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.