Tuesday, October 28, 2014

Foreign Buyers of Manhattan, New York Property - Overview

By Wei Min Tan

1.0  Overview for the foreign investor
1.1  Why New York
1.2  Can foreigners buy in Manhattan, New York?
1.3. What type of properties are popular amongst foreign / international buyers?
1.4  What are expenses associated with owning a property in Manhattan?
1.5  Financing for foreign / international buyers
1.6  Cash buyers 
1.7  Transaction costs
1.8  Taxes, taxes, taxes
1.9  How does the fee work when buying/selling?
1.10  How does the agent fee work when renting?
1.11  Should I use more than one agent?
1.12  What are the best areas for investment?
1.13  Does buyer have to be in New York for the closing?

2.0 How we add value
2.1  Niche focus on foreign buyers
2.2  Financial background
2.3  We are also property investors
2.4  Market experts
2.5  One stop solution
2.6  Oh yes, we are nice to our clients. 

3.0 Buying process for foreign / overseas investors

4.0 Managing the property 

5.0 Selling the property 

1.0 Overview for the foreign investor

1.1 Why New York
Manhattan is the most expensive, most stable and most recognized market in the US.  The recent Knight Frank Wealth Report 2014 ranks Manhattan as the top real estate market in the world based on factors including economic environment, political climate, knowledge and quality of life.  Globally, Manhattan is a bargain when compared to cities like London, Paris and Hong Kong.  

1.2 Can foreigners buy property in Manhattan, New York?
Yes. Our foreign clients buy property in Manhattan because of brand value and appreciation potential. They often purchase as a pied-a-terre (vacation home), or as an investment property. 

1.3  What type of properties are popular amongst foreign / international buyers?
There are two categories of apartments - condominiums and cooperatives. We recommend condos because of the higher appreciation and investment values. Co-op buildings often restrict ability to rent and perform renovations.  This reduces their attractiveness as an investment property. The process of buying a co-op is subject to board approval which prolongs the buying process.   Further, a co-op board may even reject a buyer.

The value of a condo, on a per-square-foot basis, is about 30 to 50 percent higher than that of a co-op. However, the appreciation potential and demand for condos are higher as well.  

Besides apartments, our clients also purchase commercial mixed use and multifamily buildings.  Apartments are more popular because they are easier to manage and simple to understand. 

1.4  What are expenses associated with owning a property in Manhattan?
For apartments, the main monthly expenses are: 
(i) property taxes
(ii) common charges
(iii) insurance
(iv) if financing is used, mortgage principal and interest.

New development apartment buildings often have a tax abatement which reduces the monthly tax bill. Without abatement, annual taxes are between 0.5 to 1 percent of property value.  Common charges average $1 per square foot per month and goes up or down depending on number of units and amenities.  Insurance is about $500 per year.

Expenses for mixed use or multifamily buildings are higher and include taxes, insurance, maintenance, repairs, property management and others.  

1.5  Financing for foreign / international buyers
Mortgage loan financing is available and can be obtained either through a U.S. or non-U.S. bank.  Since the credit crisis, lenders have tightened credit criteria and will require about 40 percent as downpayment from a foreign buyer.   

Financing allows the ability to leverage funds, thereby magnifying returns.  For example, if  an investor buys one condo at $1 million in cash, he gets the appreciation benefit of  only one  apartment.  But if the investor obtains mortgagae financing and only puts 50% down payment, he can actually buy two apartments, effectively benefiting from the appreciation of two properties with the same (theoretical) equity investment. 

The two ways of arranging financing are:
(i) Financing from U.S. lender:  This option is easily arranged through a bank in the U.S.   The requirement is usually a 40 percent down payment (60% Loan-to-Value).  Also, the buyer needs to show liquid assets that is usually based on a multiple of the monthly payments.  Since financing is in the U.S., the buyer would have to pay about 2% mortgage tax.

(ii) Financing from home country:  This refers to getting an international mortgage from the home country of the investor.   Hence from the U.S.'s perspective, a cash transaction.  The main difference is saving on the mortgage tax and various bank fees.  But of course, there may be other fees associated with the financing bank.  

We would refer our foreign clients to contacts for both options.  Ultimately, the international investor needs to do a cost benefit analysis.  It's a matter of comparing loan terms, amortization period, interest rate, costs etc.

1.6  Cash buyers 
Foreign investors purchasing in cash save on the New York mortgage tax, about 2% of the loan amount.  In addition, the cash buyer saves various bank related fees.  

1.7  Transaction costs
For the buyer,  transaction costs are about 5-6 percent of the loan amount.  This estimate includes mansion tax, mortgage tax, title insurance,  attorney fees, recording taxes and other administrative expenses.  With an all-cash closing, the transaction costs are about 1.5 to 2 percent of property price.  The broker's commission is paid from the seller's proceeds.  

Read more:   Closing Costs and Stamp Duty.  

For the seller, transaction costs are about 8% of the selling price and this is driven by the broker commission and transfer taxes.

1.8 Taxes, taxes, taxes

The categories of taxes are: 

(i) Property tax
These are reflected as a monthly expense with each condo and paid quarterly.  If there is a mortgage, the bank could escrow the tax amouint.  This means collecting and paying on behalf of the owner.  For properties without a tax abatement, this tax is roughly 1 percent of price per year.    

(ii) Capital Gains Tax - depends on how ownership is held.  

(iii) Annual Operating Tax
This refers to annual taxes on profits assuming the property is rented out.  The U.S. government allows depreciation of property every year.  In Manhattan, 40 percent down payment is typically required for rental income to offset carrying costs including financing.  Hence, assuming breakeven cash flow, the depreciation allowance would create a NEGATIVE taxable income.  This means no operating taxes for the owner.  However, depreciation would have to be recaptured at time of sale.

(iv) Estate tax:
The largest tax exposure to a foreign property owner (compared to a U.S. owner) is the estate tax.  U.S. law is such that if a foreign owner passes, estate taxes could be as high as 50 percent.  The good news is that there are tax structures that can be set up to remove this risk.   

We have tax attorneys and accountants in our network that are qualified to advise our clients on all the above tax matters.  

1.9  How does the agent fee work when buying or selling?
In New York, agent fees are paid by the seller. When the seller’s agent agrees to list a property for sale, a certain percentage is agreed upon as commission.  If the buyer is represented by an agent, this pre-negotiated commission would be split with the buyer’s agent.  If the buyer does not have an agent, then the seller’s agent keeps the entire pre-negotiated commission.  Hence, it is in the best interest of the buyer to have agent representation to help identify the right property, negotiate the best price and coordinate the entire purchase process.

Access to inventory:  The property inventory in New York is openly accessible to all.  For example, if there are 5,000 listings for sale at a given point in time, all brokers and consumers have access to this inventory.  There is no restricted or exclusive access given to certain brokers.  Brokers usually access the inventory through the broker system while consumers can access them through websites like Streeteasy.com and Trulia.com.  Any broker can bring a buyer client to view any property.  As such, the value of a buyer's broker is in identifying and negotiating the good buys.  The value is not in getting access to properties.   

The fiduciary responsibility of the buyer's agent is to the buyer while the fiduciary responsibility of the seller's agent is to the seller - regardless of the fact that the commissions for both is coming from the seller's side.   This is just the way the brokerage trade agreement works in New York.  

1.10.  How does the agent fee work when renting?
For rentals, the agent fees  for both landlord's and tenant's agents are paid by the tenant.  The market rate is usually 15 percent of annual rent.  Despite the agent fees coming from tenant, the landlord's broker represents the landlord's interest while the tenant's broker represents the tenant's interest.

1.11  Should I use more than one agent?
All agents in New York, through the real estate trade agreement of the Real Estate Board of New York, have access to the same listings.  For example, if there are 5,000 properties for sale in Manhattan, every agent will have access to the 5,000 listings.   As such, the brokerage community strongly discourages the buyer on using multiple agents as this would create confusion.

We recommend that a potential client interview several agents and then decide on one.  As we will be 100% focused on helping our investor client identify the right property, we in turn expect client loyalty.  This expectation is consistent amongst all good brokers. 

1.12 What are the best areas in Manhattan for investment?

It would be foolish to recommend a "best area" without first discussing the buyer's objectives.  The risk/reward model applies to Manhattan property which is probably the most efficient property market in the world.  An emerging area may have higher expected returns but also comes with higher  financial risk such as higher vacancy rate.  An established area would have lower return but would likely be faster to rent out and prices would not be as dependent on  external factors.  

1.13  Does buyer have to be in New York for the closing?

This depends on the bank that is providing the mortgage.  Generally, the buyer can assign Power of Attorney (POA) to a representative in New York and hence does not have to be in New York for the closing.  The individual assigned the POA can be a lawyer who would be given authority to execute contracts specific to the transaction.  

2.0 How we add value

2.1  Niche focus on foreign buyers
We are the top New York agents serving foreign investors of Manhattan, New York property.  Our clients come from regions including North America, Asia, Europe and the Middle East.  

2.2  Financial background
Leveraging prior careers at top Fortune 500 companies, we have a strong financial background which allows us to explain in terms of ROI, yield and appreciation potential vs other investment options faced by the investor (stocks, bonds, hedge funds).  This differentiates us from the "typical" agent whose focus is to stress the granite countertop or marble bathroom.

2.3  We are also property investors
We were property investors before becoming property agents.  Our clients will benefit from our insights as landlords.

2.4  Market experts
We are market experts as evidenced by extensive media appearances and interviews in publications such as the Wall Street Journal, New York Times, Bloomberg, NBC, CBS, TheStreet, Fidelity and CNN.

2.5  One stop solution
We provide a one-stop solution to foreign buyers.  This includes identifying the right property, negotiating price, bringing the team together (closing attorney, tax attorney, accountant, financing), finding tenant, dealing with tenant, eventually marketing property for  sale.  The cycle typically starts all over as our clients often want to redeploy capital to buy another property.  

2.6  Oh yes, we are nice to our clients.  We don't pressure, create false urgency etc.  

3.0 Buying process for foreign / overseas investors

Below is the process for buying a condo in Manhattan, New York.  The process is similar for those buying the condo as an investment property or as a vacation home.  Main difference is that for investment property buyers, down payment required by the lender is higher.  

Estimated Time to closing after identifying property:
With Financing:  10 to 12 weeks
All Cash:  2 to 3 weeks

1.  Obtain pre-approval from lender (1-5 days)
Lender can be a U.S. bank or overseas bank at buyer's home country with an international mortgage program.  

2.  Identify Property (2 days - several months)
Property viewing can be a pleasurable or tiring experience.  Our value is in filtering properties based on the client's objective to maximize productivity of the client's time.  

3.  Make offer and negotiate price (1 week)
Negotiation skills are critical.   Experienced negotiators could obtain many favorable financial and non-financial terms for the buyer.

4.  Execute contract (1-2 weeks)
The agreed upon terms are provided to both parties' attorneys who will prepare the contract.  The buyer's attorney will perform due diligence on the property prior to actual contract execution.  Once all is agreed upon, the contract is executed.  At this time, a 10% deposit will be required from the buyer to be held in escrow by the attorney.

5.  Apply For Mortgage and Obtain Commitment Letter (6-9 weeks)
The buyer formally applies for a mortgage after which the lender will perform due diligence, including appraisals etc.  Consequently, the lender will issue a commitment letter.  

6.  Submit condo package to condo board for approval (1 to 4 weeks)
This occurs concurrently with Step 5 above.

7.  Schedule Closing
At closing, all parties - buyer, seller, bank, attorneys, brokers, will come together at a table.  A lot of paperwork is signed and funds will be provided to the seller in exchange for the buyer getting legal title to the property.  The deal will be completed at the table and usually no future follow-ups are necessary.

4.0 Managing the property 

After our investor client buys an investment property in New York, the next step is to market to potential renters.  The broker fee for both landlord and tenant's brokers are paid by the tenant.  Both brokers still represent the interest of their respective clients despite fees coming from tenant. 

Here are the steps we perform:

  • Market property to tenants
  • Personally show your property to potential tenants/their agents
  • Convincing presentation of property's upsides
  • Internet marketing (Website, Broker system, Streeteasy, Trulia) 
  • New York Times
  • Professional photography
  • Professional floorplan
  • Google marketing
  • Social media marketing (Facebook, Twitter)
  • Screen potential tenants (credit score, references, salary, work history)
  • Arrange for tenant move in
  • Set up automatic transactions for tenant to automatically deposit monthly rent checks into owner's account.  

The system above removes the need for owner to pay monthly property management fees.  Property management fees are anywhere from 3% to 10% of gross rent.  Since Manhattan tenants are usually high income and good credit quality individuals, there is usually very little management necessary.

As the need arises where the tenant requires attention, we will be the point of contact to help resolve the issue at hand.

5.0 Selling the property 

At time of sale, we could represent the owner as seller's agent.  Marketing the property for sale includes the following activities.

  • Pricing property based on market drivers and financials 
  • Market property using multiple channels to both domestic and international buyers 
  • Leverage our media popularity to gain exposure for the property
  • Marketing strategy
  • Personally show property to potential buyers/their agents
  • Convincing presentation of property's upsides
  • Internet marketing (Website, Broker system, Streeteasy, Trulia, Zillow) 
  • New York Times
  • Professional photography
  • Professional floorplan
  • Google marketing
  • Social media marketing (Facebook, Twitter)
  • Open houses for broker previews
  • Open houses on Sunday catering to buyers
  • Media interviews at property (as opportunity permits)
  • Broker/potential buyer exposure events at property (as opportunity permits)
  • Refer to 1031 exchange sources for owners who wish to defer tax payments by exchanging to a like-kind investment property.  This is an effective portfolio building strategy.
  • Seller would pay broker fee to market the property.  This fee, usually 6 percent of price, would be split between brokers from both sides.  Despite fees coming from seller, the buyer's broker represents the interest of the buyer while the seller's broker represents the interest of the seller.   

Always consult your CPA or attorney on tax matters as individual situations differ. 

About The Author:

Wei Min Tan is a property broker focusing on Manhattan, New York luxury condominiums and foreign buyers.   He is often interviewed by the media including CNN, The New York Times and The Wall Street Journal on the subject of foreign buyers of Manhattan property.  

Wei Min can be reached at +1.212.380.6134, tan@castle-avenue.com.

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