U.S. real estate: Take my house — please

Attention, real estate shoppers: the entire U.S. sunbelt is
now
officially on sale. Prices in many areas of Florida, Arizona, Nevada
and
California
have dropped 40% from their peaks of a couple of years ago, to the
point where the deals seem nearly too good to be true. In Naples, Fla.,
a three-bedroom, two-bathroom home that sold for $350,000 in 2007 is on
the market for only $200,000. A starter home in Sacramento, Calif.,
that sold
for $215,000 in 2004, is on offer for a mere $129,000. And remember:
these
aren’t sale prices. They’re asking prices.

Are these apparent bargains really as attractive as they appear? Sandra
and
Pat Parente of Richmond Hill, Ont., scouted condos in Fort Lauderdale,
Fla., in
March of this year. Their eyes lit up when they saw a handsome
two-bedroom,
two-bathroom unit only steps from the beach. It had been listed this
past October
for $239,000, but had since been reduced to $199,000. “My
immediate
thought was, ‘Wow, this is fantastic,’”
says Sandra, who works as an advertising
executive in Toronto. “It needed a bit of sprucing up, but
there wasn’t anything
that needed urgent attention. It had a green area all around it, and a
pool, and
we saw it as a great way to get into the Florida market.”

The Parentes offered $175,000. The condo owner responded in a flash
with a
counteroffer of $189,000. As they pondered the counteroffer, the
Parentes made
further inquiries. The more they learned about the local market, the
shakier
it looked. “In the end, we let it go because we were worried
that, even though
prices had dropped, we were probably still overpaying,” says
Sandra. “We began
thinking that there may still be some downside in the Florida
market.”

The Parentes’ wariness is justified, say real estate experts.
Many believe we’ve
seen just the beginning of a monumental href="http://www.canadianbusiness.com/managing/ceo_interviews/article.jsp?content=20080414_198720_198720"
class="articleLink">
real estate collapse.
“The size of href="http://www.canadianbusiness.com/columnists/larry_macdonald/article.jsp?content=20080508_092825_10276"
class="articleLink">
the
U.S. real estate bust on the way down will be proportional to the size
of the
real estate boom on the way up,” says Robert Campbell, a real
estate economist
in San Diego, Calif., and author of style="font-style: italic;">Timing the Real Estate Market.
“There’s no
slowing down this train. The areas that had the biggest booms will have
the
biggest bust. Prices are heading lower — way
lower.”

Campbell points to many negative factors, including the galloping rate
of
foreclosures, which are running at record levels across the U.S. Those
foreclosures
are adding to a glut of homes on the market. To put the situation
 into perspective, consider that a three- to six-month supply
of
homes for sale has historically been considered typical for most
markets. But in the Miami-Fort
Lauderdale area, the supply of
single-family homes and condominiums
for sale is enough to last
for 34 months. The backlog is 21
months in Orlando, 18 months
in Tampa and Las Vegas, and 14
months in Phoenix. Meanwhile,
even more units are coming on
the market as builders finish the
projects they started in better
times. “Builders are offering huge
incentives and lease-back programs,” says Mark Dziedzic,
president
of Arizona for Canadians, a real estate firm that specializes in
helping
Canadians buy second homes in Arizona. “Here in Arizona,
some will guarantee you rent of $1,500 a month for two years on
any property you buy, while others offer huge discounts on sale
prices. The competition is tremendous.”

For Canadians, all of this means that there’s absolutely no
reason
to rush into the market. “On a pure timing basis, Houston is
the
only place in the U.S. you want to buy right now,” says
Campbell,
who has spent 35 years following real estate trends in the U.S. He
believes some states will bottom out in a year or two. Others, such
as California and Florida, will have to wait three or four years before
prices hit bottom. “I know Canadians will be saying to
themselves
‘ href="http://www.canadianbusiness.com/managing/strategy/article.jsp?content=20080428_198713_198713"
class="articleLink">
look what we pay here in Canada’ and compare it to
what they can
get in the U.S.,” says Campbell. “But
don’t look at prices relative
to where you are. Instead, look at prices relative to where the real
estate market is in the U.S. My data shows that the year 2011 is
when most real estate markets will finally find bottom.”
Even then you should be careful. Before putting down a penny,
take a moment to learn about property taxes, rental restrictions
and other bits of fine print that can undermine your dream place
in the sun. You should:

SWEAT THE SMALL STUFF
 Some states abuse out-of-state home
owners. Of course, real estate agents don’t tend to mention
this
when they’re showing you sunbelt properties. As a result,
many
Canadians get a nasty surprise when they scoop up a bargain property
only to find themselves stung by unexpected expenses.

Florida plays the most aggressive game of
pin-the-bill-on-the-foreigner.
State law allows Florida municipalities to impose different property
taxes on out-of-staters than on in-state residents. So if you
buy a property from a Florida resident, don’t be surprised if
the tax bill
on a property triples or quadruples. You can wind up paying $9,000
or more in property taxes on even a modest condo.

And that’s not the end of it. Florida and California
homeowners pay sky-high rates for property insurance because of the
frequency of
hurricanes, tornados and earthquakes. Buy a home in one of those states
and you may have to pay several thousand dollars a year for
insurance coverage — and that’s assuming you can
get
it. “In Florida, because of the hurricanes, there are certain
areas that are deemed
extremely high risk by the private insurance market and as a result,
they do not want to take on new insurance clients,” says
Lawrence
Barker of the Canadian Snowbird Association. “But if you
don’t have private insurance on your vacation home in
Florida, and it’s
wiped
out in a Hurricane Katrina-like situation, then you’re
done.”

Arizona offers a much better deal to out-of-state residents. Expect
to pay $1,000 or so in annual property taxes on a $200,000
property. Insurance rates are also relatively low. As a result, many
Canadians are selling their vacation homes in Florida and purchasing
property in Arizona instead, says Barker.

TEST THE WATERS
 “There’s more to buying a vacation
home than price,” says Barker. “Rent for a couple
of
years to make sure
you enjoy the lifestyle in a given location. Don’t go
thinking that a place is perfect for you just because its price has
dropped.”

David and Cheryl Burwash of Ottawa spent 10 years vacationing in
Carefree, Ariz., before finally taking the plunge this spring and
buying a two-bedroom, two-bathroom home in the community. “We
asked ourselves where we wanted to be in five to seven
years,” says
David, 51. “After all the time we’ve spent here in
this area, we knew it well and felt comfortable making a commitment. We
love the fact
that hockey, basketball and baseball games are $20 for a half-decent
seat. There’s no humidity, no bugs and good wine for sale in
the local
grocery stores. It was the right choice for us.”

GO SMALL
With so many homes on sale in sunbelt states, it’s tempting
to indulge your Gone
with the Wind fantasies and buy a
sprawling mini-mansion. In most cases, though, a smaller place makes
far
more sense. If prices recover quickly, a small place gives
you a firm foothold in the market; if prices plunge further, a small
property minimizes your losses.

“My family and I have been vacationing in South Carolina
since the 1970s and we loved the huge 4,000-sq.-ft. golf course
homes,”
says Ann Bosley, vice-president of Bosley Real Estate Ltd. in Toronto.
“But while we were looking for the right property we realized
that we
didn’t want the reality of a huge house — cleaning
it, furnishing it, all that upkeep. So we’re looking at
smaller
properties.” The Bosleys
recently bid on an 1,800-sq.-ft. condominium in Hilton Head, S.C., that
comes with maintenance and security included.
“It’s a matter
of practicality,” says Bosley. “We don’t
want to feel tied down to a property, and we wanted something that was
accessible by car so that
the kids and grandkids can drive down and use it as well.
It’s a good fit for the whole family.”

DO YOUR RECONNAISSANCE
 “Believe me, the real estate community is biased
and
will encourage you to buy, even as prices keep falling,” says
Campbell. “You have to
avoid that. Getting as much information as possible from reliable
sources — whether
from print, the Internet or close friends — will
help you make a better decision.”

Two good places to start are class="articleLink">www.hotpads.com, which lists
information
on bank foreclosures, and class="articleLink">www.ushomeauction.com, which
will give you a
good idea of prices for foreclosed homes throughout the U.S.
“My
husband did some fact-finding
on the Internet and I attended real estate seminars before I contacted
a real estate agent,” says Maria Woroniuk, 50, an operations
manager in Calgary, who is interested in buying a property in Arizona.
“The best deals are in houses built between 2001 and 2004.
They
were built for $300,000 and are now going for between $100,000 and
$120,000. That’s where I’m concentrating my search
over the
next few months.”

BID LOWER THAN YOU THINK  You
may be tempted by the low price on a
foreclosed home, but take the time to do a thorough review of the
property’s legal status, as well as a site inspection. Many
homes
that have been seized by the bank have liens against
them. Many have also been the targets of a
previous owner’s rage. Expect to see walls
with holes in them and torn-out faucets, as
well as general dilapidation. “If the owner
of a foreclosed property couldn’t make the
mortgage payment, he probably didn’t have
money for maintenance and upkeep either,”
says Robb Mackett, a real estate broker with
Blue Heron Realty in Naples, Fla.

Bosley, the Toronto real estate agent,
says her search for a U.S. property taught
her never to think that any offer is too low.
“Nobody is bidding the asking price on any
property right now,” says Bosley. “In fact,
U.S. real estate agents are advising clients to
bid 20% under the asking price, then take
off extra for necessary reno costs.”

When you have narrowed down your
search to a specific state, contact a U.S. real
estate agent used to dealing with Canadians.
Big-name companies such
as Re/Max and Century 21 will often
have expat Canadians on staff who
can help you with your purchase.

CHECK OUT THE RENTAL
SITUATION  Many condo developments
forbid you to rent out your
property —  problem for owners
who want to rely on rental income
to help offset some of their
expenses. “One of the main reasons
we dropped our offer on the Florida
condo was because the building we
were interested in didn’t allow renting,”
says Sandra Parente. “We were
counting on that money to help pay
for some of our expenses. Now we
know to ask about renting restrictions
before we ever put in a bid.”

FINESSE THE FINANCING
Before
the U.S. housing collapse, you
could have borrowed 100% of the
purchase price of practically any
home. “Banks would have lent
money to anyone,” says Robert
Keats, a fee-only planner in Phoenix,
Ariz. and author of The
Border
Guide: A Canadian’s Guide to Living,
Working and Investing in the United
States. These days, however, you will need
at least a 25% down payment to qualify for
financing from a U.S. lender.

A better option is to remortgage your
home in Canada and pay for your U.S.
property in cash. This strategy has the
added benefit of protecting you from the
fluctuations of the Canadian dollar. “In the
1990s, when the Canadian dollar plunged
from 80 cents to 60 cents, a lot of Canadians
took a beating,” says Keats. “Alternatively,
if you do get a mortgage in the U.S., protect
yourself against fluctuations in the U.S.
dollar by making sure you have enough
U.S.-generated income or sources of U.S.
income. It could get very expensive for you
if the Canadian dollar starts sliding.”

REMEMBER THE TAXMAN
Keats says
Canadians have to take three taxes into account
when buying U.S. homes: property
taxes (which we’ve already mentioned),
income taxes and estate taxes.

U.S. income taxes are a concern if you
decide to rent out your U.S. home. If so, you
have to claim your rental income in both the
U.S. and Canada and you are required to file a U.S. tax
return. You pay the U.S. taxes on
the income first, and you get a credit for the
amount against your Canadian taxes. You will
also have to file a state tax return. If you don’t,
you will have to pay 30% of your gross rents to
the U.S. Internal Revenue Service. “There’s no
way around this,” says Keats. “File a tax return
yearly if you’re receiving rental income.”

If you decide to sell your U.S. vacation
home, you will have to pay U.S. taxes on
any capital gains. Again, you pay the U.S.
taxes first, and you get a credit against your
Canadian taxes. Keats says you should get a
U.S. tax ID number well in advance of trying
to sell your home (it takes about eight weeks),
as you can’t close the deal without one.

Finally, there’s the matter of estate taxes.
Unless your worldwide estate amounts to
$2 million (U.S.) or more, you are likely not
subject to the estate taxes that U.S. residents
have to pay. However, when you pass away,
your estate will have to pay Canadian taxes
on your U.S. home’s capital gains.

Some Canadians try to delay paying capital
gains on their U.S. property by putting
their kids’ names on the property deed. But
that’s a dangerous move because of U.S. gift
tax. If you put yourself and your two kids
down as owners of a $300,000 property,
but pay the whole shot yourself, Uncle Sam
sees it as equivalent to handing each child a
$100,000 gift. Under U.S. tax law, your kids
therefore owe gift tax of 20% to 45% on the
money they’re deemed to have received. To
avoid being hit by a tax bill, Keats suggests
you give your kids the money in a bank
account in Canada, then have them pay
their share of the purchase price from that
account. “Otherwise, gift tax could be a lot
worse than the estate tax,” says Keats.

After sifting through the details, it’s easy
to see why some Canadians — Sandra and
Pat Parente included — have put off buying a
U.S. property. In April, the Parentes received
a phone call from their Florida real estate
agent informing them that the seller of the
condo in Florida had reconsidered and would
accept their $175,000 offer if they wanted to
resubmit it. The couple chose not to. “We’ve
reconsidered as well,” says Sandra. “I’m
reading
every day about more foreclosures happening
in the next few months and I think
we need to do more research on taxes and
rental issues. When we finally buy — which
we’d love to do eventually — it will be with
our eyes wide open.”

Where the
deals are
A three- to six-month supply of unsold homes
is standard. Many U.S. cities have far more.