America: buyer beware

In part one of our series on investing in the depressed US property market, Property Observer talked about who was buying up US housing stock, how and why. In the second part of the series, we discuss the pitfalls of investing in the US property, which might be cheap for a reason.

What are the traps?

Australian buyer’s agents point to underhand methods allegedly adopted by some of their competitors.

Hidden commissions: “Every day I am offered upwards of 10 per cent commission ‘if you sell this property to one of your clients’,” says Redman. “We don’t work that way.” He agrees that buyer’s agents who accept such commissions are ripping off their clients.

Redman says some Australian companies have arrangements with American companies to earn a 20 per cent sales commission or to load the price of a property by 20 per cent.

 Two-tier pricing: Redman says it is common practice for agents to list one price for Americans and a much higher price for Australians.

“We have one property for $42,000 and they [another Australian-based company] are charging $62,500 for the same property,” Selleck says.

 Redman claims some Australian companies take an option to buy a US property for, say, $30,000 and then market it in Australia for $60,000.

"Flipping": US-based “flippers” buy a US property and “flip” it a short time later to Australian buyers at much higher prices. The flippers add little or no value before reselling a property.

“Some Australian companies buy a US property very cheaply, whack a bit of paint on it and then sell it for triple what they paid for it,” Redman says.

 Misleading rental yields: Promoters of US properties quote net annual yields of 10% and more. But such yields, unless sustainable, can give buyers a misleading impression of a property’s value.

 A buyer’s agent told Property Observer that some operators place a tenant in a property for an exorbitant rent that would produce yields of up to 25% if sustained and then sell the property to an Australian. But within a few months, the tenant has often moved elsewhere and the property falls into disrepair.

Jenman says low US interest rates mean that if an American can obtain a housing loan, it would be much cheaper to buy than pay high rents.

Unfamiliar markets: We all know parts of our local city or state that astute property investors wouldn’t go near. Of course, it’s the same story in the US. “Some areas are ghettoes that resemble war zones,” Jenman says. Investing away from home is often a high-risk strategy.

What is the outlook for US housing?

Based on just a sample of the economic and sales data available, the outlook for US property is far from promising.

US Federal Reserve chairman Ben Bernanke said in a recent address that the poor state of the US housing market was holding back the US economic recovery.

 Bernanke stressed that foreclosure rates remained very high and many “underwater” homeowners avoided foreclosure by holding on to their homes even though the size of their mortgages exceeded their homes’ value. Additionally, long-term unemployment remained at a historic high, he said.

RealtyTrac, the US online marketplace for foreclosure properties, reports that there were almost 700,000 foreclosures in the first quarter of 2011, a 15 per cent decrease on the previous quarter. But it seems that fall is largely attributable to a backlog of thousands of foreclosures as lenders address improperly prepared mortgage documents.

 RealtyTrac warns of weak demand, declining home prices, lack of credit and the threat caused by the “looming shadow inventory of distressed properties” that are yet to reach foreclosure stage. In short, RealtyTrac expects the foreclosure rate to rise.

 Is investing in US a good idea?

The risks appear excessively high.

For example, Jenman knows an Australian who lost most of her money after the three properties she bought in upstate New York failed to rise in value. She bought one property for $US34,900 and sold it four years later for $US12,000. Another she bought at the same time for $US51,900 she sold years later for $US25,000. The third remains unsold.

I believe if you go over to America, hire a car, drive around and research the areas properly, you might be able to find yourself a good buy,” Jenman says. “But I believe with all of my heart if you go through an Australian company that is flogging American real estate here in Australia, you will almost certainly lose a great deal of money.”