Although known as ‘the land of the free’, American policy following the September 11, 2001 attacks has changed the sentiment of freedom for Americans. But what does it mean to foreign property investors?
The Uniting and Strengthening America by Providing Tools Required to Intercept and Obstruct Terrorism Act, also known simply as the Patriot Act, was passed in 2001 by the United States Congress. Its intention, as it specifically relates to foreign direct investment (FDI) in America, is to limit money laundering that might fund terrorist organisations both on American soil and beyond.
Section III of the Patriot Act expands the existing authority of the Secretary of the Treasury by requiring extra ‘due diligence’ on the part of any financial institution, which technically covers real estate agencies as well. The due diligence refers – somewhat vaguely – to stricter rules and regulations to ensure the ownership of any related financial accounts, the legality of any transaction, the monitoring of financial activities, and most notably, holding other financial institutions with which they deal to the same standards.
In other words, if opening a bank account in America in order to obtain a mortgage, and money is transferred into that new account from a bank in another country, the American bank has an obligation to override any privacy regulations held by that other institution so that it may perform its due diligence and verify the source of the income. If the foreign financial institution refuses to cooperate, the American bank may refuse the business, possibly even report the activity to the American government as ‘suspicious behaviour’.
While this certainly sounds like an infringement of an investor’s right to privacy, the reality is far less worrisome.
The USA is the largest recipient of FDI in the world as well as the largest foreign direct investor. According to a report issued last year by the Congressional Research Service, Foreign Investment, CFIUS, and Homeland Security: An Overview, this two-way exchange impacts the global economy, or ‘the spread of economic activity by firms across national borders’, and means that the American government must take greater care in its foreign investment policies; the report adds, however, that it treats foreign investors ‘no less favorably than U.S. firms’.
In fact, it is on the whole true that the American government actually welcomes the influx of investment by foreigners by making it quite easy to invest, and that the Patriot Act has received an undue amount of bad press, mostly from Americans themselves afraid for their own personal liberties. Pre-dating the Patriot Act, and perhaps much more relevant to foreign investors, is the Committee on Foreign Investment in the United States (CFIUS).
CFIUS is not an independent entity with the freedom to review foreign investment transactions, but operates instead under the authority of the American president and reflects his attitudes and policies. Its task is to assess the implications of national security from foreign investment in the economy.
The US presidential elections
If the real debate behind FDI in America lies with CFIUS and the direction it receives from the presiding president, then how will the November 2012 elections impact foreign investors?
The Bloomberg BusinessWeek recently published an article that says Republican candidate Mitt Romney has a ‘housing policy’ quite similar to Obama’s. Leading up to the elections, little had been said by either candidate about FDI specifically.
However, for the first time in 22 years an American president blocked a foreign transaction: in October of 2012, President Obama stopped a Chinese firm from purchasing a wind farm in Oregon stating that it was too close to a Navy base.
Realistically, then, a foreigner looking for a home – an apartment or house for investment or spending holidays in the USA – has little to fear from American presidential policy or its relationship to financial institutions. Instead, the November elections hold a much more interesting story: what will happen to the Washington D.C. housing market following the elections?
Washington D.C. as a foreign investment opportunity
Since Obama was re-elected, then the answer is: not much. If a new president had made his way into office, however, the local housing market was set to explode.
The incumbent’s staff, not to mention the many lobbyists, journalists, and the more than 200 other elected officials who work on Capitol Hill own a large section of the D.C. real estate market. Any of these who are tied to Obama or the Democratic Party specifically might have found themselves with a ‘For Sale’ sign in their front yard following the election. Then the new president’s staff would have moved in, buying up the available real estate.
This ebb of property ownership in and around the D.C. area (which may extend as far as the nearby states of Virginia, Maryland and Delaware) makes for a reliable property investment; for as long as there are politics and elections in America, the D.C. housing market remains a resilient and safe investment opportunity.
Chinese buying US$1 million+ homes in America
Washington D.C. is far from the only sound property investment option in America. The well-known hotspots such as New York, Florida and California are always strong bets – something Chinese investors seem to already understand. The Wall Street Journal says, ‘A new wave of buyers from China is snapping up luxury properties across the U.S., injecting billions of dollars into the country’s residential-real-estate market.
‘Buyers from China and Hong Kong accounted for $9 billion of U.S. home sales in the 12 months ending in March, up 89% from 2010, making them the second-largest group of foreign buyers of homes in the U.S. behind Canadians.’
Although reports are in from all over the USA that Chinese investors are making purchases of extreme luxury homes, including entire floors of Manhattan apartment buildings and mansions in Miami, it is in northern California, around San Francisco and Silicon Valley, that real estate agents are complaining of a lack of homes for sale in the US$1 million range due to Chinese investors. An article published in August 2012 on CNBC by Robert Frank says, ‘Sales of $1 million-plus have more than doubled in many communities in the Valley this year, toppling longtime luxury real-estate leaders like Beverly Hills or Miami.’
Beyond the infusion of Asian cash, the real estate market in America is showing signs of recovery and many journalists, financial advisors and real estate agents have even proclaimed that the housing crisis is over, citing improved purchasing prices in many of the states hardest hit by the housing crisis. This may even be part of why Obama was re-elected. Although it will take time for a full recovery of the housing market, even following the November presidential election, it seems it may not be a buyer’s market for much longer. So invest sooner rather than later so that when it does turn into a seller’s market, you are, as the Americans like to say, ‘sitting pretty’.
A buyer’s guide to the USA
Aside from the government’s ability to block foreign purchase of land or property in the USA for reasons related to ‘homeland security’, there are actually no restrictions on foreign ownership, and the property market is exceptionally straightforward, including a system of valuation and inspection standards that make is easy to know the value and quality of what you buy before you buy it. Additionally, all properties for sale in the States are listed in a nationwide database called the Multiple Listing System (MLS).
For foreigners, paying cash is optimal as mortgages can be difficult, and each state – indeed even many districts within each state – will have its own laws regarding the buying process. As always, it is best to consult a licensed real estate agent and/or specialty lawyer. Do note as well that it is the seller who pays a commission on the sale of property, not the buyer. By law in most states, the same real estate agent is not allowed to represent both the buyer and seller of a home and many agents even specialise in either buyer or seller brokerage. This is for the protection of both parties.
Once an offer is made and accepted by the seller, a binding contract is formed, and a deposit of normally 10% (although as much as 20–30% for foreigners) is placed into a trusted third-party account called an ‘escrow’ account. The buyer hires a licensed inspector to assess the property more thoroughly and identify any issues or repairs that may be needed. In some cases, the inspector’s findings may help to negotiate a better price for the property, and it is very important that the initial purchase contract include a clause that allows the buyer to pull out of the deal if any of the inspector’s findings prove too problematic or expensive for the buyer. Next, an appraiser gives the market value of the property, and then a title search is performed to ensure the property is free and clear to be sold. Finally, the deal is closed. It is in the closing that the differing state laws come into play the most; however, the closing is in essence the transfer of title and funds, including monies held in escrow, from the sale to the relevant parties.
While publicity surrounding the American property market, from the housing crisis to ‘homeland security’, may make it seem extra difficult to purchase real estate in the country, the reality is quite the opposite. The government not only welcomes outside investment, but the laws surrounding the buying process are extremely transparent, and the market itself, while still full of deals from the recent housing crisis, is on the upswing, making it the perfect time to invest.