Purchasing US Property – A Caveat
I had an excellent conversation with one of my readers the other day regarding purchasing a condo in Las Vegas and it reminded me of some very interesting points that many buyers don’t think about. Initially, he was quite excited about the idea of buying some US property as an investment after attending a recent seminar on US properties.
With the strong Canadian dollar and the ability to buy properties at significant discounts, it looked like an excellent opportunity to get in at a very cost effective price. I’m not entirely against purchasing property in the US, but my recommendation for him was to go into it with his eyes wide open.
My biggest personal concern about the US housing market is how long it will actually take to recover. Although there are stories about Canadians (specifically Albertans) flocking to buy properties in the US, this is more speculative than economically driven and speculation doesn’t create a healthy market. Speculation causes prices to go up, but usually shortly afterward, the bottom falls out as there is nothing to sustain the values.
For values to increase in a healthy way, there needs to be an underlying economic engine driving the growth. This usually is directly related to a market with an increase in employment and local demand. These factors draw more workers, families and services to an area and as we saw in Alberta not so long ago create a strong housing market. Usually with a longer stability cycle than sheer speculation.
For this particular fellow his initial thoughts were to look at a condominium he could rent out due to the large cash flow that was being promoted at the seminar. On paper this appears to be a great solution, but there are several issues out of a condo owner’s control. I’ve owned multiple condos over the years and even sat on condo boards, so I have a clear idea of how a condominium is supposed to work and one of their biggest drawbacks.
Condo Fees – The Bane of Investors
This drawback was condo fees. Not just having to pay them each month, but the potential for them to increase drastically over the next few years. This would particularly be apparent in complexes with multiple units in foreclosure. If the foreclosed unit owners are not making mortgage payments, it is likely they aren’t paying condo fees either and condo fees are integral to the property being maintained and properly managed.
This could result in extra cash calls to fill up the condominiums coffers or to pay additional costs that can be incurred due to deferred maintenance. The conundrum here is that the lowest priced condos will also likely have the most units in the complex vacant, up for sale and/or in foreclosure, making the initial savings a ticking time bomb of potential future expenses. Basically there is a reasons they are priced at significant discounts!
Furthermore, depending on what the condo fees cover, energy and utility costs will also be a factor. Costs for electricity, heating (although not quite the same issue in Vegas as Alberta) and water will continue to increase causing condo fees to have to increase as well. These increases and potential cash calls to top up reserves could quickly put a dent into any cash flow that would be recognized.
This along with several other topics my conversation partner hadn’t thought of became enough to make him rethink about rushing to buy an investment property right away. He now was going to go in a bit slower and with his eyes quite a bit more open.
Investors Perspective on US Real Estate
Another big point to take from this is this person was looking at this as an investment, not a recreational property. Short term, the US market and the US economy still doesn’t have the legs to make sense as an investment in Real Estate for several more years. They simply have too much baggage right now to start turning things around in the near future.
Yes, values will likely go up eventually, but wouldn’t you rather have your money working for you now, rather than sitting there doing nothing for up to five years? People are overlooking the promise of what we have right around us. Alberta has so many positives that we have become accustomed to, we aren’t seeing the opportunities right in front of us.
What are your thoughts?
Overall, the condos in the US may not be as regulated as they are here in Canada. With that said, I’ve seen some bad things happen with condo owners right here in Calgary, like owners having to cough up $40,000 to pay for damages where no recourse on the builder could be enforced. Eyes wide open when buying a condo anywhere and it will save you to have a professional review those condo documents before you buy.
A good source of information for buying a condo in Canada is available from the CMHC website: http://www.cmhca.ca where you can download a complete guide to Condominiums.
For those of you who will be buying in the US, I have a mortgage broker who can help you with as little as 20% downpayment depending on the area.
Adding to you comment Bill the US Market still has to work through some more of the sub-prime lending & now viable mortgages are starting to default due to the depressed economy. 2012 – The Crash of the U.S. Housing Market?
From Glenn Beck’s Fox News Channel program on June 16, 2009 – a graph showing the upcoming crash of the United States housing market thanks to incompetent buffoons like Nancy Pelosi, Harry Reid, Barney Frank and Chris Dodd who were told many times this was coming and chose to look the other way as h
1 of 4Choose a Thumbnail
No Thumbnail
Hi Jennifer,
You are right it can happen everywhere. Personally, from what I saw with the one condo we were involved with, condo boards can be a nightmare. A portion of the group doesn’t want condo fees to go up while another portion understand the long term implications. In the end it makes you feel like banging your head against the wall. Or in our case convincing ourselves to not buy condos anymore!
Bill
Hi Theode,
There are definitely some hills the US market still has to go through. They are already forecasting more foreclosures in the US this year than the previous year which was a record already. Now a few things have changed and I’m not sure if 2012 will crash or more likely just continue the lethargy in the market which will drag for a few years after that. The banks have recognized the potential future implications if they continue to foreclose on properties, so they are slowing that down and simply do not process many of the foreclosures now in an effort to try and maintain prices.
The system is already so backlogged throwing even more properties into the system would be a processing nightmare. Never mind the additional pressure there would be on market prices if the number of foreclosed properties for sale increased by 20, 30 or even 50%! Thanks for providing the video!
Bill
Hi Bill…I’m looking at purchasing a Condo in Las Vegas for recreational value and not so much for investment. Can you point me in the right direction with who to speak to about the pitfalls, red tape and paperwork I might be facing with my future endevour.
Hi Robert,
I don’t know anyone off the top of my head who you could talk to, although I’ve read multiple articles online discussing fun things like double taxation on the property (the US and Canada both tax any profits you may make), the increase on taxes for foreign owners of US property that is pending and will take many earlier buyers by surprise, the illegality of you working on your own property as it takes jobs away from Americans (this might only apply to the rental properties, but if you rent the property out part of the year could also apply to you), and the issues with getting a US mortgage through a US lender.
I can’t specifically point you to anyone, but I would recommend you avoid choosing some of the seminar folks who are appearing everywhere in Alberta and Saskatchewan touting the great opportunities right now in the US. Yes prices are ridiculously low, but they aren’t going anywhere until they straighten their economy out. If you have read anything about the increase in values in some areas of the US, look behind the curtain, most of it is being influenced by foreign buyers. You might be better off spending a week in Vegas and doing some research on who can help you down there.
Final note, I just saw a news article on one of the news channels earlier this month talking about how far behind Vegas is compared to other areas of the US as far as recovery. Much like Alberta, they overshot so far in housing values that it is going to take multiple years for the backlog and excess to get used up.
Regards,
Bill