in Canada’ and compare it to what they can get in the U.S.,” says Campbell. “But don’t look at prices relative to where you are. Instead, look at prices relative to where the real estate market is in the U.S. My data shows that the year 2011 is when most real estate markets will finally find bottom.” Even then you should be careful. Before putting down a penny, take a moment to learn about property taxes, rental restrictions and other bits of fine print that can undermine your dream place in the sun. You should:
SWEAT THE SMALL STUFF Some states abuse out-of-state home owners. Of course, real estate agents don’t tend to mention this when they’re showing you sunbelt properties. As a result, many Canadians get a nasty surprise when they scoop up a bargain property only to find themselves stung by unexpected expenses.
Florida plays the most aggressive game of pin-the-bill-on-the-foreigner. State law allows Florida municipalities to impose different property taxes on out-of-staters than on in-state residents. So if you buy a property from a Florida resident, don’t be surprised if the tax bill on a property triples or quadruples. You can wind up paying $9,000 or more in property taxes on even a modest condo.
And that’s not the end of it. Florida and California homeowners pay sky-high rates for property insurance because of the frequency of hurricanes, tornados and earthquakes. Buy a home in one of those states and you may have to pay several thousand dollars a year for insurance coverage — and that’s assuming you can get it. “In Florida, because of the hurricanes, there are certain areas that are deemed extremely high risk by the private insurance market and as a result, they do not want to take on new insurance clients,” says Lawrence Barker of the Canadian Snowbird Association. “But if you don’t have private insurance on your vacation home in Florida, and it’s wiped out in a Hurricane Katrina-like situation, then you’re done.”
Arizona offers a much better deal to out-of-state residents. Expect to pay $1,000 or so in annual property taxes on a $200,000 property. Insurance rates are also relatively low. As a result, many Canadians are selling their vacation homes in Florida and purchasing property in Arizona instead, says Barker.
TEST THE WATERS “There’s more to buying a vacation home than price,” says Barker. “Rent for a couple of years to make sure you enjoy the lifestyle in a given location. Don’t go thinking that a place is perfect for you just because its price has dropped.”
David and Cheryl Burwash of Ottawa spent 10 years vacationing in Carefree, Ariz., before finally taking the plunge this spring and buying a two-bedroom, two-bathroom home in the community. “We asked ourselves where we wanted to be in five to seven years,” says David, 51. “After all the time we’ve spent here in this area, we knew it well and felt comfortable making a commitment. We love the fact that hockey, basketball and baseball games are $20 for a half-decent seat. There’s no humidity, no bugs and good wine for sale in the local grocery stores. It was the right choice for us.”
GO SMALL With so many homes on sale in sunbelt states, it’s tempting to indulge your Gone with the Wind fantasies and buy a sprawling mini-mansion. In most cases, though, a smaller place makes far more sense. If prices recover quickly, a small place gives you a firm foothold in the market; if prices plunge further, a small property minimizes your losses.
“My family and I have been vacationing in South Carolina since the 1970s and we loved the huge 4,000-sq.-ft. golf course homes,” says Ann Bosley, vice-president of Bosley Real Estate Ltd. in Toronto. “But while we were looking for the right property we realized that we didn’t want the reality of a huge house — cleaning it, furnishing it, all that upkeep. So we’re looking at smaller properties.” The Bosleys recently bid on an 1,800-sq.-ft. condominium in Hilton Head, S.C., that comes with maintenance and security included. “It’s a matter of practicality,” says Bosley. “We don’t want to feel tied down to a property, and we wanted something that was accessible by car so that the kids and grandkids can drive down and use it as well. It’s a good fit for the whole family.”
DO YOUR RECONNAISSANCE “Believe me, the real estate community is biased and will encourage you to buy, even as prices keep falling,” says Campbell. “You have to avoid that. Getting as much information as possible from reliable sources — whether from print, the Internet or close friends — will help you make a better decision.”
Two good places to start are www.hotpads.com, which lists information on bank foreclosures, and www.ushomeauction.com, which will give you a good idea of prices for foreclosed homes throughout the U.S. “My husband did some fact-finding on the Internet and I attended real estate seminars before I contacted a real estate agent,” says Maria Woroniuk, 50, an operations manager in Calgary, who is interested in buying a property in Arizona. “The best deals are in houses built between 2001 and 2004. They were built for $300,000 and are now going for between $100,000 and $120,000. That’s where I’m concentrating my search over the next few months.”
BID LOWER THAN YOU THINK You may be tempted by the low price on a foreclosed home, but take the time to do a thorough review of the property’s legal status, as well as a site inspection. Many homes that have been seized by the bank have liens against them. Many have also been the targets of a previous owner’s rage. Expect to see walls with holes in them and torn-out faucets, as well as general dilapidation. “If the owner of a foreclosed property couldn’t make the mortgage payment, he probably didn’t have money for maintenance and upkeep either,” says Robb Mackett, a real estate broker with Blue Heron Realty in Naples, Fla.
Bosley, the Toronto real estate agent, says her search for a U.S. property taught her never to think that any offer is too low. “Nobody is bidding the asking price on any property right now,” says Bosley. “In fact, U.S. real estate agents are advising clients to bid 20% under the asking price, then take off extra for necessary reno costs.”
When you have narrowed down your search to a specific state, contact a U.S. real estate agent used to dealing with Canadians. Big-name companies such as Re/Max and Century 21 will often have expat Canadians on staff who can help you with your purchase.
CHECK OUT THE RENTAL SITUATION Many condo developments forbid you to rent out your property — problem for owners who want to rely on rental income to help offset some of their expenses. “One of the main reasons we dropped our offer on the Florida condo was because the building we were interested in didn’t allow renting,” says Sandra Parente. “We were counting on that money to help pay for some of our expenses. Now we know to ask about renting restrictions before we ever put in a bid.”
FINESSE THE FINANCING Before the U.S. housing collapse, you could have borrowed 100% of the purchase price of practically any home. “Banks would have lent money to anyone,” says Robert Keats, a fee-only planner in Phoenix, Ariz. and author of The Border Guide: A Canadian’s Guide to Living, Working and Investing in the United States. These days, however, you will need at least a 25% down payment to qualify for financing from a U.S. lender.
A better option is to remortgage your home in Canada and pay for your U.S. property in cash. This strategy has the added benefit of protecting you from the fluctuations of the Canadian dollar. “In the 1990s, when the Canadian dollar plunged from 80 cents to 60 cents, a lot of Canadians took a beating,” says Keats. “Alternatively, if you do get a mortgage in the U.S., protect yourself against fluctuations in the U.S. dollar by making sure you have enough U.S.-generated income or sources of U.S. income. It could get very expensive for you if the Canadian dollar starts sliding.”
REMEMBER THE TAXMAN Keats says Canadians have to take three taxes into account when buying U.S. homes: property taxes (which we’ve already mentioned), income taxes and estate taxes.
U.S. income taxes are a concern if you decide to rent out your U.S. home. If so, you have to claim your rental income in both the U.S. and Canada and you are required to file a U.S. tax return. You pay the U.S. taxes on the income first, and you get a credit for the amount against your Canadian taxes. You will also have to file a state tax return. If you don’t, you will have to pay 30% of your gross rents to the U.S. Internal Revenue Service. “There’s no way around this,” says Keats. “File a tax return yearly if you’re receiving rental income.”
If you decide to sell your U.S. vacation home, you will have to pay U.S. taxes on any capital gains. Again, you pay the U.S. taxes first, and you get a credit against your Canadian taxes. Keats says you should get a U.S. tax ID number well in advance of trying to sell your home (it takes about eight weeks), as you can’t close the deal without one.
Finally, there’s the matter of estate taxes. Unless your worldwide estate amounts to $2 million (U.S.) or more, you are likely not subject to the estate taxes that U.S. residents have to pay. However, when you pass away, your estate will have to pay Canadian taxes on your U.S. home’s capital gains.
Some Canadians try to delay paying capital gains on their U.S. property by putting their kids’ names on the property deed. But that’s a dangerous move because of U.S. gift tax. If you put yourself and your two kids down as owners of a $300,000 property, but pay the whole shot yourself, Uncle Sam sees it as equivalent to handing each child a $100,000 gift. Under U.S. tax law, your kids therefore owe gift tax of 20% to 45% on the money they’re deemed to have received. To avoid being hit by a tax bill, Keats suggests you give your kids the money in a bank account in Canada, then have them pay their share of the purchase price from that account. “Otherwise, gift tax could be a lot worse than the estate tax,” says Keats.
After sifting through the details, it’s easy to see why some Canadians — Sandra and Pat Parente included — have put off buying a U.S. property. In April, the Parentes received a phone call from their Florida real estate agent informing them that the seller of the condo in Florida had reconsidered and would accept their $175,000 offer if they wanted to resubmit it. The couple chose not to. “We’ve reconsidered as well,” says Sandra. “I’m reading every day about more foreclosures happening in the next few months and I think we need to do more research on taxes and rental issues. When we finally buy — which we’d love to do eventually — it will be with our eyes wide open.”
Where the deals are
A three- to six-month supply of unsold homes is standard. Many U.S. cities have far more.
|Metro Area||Months Supply|
|Miami-Ft. Lauderdale, Florida||34.4|
|Las Vegas, Nevada||17.5|
|Orange County, California||10.4|
|Charlotte, North Carolina||9.9|
|Source: The Wall Street Journal quarterly survey of housing market conditions for the quarter ending Mar. 31/08.|