Investing in real estate markets overseas

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While the housing market in the U.S. remains uncertain, it has become imperative for investors to seek opportunities elsewhere. In diversifying their portfolio, one of the best bets this year is to look at real estate overseas.

For investors that haven’t considered the possibility of looking overseas for investment opportunities, picking from among the many options available can be difficult. To help, here are a few leading picks according to experts:

1. A new report states that the top choice these days for real estate investments overseas is Panama. The property values there have appreciated in key waterfront areas which include Punta Pacifica, Balboa Avenue, and Costa del Este. Immigration to Panama is also expected to remain high as retirees, international corporations, and banks are expanding into the market. Meanwhile, the inventory for apartments remains low.

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2. Apart from Panama, Paris is also among the top picks. Even as the real estate market in the rural areas of France has not seen much improvement, Paris experienced reasonable growths in the past few years. There are active rental markets in the city and it even has a neighborhood that has been attracting attention from many investors.

3. As for those who are looking to invest in farmlands, Uruguay is worth looking into. With about 95 percent of the country farmable, there are also no restrictions to foreign ownership and the use of land.

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RE{PST: Manhattan Real Estate Feels a Russian Chill

According to this NewYorkTimes.com article, rich Russians have been sinking fortunes into some of the priciest condominiums in Manhattan. Read it below:

Image Source: nytimes.com

Who doesn’t enjoy a good yarn about Russian oligarchs who throw their fortunes at New York real estate? Take the Russian fertilizer king Dmitry Rybolovlev, who is linked to a record-breaking $88 million sale at 15 Central Park West, or the composer Igor Krutoy, who bought three apartments at the Plaza Hotel. Yet these tales of excess could soon fade into memory.

Moscow may be 4,500 miles from Manhattan, but with tensions intensifying over the annexation of Crimea, an Arctic Russian blast could chill the high-flying luxury real estate market here.

Rich Russians have long been a force in the city, headlining some of its flashiest apartment sales, but now many are fearful that buying a New York apartment could have political ramifications at home. And even if they were willing to risk President Vladimir V. Putin’s ire, economic sanctions and visa restrictions might soon make such purchases impossible.

There are no official figures, but anecdotally, about 40 percent of the condominium and townhouse buyers in Manhattan are foreigners, and more than half of buyers in new developments come from overseas, according to Jonathan J. Miller, the president of the appraisal firm Miller Samuel. It is unclear what percentage of that total is Russian, but Russian buyers have dominated the news in recent years, along with buyers from China and Brazil.

The prospect of Russian cold feet couldn’t come at a worse time, as condominium prices at the high end of the market are surpassing levels reached during the peak of the last real estate boom, and developers are buying up sites at a frenzied pace. New projects, planned with billionaire foreign buyers in mind, are altering the landscape of the city. Perhaps most notable is the spate of super-tall, narrow towers in the works along West 57th Street, their long shapes casting a shadow on Central Park.

Victoria Shtainer, an associate broker at Douglas Elliman Real Estate, has felt the chill firsthand. She had been working with a Russian buyer, a legislator, since December. With a budget of $25 million to $52 million, he had been considering listings at the Plaza Hotel and the Marquand, a new development at 11 East 68th Street. He was coming to New York for a visit this month when Russian forces invaded Crimea. Soon afterward, Ms. Shtainer learned via an email that “due to relations with the U.S., he was canceling his trip,” she said. “It said he wanted to wait until things quieted down.” Another of Ms. Shtainer’s Russian clients, who had been looking for an apartment in the $4 million to $5 million range, also canceled a visit. “She told me she was afraid to get a visa, that they were just going to wait it out,” Ms. Shtainer said.

“Putin has drawn a red line — he has made it clear that ‘you are either with us or against us,’ ” said Mark Reznik, a broker at A & I Broadway Realty, which has many clients from the former Soviet Union. “There is so much propaganda in Russia, people are scared to do business here.”

Elliot Bogod, the president of A & I Broadway Realty, also has several clients who are pausing to regroup. “I have a client who almost signed a contract in Battery Park City but now wants to wait,” he said. The buyers, a couple who live in central Kiev, are concerned that the Ukrainian government will forbid citizens to remove their money. “They are worried that they won’t be able to transfer funds or pay the common charges,” Mr. Bogod said.

But real estate brokers naturally love to spin the news positively, and they argue that the freeze is just temporary. The wealthy in Moscow now see the writing on the wall, the argument goes, and so they will soon start strategizing on ways to relocate their money, and even themselves, to New York.

“It is the whole idea of flight to safety,” said Edward A. Mermelstein, a real estate lawyer who does a lot of business in Russia, and who says he is fielding more calls now from clients in the region. “Anytime there is uncertainty overseas, it is a good time to bring money to the U.S.”

For anyone looking to move assets stateside, real estate can be an excellent option — particularly for anyone wanting to avoid intense scrutiny. A transaction in a new development, for example, involves buying directly from the sponsor, or developer, who demands little in the way of personal information. “If you open a bank account,” said Jacky Teplitzky, a broker at Douglas Elliman, “you have to answer a lot of questions, or with stocks there is a lot of oversight. In new construction, there is no board, no application, nothing. You just write a check and buy an apartment.”

Ms. Teplitzky is representing several Russians who are looking to buy in New York and Miami. She says that although it is true Russians fear reprisals internally if they move assets overseas, and are concerned about the prospect of economic sanctions, “they are trying to think of their worst- or best-case scenario, and they have to take a chance either way; it isn’t like they can do nothing.”

Some Russians who are moving ahead with purchases hope to fly under the radar; thus, rather than buy a high-profile penthouse, they are choosing smaller apartments. “Because they don’t want their names in the paper,” Ms. Teplitzky said, “they are using a different strategy that is less visible. Nobody writes about the $2 million deals, right? They all want to cover the big expensive purchases.”

The Russians who might begin looking to buy in the States could also be of a different ilk than before. “I think the freeze is going to be temporary,” said Mr. Reznick, “and then, over the next three years as the sanctions get tougher, we will see a new kind of buyer, not an investor, but someone who is looking to emigrate. Russians will realize they want to buy a place here not just for investment, or not just for their kids while they are in college, but a place for the whole family, a large family home.”

And real estate players can take some solace in knowing that even if Russian buyers dwindle, there are other rich foreigners who would gladly take their place. New York’s profile is rapidly gaining favor among the global elite. According to the most recent Knight Frank Global Cities Survey, which tracks the cities of most importance to the world’s wealthiest people, New York is in second place this year, behind London. And by 2024, the survey is predicting that New York will top the list. That could bring a welcome sigh of relief to all those New York luxury developers quaking under their hard hats in fear of a Russian exodus.

Esplanade Capital is known for intelligent investing in the real estate industry. Follow this Twitter page to know more about the company.

REPOST: Not all housing bubbles crash equally

Why are investors and economists worried of the effects of the possible bubble crash in China's housing market? CNN.com has the story.

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FORTUNE -- As China's home prices soar to record highs and well beyond the reach of ordinary citizens, the world watches closely as many wonder if the housing market might eventually crash. The global economy is still recovering from the financial crisis triggered largely by the collapse of America's housing market, and it's easy to see why investors and economists would worry that a similar boom-and-bust scenario in China could deepen the lingering slump.

Such concerns, though, are premature at best. Is there a bubble in China's housing market? It's possible, especially in major cities, such as Shanghai, Beijing, Shenzhen, and several provincial capitals. But China's economy is far different from America's; should a real estate bubble in China suddenly burst, the following differences could temper the risks of another global disaster:

China's saving propensity might save the day

Declining home prices erode what's called the "wealth effect." If home prices drop, theoretically homeowners feel less wealthy so they consume less, which in turn, leads to an economic slowdown. The U.S housing crash in 2007 damaged the wealth of countless Americans, but such spillovers likely won't be as deep in China because the country saves far more than most other countries.

Most Chinese don't enjoy the kind of retirement plans and other social safety nets that most Americans do. So they tend to rely on savings and their children for financial security. In addition, they also save to help their children in their competition for marriage partners. As the ratio of males and females in the youth cohort rises due to gender-selective abortions, the competition for brides is getting fiercer for families with a son, and the competitive savings have risen in importance relative to the precautionary savings. Because of these factors, Chinese households save a greater fraction of their incremental wealth than most other countries.

As home prices rise, incremental consumption as a share of incremental wealth in China is smaller than in the U.S. For the same reasons, if home prices were to fall, the decline in consumption as a share of a decline in housing wealth may also be smaller than in the U.S.

 An affordable housing program can partially offset a slump

A housing bust could also disrupt input-output linkages -- when home prices collapse, the ramifications could ripple across the construction industry, leading to reduced demand for steel, cement, and appliances. China isn't immune, but the government's ambitious affordable housing program could cushion the blow to the wider construction industry. This program is meant to help address income inequality. To build these houses, you need cement, steel, and eventually furniture. To the extent that a price correction occurs in the normal housing market, the construction of low-income housing will at least partially offset any potential negative effect.

China's banks can manage bad home loans

As we saw in the U.S., a collapse in home prices nearly destroyed the nation's financial system as loans to real estate developers and homeowners turned sour.

In China, loans to real estate developers and mortgage loans to homeowners altogether account for about 20% of all bank loans. Suppose 20% of these loans go bad, which is an aggressive assumption given that subprime loans in the U.S. accounted for less than 20% of all banks' loans during the subprime crisis of 2007-2008 (and not all subprime loans went bad); this will produce 4% of bad loans.

While this is not negligible, China's banking sector should be able to work itself out, perhaps with the government's help. The fact that China's government debt burden is much lower than the U.S., Europe, or Japan is important here. After all, the Chinese banking sector got itself out of a far more serious bad loan problem a decade ago.

Policymakers don't sit idle

Chinese government policies are not fixed either. In the last few months, the country's central bank has tightened its expansionary monetary policies used to counter the global economic slowdown. It did so because it made a judgment that risk in the housing market was not very big. If it sees signs of a housing price correction and a potential negative effect on the overall economy, it can reverse course.

Bubbles are an inevitable byproduct of a market economy, especially when the underlying asset is hard to sell short (such as housing in China). However, even if a housing price correction comes, it won't have the same impact on the overall economy that we experienced when the U.S. and European markets collapsed.

Shang-Jin Wei is the director of Columbia Business School's Jerome A. Chazen Institute of International Business and the NT Wang Professor of Chinese Business and Economy.

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More mortgage and real estate news can be found on this Esplanade Capital blog site.

Factors directly affecting home value

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Knowing the direct factors affecting home value can help sellers determine the right price for their property. It also helps owners decide on the needed improvements to increase their home’s market value.

Below is a comprehensive list of the direct factors that may make or break the ideal price of your home:

Community. People move from one place to another for one important reason—community. This includes efficient city services, ample resources, and a bustling business district. The community where the house is located directly affects its desirability in the market. Among the questions home buyers need to ask when evaluating a property include “Is the community prone to high crime rates? Who lives in the community? Is it near commercial establishments?”

Schools. Studies suggest that houses located nearest the best schools offer one of the highest housing prices in the market. Thus, a home’s overall market value could be affected by a property’s proximity to good schools.

Image Source: news.com.au

Amenities. House features have direct impact on its price. According to Realtor.com, the most worthwhile investments for houses are its amenities, which include traditional upgrades in kitchen and bathroom, as well as creating high-end amenities like specialty rooms such as media rooms and children’s playroom. Other amenities include outdoor areas like parks.

Transportation. This is of prime importance for people who need easy access to public transportation, especially for families who commute daily to and from work.

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Jay Eisenstadt and Esplanade Capital provide investors with valuable information about real estate market trends. For similar discussions about the housing sector, visit this blog.

Highest and lowest priced housing markets in the U.S.

Image Source: businessinsider.com

Home prices were the highlight of the 2013 U.S. housing market, recovering with bigger than expected price gains and solid home sales. This year, economists predict prices to rise slowly as more homes are coming into the real estate inventory in the succeeding months.

Despite numerous price fluctuations, there are particular housing markets in the U.S. that have remained either affordable or expensive for buyers across different states.

Fox Business reports that Malibu, California, remains the most expensive neighborhood to buy a home in, with a sample-size house priced at more than $2 million. The cheapest homes, meanwhile, are in Cleveland, with a sample size house costing an average of $63,729.

Image Source: cnbc.com

The rankings, which were based on Coldwell Banker’s annual home listing report, used sample-size houses that have four bedrooms and two bathrooms across the country. Throughout 2013, the bank evaluated 1,900 markets and 52,000 listings to come up with the collated data.

Other areas marked with expensive homes are in California: Newport Beach ($1.8 million), Saratoga ($1.7 million), Los Gatos ($1.36 million), and San Francisco (1.3 million). Conversely, the most affordable markets are Ohio ($66,000), Flint, Michigan ($84,000), Saginaw, Michigan ($87,000), and Jackson, Mississippi ($94,000).

One neighborhood that stood out from the list is New York, which has some of the priciest, as well as most affordable homes. Properties in Great Neck, for example, averaged $1.1 million, while those in Buffalo cost around $100,000.

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Jay Eisenstadt and Esplanade Capital provide investors with intelligent and responsible information about real estate trends. For more related topics about housing markets, visit this blog.

REPOST: How To Get Screwed When Buying Real Estate

Are you looking for perfect place for your business? Hanny Lerner shares tips on how to make sure that you don’t screwed in your next deal, buying or selling.

Image Source: forbes.com

Not many small businesses today could afford to buy a building for their business, considering that banks typically require the buyer to put down 35%-50% of the purchase price. But the federal government-backed loan program SBA 504 is a great option to consider, as it allows qualified buyers to obtain 90% financing.

Buying an industrial building for my business took me the entire 2013 – six months to find the right building, three months to negotiate the contract and another three months of being in contract. I learned an incredible amount during the process, a lot of which I’m going to share with you in this article, so you can learn from my experiences and avoid making my mistakes.

A. Negotiating the Contract

First rule: everything in the contract is up for negotiation. There is a long list of things to consider, including:

- how much of a deposit to put down
- how long of a due diligence period
- whether the seller will accept the contract subject to SBA financing
- the seller’s financial responsible to remedy title and/or environmental issues

My contract negotiations took as long as it did because we couldn’t agree on the deposit amount, due diligence period, mortgage contingency period, seller’s responsibility for title remediation and much more. We ended up settling on a 10% down payment, 45 days of due diligence period and 60 days mortgage contingency period with a closing date of 90 days from contract signing. I also agreed to buy the building “as is”, which means that the seller wasn’t responsible for doing any structural or cosmetic repairs.

1. Mortgage Contingency

It’s in your best interest to make the contract “mortgage contingent”, so you can back out of the deal for a full refund if you aren’t able to obtain financing within the contingency timeframe. A “non-mortgage contingency” (or “all-cash deal”) means that the you can’t back out of the deal, regardless of your ability to get financing. In my case, the seller begrudgingly agreed to an SBA mortgage contingency solely because she trusted her real estate broker who assured her that I would close. But in all fairness, I should have started the mortgage approval process way before I signed the contract to ensure that I had enough time to close; I was running against the clock from the minute I signed it.

2. Creating an Entity

To limit liability, you should buy a building under a new corporate entity, and not under one’s personal name or operating business name. If your business gets sued, you don’t want the Plaintiff to come after your building too. On the flip side, if someone trips in front of your building and sues you, you don’t want them to come after you personally or your business. I learnt this the hard way when I was 25 and got sued personally by an ex-tenant who claimed the roof fell on his head. The building was under my personal name at the time.For this new building, the Purchaser was an LLC that I formed once I received the contract.

3. Time of Essence

You never want to accept a “time is of the essence” (TOE) clause in your contract, unless you are buying the building with all cash. A TOE clause requires you to close by a certain date, whether you obtain financing or not. If you don’t close on or before that date, you are in breach of contract and you will lose your entire down payment and the building.

Sometimes you have no choice, like what happened to me. The 60-day mortgage contingency period was up and, thanks to the government shutdown and delayed tax return filings, I still hadn’t received a commitment letter from the traditional bank or SBA. At that point I had a choice: either to cancel the contract, get my down payment back and lose the building, or agree to a TOE and close within 90 days of contract signing.

I really wanted to buy this building. Being the risk-taker that I am, I agreed to convert the contract into a TOE closing, accepting the pressure of obtaining 90% financing and close within the next 30 days (or I’d lose my 10% down payment). Doing what I did is not recommended. If you decide to do a TOE closing, be positive that you will get the financing and are able to close on time. When I realized it was impossible to close within 30 days, I begged the seller to give me more time to close; she finally agreed to extend the deadline by 30 days, stating that she’s only doing it because she admires my determination to get this deal done.

I got approved by both the SBA and traditional lender barely two weeks before the new closing. As you can imagine, the pressure and stress I endured during this period was off the charts.

B. Obtaining Mortgage Financing

The SBA 504 is structured where a traditional bank (i.e. Citibank or Chase ) finances 50% of the purchase price. The SBA finances 40% of the purchase price and the buyer puts down the remaining 10% financing.

1. Traditional Bank

I wasted a lot of time trying to get financed with the large banks. I later learned (from my business banker at Citibank, no less) that they get hundreds of mortgage applications a day and are extremely selective in who they approve. They will always opt to finance a company that generates eighty million dollars in annual revenue over a young company that generates a couple million. I finally turned to smaller banks like American Community Bank, Sovereign and Celtic Bank, all of whom were eager to finance my deal.

2. SBA Financing

The SBA application process was tedious. Just to get them all the required documents took several months, as they kept asking for more and more items each week. They ended up offering me a 20-year fixed rate amortized over 20 years, which I happily accepted.

In hindsight, it was a big mistake to go directly to the banks and NYBDC (SBA’s CDC) to get financed. I should have used an experienced mortgage broker who already has relationships with the banks to get the deal done. The time and energy I spent getting the mortgage (versus working on my business) was definitely not worth the 1% that I saved on the broker fee. I’ll never make that mistake again.

C. Due Diligence

The “due diligence” period is the time the buyer has to assess and research the property. The two most important reports are the title search and environmental assessment.

1. Title Search

All buyers obtaining financing must buy title insurance on the property. The title search confirms land tenure and title claims, as well ensures that there are no liens, violations, or outstanding bills on the property. Typically, the seller is responsible for clearing up any title issues, such as liens, DOB or HPD violations and outstanding debt. Double check your contract to make sure the seller assumes responsibility for removing any title issues.

In my case, the seller was responsible for up to $7500 (negotiated up from $5000) to remedy any title issues. Thankfully the building didn’t have any title issues because $7500 probably wouldn’t have sufficed if there were!

2. Environmental Phase I and II

The mortgage company conducts an Phase I environmental on the building being purchased. The environmental company inspects and researches the building to ensure that there are no underground oil/fuel tanks or contamination affecting the property. If they find anything questionable on the Phase I, the buyer is required to do a Phase II, which is a more rigorous analysis that can include drilling and excavation. If the Phase II comes back with any signs of contamination, you’re pretty much screwed. You’d have to excavate the entire ground, which can cost hundreds of thousands of dollars.

My Phase I report showed that there were two buried tanks in the building, so I was required to do a Phase II. Between missing affidavits from the Fire Department and no proof that the underground tanks were ever properly abandoned or removed, I had to hire a tank removal company to excavate the ground and properly abandon the tanks. Unfortunately, my contract didn’t include any clause for the event of any environmental issues; the seller was relieved from paying any of the remediation costs and I incurred the entire cost of excavating and removing/abandoning these tanks. I do wonder how my attorney missed adding that clause in the contract.

3. Architecture and Construction

You definitely want to bring in an architect and general contractor during your due diligence period to ensure that you’re fully aware of the costs associated to build out your space. In some cases, if the construction costs are too high, it may not make sense anymore to buy the building.

In my case, I needed to redo the roof, upgrade the electric service (so that it handled the machinery we use), and create partitions for our offices and workrooms. It was going to cost me at least $300,000 to do the renovations, which I was okay with.

D. Finding Incentives

Federal, state and city agencies offer many incentives for small businesses that purchase and renovate a building. Here are some that I researched:

ICAP : This program provides a 15 to 25-year property tax abatement when your renovation costs are at least 30% of the purchase price. This is by far the biggest incentive I’ve discovered.

New York Power Authority: NYSERDA, Con Ed and National Grid offer rebates when installing certain energy savings equipment, such as LED lighting and efficient heating and cooling systems. Excelsior: This program provides tax incentives if you create 10 new jobs when you move into the building you’re buying. IBZ Relocation Tax Credit: If your building is in the IBZ zone, you receive a one-time $1000 tax credit for each employee when you move your business. Use Tax Exemptions (IIP): You can apply for a use-tax exemption on all new manufacturing equipment/machinery that you buy for the new space. There is also a Guide to Incentives for small businesses in NYC, which include more incentives provided by the Industrial Development Authority (IDA), Energy Cost Savings Program (ECSP), as well as the Façade Grant Easement, Non-Historic Tax Credit and more.

D. We Can’t Control Everything

Buying a building is by no means a simple undertaking. If you decide to take the plunge, know that you’ll be under a lot of stress—before, during and after you buy the building. In fact, so many things can go wrong during the process that can cause you to lose the building (along with a lot of money). For example, environmental issues may be too great for you to remedy, the seller may decide to back out of the deal or your financing may fall through. Tragically, the latter just happened to me.

My TOE closing date was set for today, 12/31/13. Just a couple of weeks before closing, my soon-to-be ex-partner put a “lis pendens” on an apartment building that I own (as part of his marital asset claim); the mortgage company and SBA needed to use that building as collateral for my new building, and dropped the deal as soon as they saw the “ lis pendens”. The building that I worked an entire year to buy was sabotaged in exactly 30 seconds flat.

While I am devastated for having lost the building and all the money I put into it, I believe that everything happens for a reason. I learned a tremendous amount in the last 12 months that will only help me with my next purchase. And if dreams do come true, maybe the seller would be willing to sell me the building again one day.

Esplanade Capital provides a vigorous approach to real estate business. For more industry topics, follow this Twitter page.

REPOST: U.S. postpones 2014 hike in mortgage fees

Fee increases in mortgages will be postponed. Read more of this good news from this CNN.com article:

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It's a Christmas miracle! Planned fee increases that would have added to the cost of millions of mortgages will be postponed.

Currently, borrowers seeking loans backed by Fannie Mae and Freddie Mac are set to pay higher upfront fees starting April 1.

The fees, ordered by the Federal Housing Finance Agency earlier this month, are meant to help safeguard banks against risky borrowers who might default.

But housing experts say they will add thousands of dollars to the cost of all mortgages insured by Fannie and Freddie, with the biggest hits taken by borrowers with less than perfect credit histories.

On Friday, the incoming chief of the FHFA, Mel Watt, said he intends to postpone the fees -- and perhaps even cancel them -- until more analysis is done. The FHFA oversees Fannie Mae and Freddie Mac.

Watt, a former Democratic member of Congress, has been confirmed to his post by the Senate and takes office on January 6.

In a statement, Watt said he intends to "evaluate fully the rationale" for the fees and their impact on Fannie and Freddie and the "availability of credit."

The mortgage industry has been bracing for substantial increases in the price of loans in 2014.

"If these [policies] had been implemented, it would have increased borrowing costs dramatically," said David Stevens, CEO of the Mortgage Bankers Association.

The hit for individual borrowers would depend on the amount of the home purchase being financed, according to Brian Koss, executive vice president at Massachusetts-based lender Mortgage Network.

Borrowers would have paid a fee when they took out the loan, or they could have effectively rolled the higher fees into their interest rate, raising monthly mortgage payments by as much as a quarter percentage point.

Even with the reversal, however, mortgages will probably get more expensive over the next few months anyway as the Federal Reserve cuts back on its purchases of mortgage backed securities, a program designed to keep interest rates low.

Stevens, the mortgage industry representative, said the proposed increases made little sense. Defaults on mortgages made in recent years have been much lower than on those made before the housing crash.

As a result, Fannie and Freddie are flush with profits, so much so that they have already returned almost all of their $187 billion taxpayer-funded bailout.

"The GSEs are making a lot of money," said Stevens. "There's no rationale for the increases."

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