American dream or nightmare?

The website of Byron Bay-based buyer’s agent 888 US Real Estate features principal Vincent Selleck proudly planting the Australian flag on the White House lawn. The image conveys a conquering Australian, dressed in shorts.

 The Huffington Post presents another picture of US property. The news website asks for readers’ photographs of “America’s foreclosure ghost towns”. Photograph upon photograph shows boarded-up wrecks of houses, covered in graffiti and decay.

 Looking at these photographs, it would take a truly brave Australian investor to try to take advantage of America’s property troubles. 

 However, Selleck says the growth in the number of Australians investing in US property is “enormous”, particularly over the past six months. And he says that the US market offers “insane” value.

 Property consumer advocate Neil Jenman puts it another way: “You would be insane to buy it.”

 Jenman says thousands of Australians are pouring money into US properties as countless companies target Australian buyers. He is convinced that almost all Australian investors will suffer huge losses when their properties are eventually sold. But Selleck says US property is a smart investment, and Australians are “moving to where the market opportunity is at the moment”.

 Property Observer spoke to those on both sides of this debate and examined the outlook for the US housing market. Over a two-part series we attempt to answer the question: Does US property present a money-making opportunity or looming disaster for Australian investors?

 What’s attracting buyers?

According to the proponents of US residential property, the combination of homes selling at way below replacement value, claimed double-digit net rental yields and the high Australian dollar are creating amazing bargains for Australians.

 For instance, Selleck has just listed a freestanding five-year-old, three-bedroom house in Phoenix, Arizona, for $US52,000 (about $A48,800). “It rents for $US900 a week, and the replacement value is anywhere from $US120,000 to $US180,000,” he says.

 “So you are buying real assets for a fraction of their real value. You can’t do that anywhere else in the world; it’s a once-in-a-lifetime opportunity.”

 Before the GFC, the Phoenix house had sold for $US167,000.

 Who’s investing in America?

Cashed-up individual investors and self-managed super funds are reportedly the main buyers of US housing stock, as Selleck says Australian banks won’t accept US property as security for a loan. His firm has found only private lenders in the US, which charge high interest rates, willing to lend to Australians.

 Selleck says Australian buyers – apart from self-managed super funds – either use Australian properties as loan security or finance their purchases with the proceeds from the sale of investments.

 Daniel Redman, managing director of Melbourne-based buyer’s agent US Property Direct, says many Australian buyers have borrowed against the equity in their homes.

 How are they investing?

Many Australian investors buy through Australian-based buyer’s agents who have contacts with US real-estate agents or US property wholesalers that purchase foreclosed properties in bulk from banks.

 Jenman says some Australian property spruikers hold joint Australian seminars with their visiting US associates to promote US property.

 Selleck explains that US wholesalers might buy 100 properties at a time from banks, sight unseen. “They might find that 90 of the 100 properties are worth something and the remaining 10 are throwaway,” he says.

 Wholesalers, Selleck says, renovate the properties and find tenants. “We won’t close on a property until a lease is taken out, generally for 12 months at the agreed price.”

 Selleck says he charges a flat $3800 fee to his clients. “We don’t take any commissions.” The buyers pay all costs such as for legal work and building inspections. Redman of US Property Direct says his firm charges $3495 to clients; it also did not accept commissions from vendors or their agents.