British buyers snap up US repossessions
The collapse of large sections of the American housing market has given property hunters in the UK a lucrative investment opportunity. Chiara Cavaglieri reports
Sunday 12 December 2010
The world of property can be harsh in the extreme, with one person's misery being another one's profit. Nowhere is this truer than in the land of laissez-faire economics the United States.
The collapse in house prices in many parts of America as a result of the credit crunch and recession provides an investment opportunity for cash-rich Britons unafraid of risk and without moral qualms. Property buyers are taking on repossessed homes – called foreclosures in the US – at bargain-basement prices, then renting them out for impressive returns. But should they hand over their cash in such turbulent times?
Foreclosures accounted for 25 per cent of US residential sales in the third quarter of 2010 – compared with low single digits in the UK – according to figures from online marketplace RealtyTrac. These homes are being sold more than 32 per cent below average sales prices.
On top of this, rental yields of between 12 and 15 per cent after an initial outlay of only £30,000 to £40,000 are being reported by property investment company the Belgrave Group, which was set up to take advantage of the American repossession market. Belgrave currently focuses on buying foreclosures in Atlanta and Detroit – two areas hit particularly severely by the mortgage crisis – and selling them on to investors for between £30,000 and £42,000.
"We will not list properties that fall below 12 per cent net profit – that's what's in the investor's pocket – so these properties can pay for themselves in about six or seven years," says Nigel Gough, a director of Belgrave. "Most of these properties were worth over $200,000 a few years ago and eventually the economy will get back on its feet. So while the rental income pays you back now, you've got property to sell at full market value in six or seven years' time."
Repossessed properties are usually steeped with potential pitfalls for investors, particularly at auction when there is little or no time for an inspection. In areas with high numbers of foreclosed properties, many homes are vacant and at risk of vandalism or even squatters so the damage can be extensive. Investors will also need to fork out for a title search to check for outstanding debts and a property lawyer to determine the foreclosure laws as these differ from one state to another.
Raising finance is yet another challenge, with lenders in the UK and the US unlikely to lend on a foreclosed property, so investors have to be willing to risk a cash lump sum.
"In America, banks are not keen to lend to non-residents at all so that's a further hurdle," says Miranda John of Savills Private Finance International. "It's a cash punt, really."
For investors without a lump sum, opportunities for rental yields on Spanish repossessions could prove more successful as the banks there are far more willing to lend on foreclosed properties.
"The banks are much more innovative and proactive so most will hand on lists of their foreclosures. Some of the larger banks will even offer advantageous lending terms so clients may find they can access higher loan-to-values and lower rates than would be available for a standard purchase elsewhere," says Ms John.
Other legal pitfalls with a foreclosed property include difficulties getting previous owners to vacate the property and unpaid property taxes which may pass on to the new owner. It is usually easier, therefore, for investors to buy from the bank once the foreclosure process is completed. Companies such as Belgrave and Assetz offer to take on the bulk of the buying stress by sourcing and inspecting the properties, refurbishing them and filling them with tenants. All that's left for UK investors to do is collect the rental income every month.
Despite the attraction of cut-price properties, however, David Shaw of investment consultancy Torcana, which specialises in discounted property in Florida, warns against diving in headfirst without a local professional.
"I unfortunately see naive UK buyers getting carried away with what look like unbelievable opportunities in pretty communities, simply because they are cheap and look good. It is not uncommon in Florida for builders to overcompensate with amenities and flair to mask a questionable location," he says.
Mr Shaw says that for stable, long-term rental demand and better resale potential, investors should avoid areas which have over 25 per cent foreclosures in the community and instead concentrate on locations where affluent local professionals live, work and send their children to school.
Finally, investors should keep in mind that no matter what the initial cost, an overseas property purchase is a huge financial commitment. There is no guarantee that investors will see the level of rental income or capital growth that they hope for, particularly when you take into account the economic uncertainty in the US. "Remember that no one has a crystal ball so be wary of anyone who tries to predict what future returns you are going to get," says Jason Witcombe of IFA Evolve Financial Planning.
Unemployment levels in the US jumped to 9.8 per cent last month, its highest rate since April, and house prices declined by 2 per cent in the third quarter of this year, according to the Case-Shiller index of 20 major US cities. High unemployment rates drive down house prices so investors hoping for capital growth may find that another cluster of foreclosures could flood the market.
Buying property involves tying up a lot of money in an illiquid asset so investors need to be sure they are prepared to sit on their asset for some time.
"Also, remember that exchange rates will fluctuate and can go for or against you. This is a risk that Britons investing in UK property don't face," says Mr Witcombe.
Case Study: Zoe Guilford
Having spent much of her time in LA, Zoe Guilford, 34, always dreamt of owning her own place in the US and was looking for somewhere to invest her money. She settled on the US foreclosure market and came across the Belgrave Group. "My Nan lives in Florida for six months of the year and my parents own a property there so I have links there already," she says.
In May, she bought her first property through Belgrave, a three-bedroom house in Detroit for £27,000 cash, which in two months' time was being rented out for $900 (£570) a month.
"The thought of being able to buy a house for under £30,000 was amazing. I know that some day the American market will recover and I'm willing to hold on to them for as long as it takes," she says.
Only a month later another Detroit propertycaught her eye, this time for £29,000, which she now rents out for $850. With total earnings of $1,750 per month for an outlay of less than £60,000, Zoe is more than happy to recommend the US market to anyone.
"If I had the money I would buy another property. It is still a risk, but when you look at the return it is worth it," she says.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Ukraine crisis is Russian roulette for investors
Make money as a mystery shopper
Investment Insider: Poundland may not be cheap when it floats
How to start your own internet business
The whole truth about legal fees: Conveyancing can knock a big hole in home-buyers' finances. To get the best deal you must cross-examine solicitors about their charges, says Sue Fieldman
- 1 Oxford is the least affordable city in the UK, where houses cost 11 times local salaries
- 2 Australian man Rod Sommerville reacts to bite from deadly snake by reaching for cold beer
- 3 North Korea elections: Kim Jong-un wins 100% of the vote
- 4 David Cameron resorts to paying for Facebook fans because not enough people like him
- 5 Steve Irwin’s final words: Cameraman present at death opens up about deadly stingray attack for the first time
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
If you're horrified by a flame-roasted dog, you should be shocked at a hog roast
Poor 'live like animals' says Boris's privately educated sister after going on 'poverty safari'
Exclusive: Impact of immigrants on British workers ‘negligible’
Vince Cable: Teachers 'know absolutely nothing' about the world of work
Ukraine crisis: Russia pledges to 'retaliate against sanctions' as Ukrainian president says Crimea vote will not be recognised
iJobs Money & Business
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£55000 - £70000 per annum + benefits: Pro-Recruitment Group: In-House Corporat...
£80000 - £100000 per annum + benefits: Pro-Recruitment Group: In-House Opportu...
£30000 - £35000 per annum + generous benefits: Pro-Recruitment Group: Mixed Ta...
Day In a Page
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town