It's a myth that foreign cash buyers are smart money that purchases bargains. FCBs are generally dumb money that overpays for declining assets.
Irvine Home Address … 170 ALMADOR Irvine, CA 92614
Resale Home Price …… $399,000
I've been looking for a reject
And you ain't had nothing like me yet
Don't you think it's time for motion
I can take what you've been pushin'
Soundgarden — Big Dumb Sex
Are foreign cash buyers savvy investors who are taking advantage of low prices to snap up bargains, or are they the fools who purchase overprices assets that natives won't touch? Often its a little of both. I always enjoy reading Rich Toscano's writing, and back in 2006, he wrote a brief post on what generally happens when foreign investment becomes prevalent in a market.
RICH TOSCANO — December 20, 2006
One argument I hear a lot is that foreign demand for local real estate has grown substantially in recent years, and that such foreign demand will be supportive of prices in the future.
Unfortunately, this argument puts the cart squarely in front of the horse. Investors from other countries are well known to be the very last participants to arrive at the scene of a financial bubble. They are the last to hear about all the riches to be made, the last to buy in, and the last to realize that the party is over.
The chart to the right provides an example from the history of bubbles past. The blue line represents the price of the Nasdaq Composite Index during its late-1990s flight to the heavens, along with the very beginning of its eventual journey back to earth. The red line denotes the dollar amount of U.S. stock purchases made by foreign investors.
It can easily be seen that foreign buyers chased the U.S. tech stock bubble all the way to the tippy top, and that they lagged prices the entire way. The final onslaught of foreign cash did not even hit our shores until after the Nasdaq had begun to decline from its final peak.
Far from being a positive fundamental, a sudden excess of foreign participation in an asset market is indicative of ill-informed speculative money at work. When the foreigners really start piling on, it's always a good sign that the end of the bubble is nigh.
As a rule, foreign investment comes from those with the least understanding of the market. Most often these investors are merely chasing the latest short-term rally in hopes it will continue. Sometimes they hit big paydays, but most often they end up overpaying for assets that take years to recover in price. Today's featured article is a mixed bag; some investors are getting great deals while some are not.
By MICHELLE CONLIN (AP) – October 4, 2010
The Viceroy, a swanky condominium complex in downtown Miami, gives the impression that the United States is in another real estate boom. The sales office is strangely exuberant. Buyers gush about the glam condos — designed by hipster tastemaker Kelly Wearstler — and their hotel-like amenities: poolside libations, daily housekeeping and room service food stirred up by a celebrity chef.
Since January, 262 of the Viceroy's 372 units have sold. But there's a twist: Almost 90 percent of the buyers are foreigners. And they all paid cash.
The Viceroy's story is playing out across Miami. Individual investors from as far as Argentina, Canada, Colombia, France, Israel, Italy, Norway and Venezuela are swarming the city's sales offices to get in on what they see as one of the greatest real estate fire sales in the history of the United States.
At one time, these people would have invested in the U.S. stock market.
See Rich Toscono's graph above to see how well that usually turns out.
Now they see the opportunity of a lifetime in the nation's debilitated housing market. The idea is to rent out the properties and then sell them once the economy turns around.
As a general strategy, that idea isn't bad, but it all depends on the cashflow. Anyone who is buying cashflow negative properties and plans to wait for a rally is a fool. Those who buy cashflow positive properties with plans on waiting for a rally are not fools, but they may not be successful either. Those who buy cashflow positive properties purely for the cashflow may have an option to sell later if the price bubbles again, but they don't need that for the investment to be successful. True cashflow investors have a win-win because whether they keep the property for long-term cashflow or sell it for a huge gain, they win either way. Being cashflow positive is everything.
The math is seductive: Prices at the Viceroy are roughly 52 percent off the 2007 peak. Units once sold for as much $670 a square foot. Today the average price is $319.
That isn't seductive, that is stupid. That's like saying the $10 tee shirt you see in a clothing store that is marked down to $50 from $100 is a good bargain. The bubble price was never justified, and just because that price is cut in half doesn't make the price any better. Cashflow value is the only stable measure of value of any investment, but it is particularly useful for real estate.
"I have never seen such a high concentration of foreign nationals acquiring real estate," says Peter Zalewski, who has been in real estate for 15 years and founded Condo Vultures, a consulting and brokerage firm. "Eighty percent of the sales in downtown Miami are foreign-based. This is unprecedented."
If it can happen in Miami, it can happen in Irvine, right? ~~ giggles to self ~~
Miami is hardly the only hot spot for buyers from outside the United States. Real estate brokers say they've seen a surge in Washington, New York, Las Vegas, Los Angeles and San Francisco. In Seattle, Asians are buying property sight unseen, says Joe Brazen of Brazen Sotheby's International. In New York, 25 percent of buyers at the Armani-designed 20 Pine building, near the World Trade Center site, are from overseas.
"It's a positive in a sea of negatives," says Jonathan Miller, chief executive of Miller Samuel, a real estate consulting firm in New York.
This year in Phoenix, for the first time, there have been more buyers from Canada than from California, according to real estate data outfit Information Market. With the Canadian dollar approaching parity with its U.S. counterpart, the opportunity was simply irresistible to Jim Chuong, a 38-year-old Novartis sales manager from Toronto.
Chuong, whose house in Canada is already paid off, used to invest in U.S. stocks. Now he's investing in Phoenix condos, paying $50 a square foot for units that would cost $500 a square foot in Toronto.
"It's ridiculous is what it is," Chuong says.
This part of the story is true. I was recently contacted by a Canadian investment company that is flipping properties in Las Vegas. They are also active in Phoenix and other markets.
For foreigners with cash, the deals can make them money from day one. Chuong buys two-bedroom condos for less than $40,000 in low-crime areas. He only picks up units that already have renters. After paying association fees and taxes, he walks away with $300 a month, pre-tax, on each. The deals are now easy to do, thanks to the cottage industry of companies that has grown up to manage virtually everything for foreign buyers, down to badgering renters for the monthly check.
Investments like these will be the home runs of the housing bubble. With the positive cashflow those properties are giving off relative to their price, the investors can hold them forever.
For the international investor class, the United States' bloated inventory of homes, high unemployment and weak currency make for an unusually attractive buyer's market.
"Never before have all these things come together like this," says Patrick O'Neill, chief executive officer of the Hong Kong-based O'Neill Group, which helps Chinese invest in international real estate. O'Neill says Chinese buying in places like New York is on track to double this year.
"Unless you want to go to Baghdad," O'Neill says, "the United States is the best you can get."
Are there good cashflow properties in Baghdad? I wonder if this guy likes Detroit?
The trend is showing up in the statistics. In a National Association of Realtors report released in July, 28 percent of brokers reported they had worked with at least one international client, up from 23 percent a year earlier. Among those, 18 percent had completed at least one sale, compared with 12 percent in the 2009 report.
"I was going invest in the stock market, but I decided to invest in real estate instead," says Diego Garcia, a Mexico City native on assignment in New York City with Pfizer Inc., where he is a regional finance director. Garcia paid $850,000 for a Manhattan one-bedroom in a gleaming new high-rise that he plans to live in for now. "I'm a conservative guy," Garcia says, "and this was more conservative."
That is an investment that may turn to crap like the North Korea towers. Buying on speculation without regard to the underlying cashflow is a fool's game.
That's not to say there aren't steep risks. An economic jolt could easily throw the whole plan into disarray. The housing market is far from a recovery. In many places, prices continue to fall. What happens if currency values reverse and a foreign owner needs a quick sale? Or a renter bolts in the middle of the night, leaving an empty unit and no cash flow?
It's not as if foreign buying can be counted on for a housing market turnaround. Overseas buyers represent a mere 7 percent or so of today's total.
That that number sink in, folks. This is not an invasion. Foreign buyers represent a small fraction of the buyer pool. In places like Las Vegas that will see a 50% or more turnover of its housing stock, a few additional sales to foreign buyers won't support the market.
Yet in some cities, such as Miami and Washington, the foreign sales are helping to stabilize the markets.
In past downturns, buying a property in the U.S. was the prestigious purview of the wealthy, but today the market is within reach of the swelling ranks of the global upper-middle class.
Colombians, who often call Miami the most beautiful city in their country, have always been drawn to Florida. The difference now is the upside-down economics. It is cheaper to buy in Miami than in Bogota, and you can fly between the two cities for $59 each way.
Interesting that the substitution effect can reach across thousands of miles. I wonder what it means to Irvine prices to be seven times higher than Las Vegas prices. It's a premium on a premium, right?
"Muchos muchos muchos muchos opportunity," says Elsa de Blaschke, who owns a construction company with her husband in Barranquilla, Colombia, and is hunting for an investment property to buy in Miami. De Blaschke chose not to invest the capital at home because she says Florida offers a better chance of a bigger return.
"The international buyer pool is better than we have ever seen it before," says Phillip White, president of Sotheby's International, based in New York.
To match demand, U.S. brokerages are hiring agents who can speak foreign languages and are pouring more resources into marketing overseas.
In October, agents from 11 Sotheby's International branches will descend on Hong Kong's convention center to regale wealthy buyers there with slick visuals on showcase properties. In Toronto, agents from Florida Home Finders play to crowds of 800 every other Sunday at a Holiday Inn banquet hall. Jenny Huertas, Condo Vultures' international sales director, throws seminars for potential clients across South America.
"Their jaws drop. They can't believe it," Huertas says. "They think these deals are too good to be true."
Some of these deals are. I am buying property in Las Vegas for $/SF prices last witnessed in the late 80s early 90s. I am the foreign cash buyer in that marketplace. Perhaps I am the foolish knife catcher, right?
Today's featured knife catcher
We don't need to look to foreign nationals to find knife catchers. Of course, if a buyer uses an FHA loan, who cares? The US taxpayer will eat the losses. Today's featured property was purchased for $499,000 on 5/16/2008. The owner used a $491,290 first mortgage, and a $7,710 down payment. Without much skin in the game, he didn't feel like he needed to stay on long.
Recording Date: 08/05/2010
Document Type: Notice of Default
When you consider that this "owner" hasn't been making a payment since February, he has already recouped his down payment in squatting savings. This property has certainly cost him less to own it than it would have to rent it, and if its value had gone up, he would have made a fortune off his tiny investment.
Irvine Home Address … 170 ALMADOR Irvine, CA 92614
Resale Home Price … $399,000
Home Purchase Price … $499,000
Home Purchase Date …. 5/16/08
Net Gain (Loss) ………. $(123,940)
Percent Change ………. -20.0%
Annual Appreciation … -8.8%
Cost of Ownership
$399,000 ………. Asking Price
$13,965 ………. 3.5% Down FHA Financing
4.21% …………… Mortgage Interest Rate
$385,035 ………. 30-Year Mortgage
$75,350 ………. Income Requirement
$1,885 ………. Monthly Mortgage Payment
$346 ………. Property Tax
$50 ………. Special Taxes and Levies (Mello Roos)
$33 ………. Homeowners Insurance
$271 ………. Homeowners Association Fees
$2,585 ………. Monthly Cash Outlays
-$297 ………. Tax Savings (% of Interest and Property Tax)
-$534 ………. Equity Hidden in Payment
$21 ………. Lost Income to Down Payment (net of taxes)
$50 ………. Maintenance and Replacement Reserves
$1,825 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$3,990 ………. Furnishing and Move In @1%
$3,990 ………. Closing Costs @1%
$3,850 ………… Interest Points @1% of Loan
$13,965 ………. Down Payment
$25,795 ………. Total Cash Costs
$27,900 ………… Emergency Cash Reserves
$53,695 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 1,307 sq ft
($305 / sq ft)
Lot Size: n/a
Year Built: 1989
Days on Market: 18
MLS Number: S633520
Property Type: Condominium, Townhouse, Residential
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Private interior location of community. Central location in Irvine. Wonderful High Ceilings, Great Sun Exposure, Plantation Shutters, Wood Flooring Downstairs. Large Kitchen with Lots of Counter Area. Dual Master Bedrooms with Spacious Bathrooms. Nice Sized Patio Area with In Ground Spa.