Factors International Buyers Need to Consider When Purchasing Residential Real Estate in the United States
By Min Chan and Wen Hsu
A new wave of real estate investment by immigrants has arrived in the United States, as more and more Chinese people start the application process for the EB-5 visa. These immigrants make up the larger portion of international buyers in the U.S. real estate market, and in the past 12 months, with the cutoff date in May 2015, the total capital invested in the U.S. real estate by Chinese buyers is expected to reach $28.6 billion, an increase of $22 billion over the same period last year. According to the data provided by the National Association of Realtors, the principal investment locations for Chinese investors are California, followed by Washington and New York.
Real Estate Agents
An important professional involved in the real estate transaction process is the real estate agent. Agents not only aid buyers in finding suitable property, but they also guide the buyers in every step of the transaction process to help them make solid choices. The purchasing process in the real estate market is not exactly uniform, and an experienced agent can offer buyers critical information about the property and community that’s difficult to access otherwise. The agent’s knowledge about the market and real estate transactions, as well as their negotiating skills, all come in handy in facilitating transactions. At the same time, the agent does not charge the buyers any fees for services rendered because their commission is paid by the seller. Therefore, we suggest you find a reliable and experienced real estate agent to help you when start your search for real estate in the United States.
In China, a property owner may select more than one brokerage firm to help sell his or her property, but in the U.S. the seller often signs an exclusive agreement with just one real estate agent which allows only that agent to represent the seller in the entire process. Any interested buyer must go through the seller’s agent to find out more information about the property and they must arrange with the agent a suitable time to personally inspect the property. Almost all agents belong to a real estate association, such as the National Association of Realtors, the Real Estate Board of New York and so on. These organizations monitor the actions of the agents to ensure they follow a strict code of ethics, and require all the agents to collaborate. This means that both the seller and buyer agents work together and treat each other with professional courtesy. All properties that enter the market are posted on a unified central system, where any licensed real estate agent can access its information and can then arrange to take their clients there to have a look. Therefore we recommend that the buyer work with one agent alone to avoid any unnecessary confusion.
The exclusive agreement signed between the agent and the seller will specify the commission amount once the property is sold. If the buyer has an agent working on his or her behalf, the commission paid by the seller will be divided equally between the seller and buyer agents. Thus, it costs the buyer nothing to have their own agent. Moreover, as agents have a fiduciary duty to their clients, any action in the transaction process must be taken in the interest of their clients. Since the seller’s agent protects the interest of the seller and not that of the buyer, the buyer must find their own agent to represent and protect their own interests. Otherwise, inexperienced buyers may find themselves at a disadvantage in the transaction process.
In sum, real estate agents are licensed professionals and their compliance is required with clear stipulations. In every state, agents must be licensed by that state before conducting business and they are required to attend classes regularly for license renewal.
Home Inspectors and Real Estate Lawyers
There are other key professionals in addition to real estate agents who are involved in the real estate transaction. When you purchase a home, it may be necessary to hire a home inspector; this person is a trained and licensed professional who inspects the house and issues an inspection report. This report helps buyers better understand the condition of the property, as well as any hidden or potential flaws within it.
When you buy an apartment in an apartment building in New York City, it is unnecessary to hire a home inspector, but the buyer may need the services of a real estate lawyer. The lawyer will investigate the financial conditions and history of the apartment building, and an experienced real estate agent can recommend such a lawyer to his or her clients to help them make informed choices when purchasing property.
Before purchasing the property, the buyer must prepare adequate funds as the acquisition usually requires a large amount of money up front. Many sellers will request proof and documentation of sufficient funds from the buyers before selling the property. The buyer needs to prepare such financial information and place funds in an account that can be easily transferred to the United States at any time. If a loan is needed, then there needs to be a pre-approved loan letter issued by the bank. Proof of funds is critical in a rising market, because it is a sellers' market, and many people will bid for the same property. If the seller can’t access the buyer’s proof of funds, then they won’t take that buyer as a serious candidate and may even choose another buyer who has underbid the price but has proof of funds.
Although 70 percent of Chinese buyers purchase property with cash, foreigners can also get financing for property in the United States as many U.S. banks provide financing projects to international buyers. Sometimes for EB-5 investors, it is easy to obtain loans before becoming U.S. residents, as they can obtain the loans specifically for foreign citizens. The loan will depend on the home purchase amount, but it usually covers 60 percent of the costs and you can improve your purchasing capacity through different financing options found in the United States.
If the buyer has an account with the lending bank, the bank can transfer the buyer's credit for financing regardless of the account’s location. Some banks also allow foreign buyers to finance after purchasing a property. Once the buyer becomes a U.S. resident, he or she will face the same traditional lending standards as local buyers. The bank will review the buyer’s tax, employment, and other information that new immigrants generally have a hard time providing. The loan does has several benefits, including tax reduction, credit establishment and the conservation of funds that can be invested in other projects.
A Good Faith Deposit
A good faith deposit, or just deposit, is an important part of purchasing property. A deposit shows the seller that the buyer is serious about purchasing the property, and it can be paid when the buyer places their bid for the property or when the contract is signed. The deposit amount varies greatly and usually ranges from 1 percent to 25 percent of the property price, depending on the market conditions, local customs and laws.
The deposit is often paid to a third-party bank account designated by the seller. The account is authorized for special management of the property transaction, such as an escrow account or a title company. The contract will stipulate whether or not the deposit will be refunded. For example, if the buyer needs a loan to purchase a house, we recommend obtaining a loan guarantee. Without the loan guarantee the buyer may lose the deposit if they fail to obtain the loan. The local real estate agent should be able to provide guidance for the buyer in this process. The deposit can be counted as a part of the total purchase amount, while the remaining portion will be paid at closing. Before closing, your lawyer should have all the funds needed to sign the contract, including taxes, management fees, property fees, etc.
International buyers have just about the same home purchasing procedures as local buyers. However, when an international investor decides to sell a property, they will pay different taxes than local investors. When selling U.S. property, the foreign residents need to comply with the “Foreign Investment in Real Property Tax Act of 1980” (FIRPTA). According to the act, foreign investors are required to pay 10 percent withholding tax, because they don’t file taxes with the IRS every year. If taxes are filed before selling the property, the withholding tax can be greatly deduced. The investors can also take into consideration the “1031 Exchanges” when selling the property. It allows the investors to reinvest the funds from selling the property into a different property and they can be temporarily exempted from the income tax. Investors should seek counsel from a tax accountant or tax adviser as these professionals can widen their knowledge about the U.S. tax system.
Generally speaking, it will be of great help to work with the experienced professionals when purchasing a property as many reputable professionals can help you get a better grasp on the real estate market.
Ms. Wen Hsu is a practicing real estate agent for the City Connections Realty Company. Living in Manhattan for over twenty years, she has seventeen years of experience in real estate and financing, and provides a series of all-around services in real estate for investors in Manhattan, New York. She previously was an analyst at a credit rating company and analyzed mortgage-backed securities of residential real estate.