It may seem like the ultimate anti-cyclical investing: Australian investors buying houses in the US for seemingly giveaway prices. But buyer beware.
Property consumer advocate Neil Jenman warns that thousands of Australian investors are likely to lose millions of dollars by investing in the depressed US housing market.
“Hundreds of Australians have already lost their money,” he says.
Jenman describes this clumsy attempt at anti-cyclical investing as “all the rage, the latest fad” among many Australian investors. And he names Buffalo and Rochester in upstate New York as being places where properties have been sold particularly hard to gullible Australians.
American “flippers”, according to Jenman, often first buy the properties at fire-sale prices and then “flip” or on-sell them to “unsuspecting Australian suckers” at much higher prices.
Typically, the American promoters work in tandem with Australian property spruikers who Jenman says are the “same rogues” who used highly questionable tactics when selling residential property on the Gold Coast and in the outer Melbourne suburbs.
Jenman says some Australians paid $50,000 for US houses with expectations of extraordinary rental yields and now can’t sell the properties for $25,000. And he knows of an Australian who paid $80,000 for a house and now is unable to sell it for $40,000 – the best offer has been $10,000.
Dennis Kalofonus, director of Sydney Property Finders, says several property spruikers have “cold-called” his group asking it to participate in the promotion of US properties to Australians. He reacted by warning clients not to buy US properties.
Kalofonus says spruikers are inviting investors to fly with them to the US to view properties that are sometimes already owned by the spruikers. Buying a property already owned by a spruiker is one of the “best ways to get your fingers burnt” in real estate.
“Investing in US property is a time bomb,” Kalofonus warns, emphasising that prices could have further to fall.
The disastrous experience of Australian investors in the US should trigger a broader warning about the potential dangers of investing in other countries, as well as in any Australian states or districts that they may know little about.
Real estate specialists can provide plenty of examples where property investors have lost badly by straying far away from their home without undertaking the extra due diligence required.
“Investors who venture outside their own turf, do so at their own peril,” warns Jenman. “This is no matter whether it’s Buffalo, Barcelona or Boggabri.”
Here are six practical strategies for investors to keep foremost in their minds:
Jenman says US banks will not lend money to Australians to finance their purchase of American property. “You have to borrow against your own house in Australia and pay cash for the US properties.” This should serve as a crucial warning to stay out of that market.
“You can’t look at the American market with the same eyes as the Australian market,” Jenman adds. “In the US, there are many streets where every house has been abandoned. They can’t be given away for love or money.”
“With so much to choose from locally, there is no need for investors to look abroad,” says Kalofonus. “Australia has a strong property market and a sophisticated system of property management. And in Australia, rights are not skewered towards the tenant.”
Kalofonus says investors putting their money into overseas property usually rely on the advice of one person about whether their investment is good or bad. Generally, there is no cross-section of information available to a would-be investor, he says.
Patrick Bright, chief executive, buyers’ agent EPS Property Search in Sydney, has some straightforward advice: “Don’t invest in markets you don’t understand. You are subject to different tax laws, different environment laws, different local laws and different tenancy laws – it’s very hard to know what’s going on. And your investment is very hard to control if you are not there.”
Bright has heard “dozens of horror stories” of Australian investors who bought overseas properties and lost large amounts on the deals. The only stories he hears of people succeeding are from those who sell the properties.
“Investors look for hot spots or silver-bullets in overseas properties offering better returns than anywhere else,” Bright says. But they were almost always disappointed.
Bright has expatriate Australian clients who bought properties where they have been posted in such places as Dubai, Shanghai, Hong Kong, Singapore and London.
“Out of 100 expat clients who have done this,” he says, “there wouldn’t be half a dozen who don’t say, ‘I would have been better of in the Sydney market’.”
And of the overseas properties being specifically marketed to Australians, Bright succinctly comments: “If the property deals are so good, the locals would buy them. They wouldn’t have to go to Australia to flog them. This rings alarm bells.”
Make sure you really understand the target market and can keep a close watch on your investment.
Kalofonus has a Sydney client, for instance, who owns a beach house on the Queensland border – used as a personal holiday house and as a holiday rental – and paid a high price for being an absentee owner.
Two roof tiles became dislodged, causing $190,000 of water damage which wasn’t covered under the terms of her insurance. Kalofonus says the owner hadn’t visited the property for 12 weeks, in which time the damage caused by the water mounted.
If she had noticed the dislodged tiles within a couple of weeks, the damage bill would have been about $5,000.
Kalofonus knows of investors who bought investment houses in a country region without realising that much of its employment depended on the local abattoir. Sadly, the abattoir closed and many locals lost their jobs and therefore their ability to pay the rent.
The bottom line is that would-investors from outside a region should learn about its local economy and the identity of its biggest employer. “They need to know where the money is coming from,” Kalofonus stresses.
He is concerned, for example, about the long-term property investment prospects in towns that rely heavily on a single mine for their economies. “Who knows what’s going to happen in 10 years’ time?” Would the mine still be active?
Bright says that if investors are buying outside their local regions, they should really do their own homework, perhaps employing an independent buyers’ agent. “Unless you are paying someone directly for their advice, they are not acting in your best interest – they are acting in someone else’s interest.”
Jenman says investors should watch out for two-tier pricing scams. “These involve having one price for the locals and one for the out-of-towners.”
While two-tier pricing is being practised to the disadvantage of Australian investors “investing” in the US market, it was rife among shysters on the Gold Coast with investors from other states being the victims.
A property that has been hanging around for a long time may possibly turn out a bargain (if you make a low offer that is accepted) or a dud.
Kalofonus urges intending buyers to find out why a property has remained on the market a long time without being sold. He says the main reason is that the property may be over-priced. “The other main reason is that the locals know something about it that is unknown to blow-ins.”
This can be fraught with costs and dangers – a growing challenge considering the rapid ageing of the population and the huge numbers of baby boomers nearing or entering retirement.
Kalofonus describes the decision-making of some local governments in coastal regions “as a lot more volatile” than their city counterparts. He points out, for instance, that a change in maximum-allowable height levels may lead to a dream home for retirement being surrounded by towers of units.
A common error when buying a future home to retire is to focus mainly on, say, the views.
“For retirement, your buying should be [largely] driven by the amenities, not the perceived lifestyle,” suggests Kalofonus. This means proximity to transport, hospitals and shops – among other things. And a home’s ease-of-access is crucial for older people.
Further, he suggests that buyers look for places that are appealing for their friends to visit.
When buying a future home for retirement, Kalofonus says you should also think about whether the land tax payable until it becomes your home will exceed rental income.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
Comments