According to the National Association of Realtors (“NAR”), total sales to foreign buyers seeking investment in United States real estate reached an estimated total of $104 billion for the period of April 2014 through March 2015. This surpassed the prior year’s number of $92.2 billion.
The most recent total sales number represents a 13 percent increase in total dollar volume sales from international buyers over the preceding one year period despite a drop in number of unit sales. NAR’s chief economist explained that this means foreign investors have become an “upscale group of buyers spending more money on fewer homes”.
This would also explain why real estate agents here on the luxury Westside are scrambling to find prime real estate home sites in the most desirable parts of Bel-Air and Beverly Hills for their high end developer clients to tear down or fix and flip. Generally, spectacular sweeping city and ocean views are a must have.
These speculators are purchasing high end “fixers” with the objective of enticing obscenely wealthy prospective buyers, among them foreign buyers seeking a “safe haven” for their money, who will pay top dollar. To achieve that goal, developers offer newly constructed homes with emotional panoramic views along with all the finest finishes and avant garde technology.
In addition to the traditional outdoor pool some of these properties will include an indoor pool, spa, and sauna. You will also likely find other features that are becoming standard in luxury properties, such as wine cellar with private tasting room, large game room, plush home theatre, and of course, automobile showroom.
Despite the greater risk to the developer, potential spectacular profits are driving this upscale tier of the luxury market.
The most recent NAR report shows five countries accounted for 51 percent of all purchases by international buyers. In order of greatest dollar volume first, they are China ($28.6 billion), Canada ($11.2 billion), India ($7.9 billion), Mexico ($4.9 billion), and the United Kingdom ($3.8 billion).
Four states account for half of all international sales. Those states are Florida (21 percent), California (15 percent), Texas ( 8 percent), and Arizona (5 percent) .
Unfortunately, the influx of competitive foreign buyers has caused a wave of property price growth, forcing many local buyers out of the real estate market. With the onslaught of Chinese money, not only into the U.S. but a number of countries including Australia and the U.K., some countries are putting up barriers.
In Melbourne, Australia for example, where the flow of Chinese money has made real estate less affordable to the average citizen, the government has slapped on a 3 percent additional stamp duty for foreign buyers. Although the argument can be made that the wealth effect of foreign money is good for the general economy of a city, some governments wishing to minimize the negative effects of such foreign purchases are imposing various protectionist measures.
Experts at Knight Frank, global real estate consultant, say the present hot spots for foreign investment are the United States on the back of its growth and recovery and some emerging markets like Vietnam, just opening up to international buyers as well as Kyoto, Japan with the Olympics coming up there.
The huge upside in fixing and flipping at the luxury high end has created a frenzy for properties promising fantastic potential windfall. Some economists say increased home flipping is causing prices to rise too quickly.
These economists say the increase in home flipping numbers can be a sign that the housing market is in trouble. They explain that when prices are too high and too hot because everybody wants to get in on the profits, this may be the turning point. Average return on “flipped” real estate investments nationally last year was about 46 percent.
For now, developers are still going strong on acquiring and building high end residential projects typically in the range of $35 million to more than $100 million in desirable Westside neighborhoods like Bel-Air and Beverly Hills. According to RealtyTrac, the biggest dollar returns on flips are in California and New York.
There has been a lot of caution floating around given the current volatility in the U.S. stock market and uncertainty in the U.S. political arena, which has sidelined some buyers from the residential real estate market.
Another unknown is the impact on the real estate market of the recent federal government decision that requires the disclosure of the identities of buyers behind all-cash purchases of real estate in Manhattan, New Yorkm and Miami–Dade County, Florida. This is an attempt to crackdown on money laundering by shell companies.
The treasury and federal law enforcement have made it clear greater resources will be used to investigate luxury real estate sales involving shell companies like limited liability companies (referred to as LLC’s) and other entities. The investigations will focus on those involved in real estate transactions like real estate agents, attorneys, and bankers, as well as agents involved in LLC formations.
The use of shell companies has risen as more foreign buyers have sought out safe havens for their money in the United States. A treasury official noted that multimillion-dollar homes have been “used as safety deposit boxes for ill-gotten gains”
The government is requiring title insurance companies to discover the identities of buyers and submit the information to the treasury. This applies to properties in Manhattan sold for more than $3 million and to properties in Miami-Dade County sold for more than $1 million.
As of this date the requirement runs from March through August. However, if treasury officials find that many sales involved suspicious money, the intent is that the treasury will impose reporting requirements permanently all through the country.
For the time being, the high-end real estate market on the luxury Westside appears impervious to the tale of woe concerning the fragile state of the global economy.
Have you heard? Another property in the $10 million-dollar range in the sought after Trousdale neighborhood of Beverly Hills just got an accepted offer!
For a free courtesy consultation, or information regarding mortgage brokers, contact Bess Hochman, a top Westside Real Estate Broker for over 20 years. Bess is also distinguished by holding a law degree. This article expresses the opinion of the author. You are advised to consult attorneys & others experts specializing in the issues referenced in this article.
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Bess at 310.291.4111 or Bess.CenturyCityNews @yahoo.com.
“Bess is a master negotiator!” says Michael Donaldson, attorney and author of “Negotiating For Dummies.”