Although foreign buyers only account for a small portion of all home sales in the United States, $74 billion worth of property was sold to foreign buyers from March 2019 – March 2020. According to the NAR (NAR), the sales included 154,000 properties, and 61% of these were resident foreign buyers*. On the commercial side, the NAR reported there was $53.4 billion in cross-border capital inflows, 58% were purchased with cash, and 54% of buyers were outside of the United States.
Real estate agents need to be prepared to deal with foreign investors, because these transactions can be a challenge for even a seasoned real estate professional. You might need to deal with a person you’ve never met, and sell a property the buyer has never seen in person. You may also need to work through language barriers, cultural differences or currency confusion issues. Then, there is also an increased risk of becoming a victim of a scam or fraudulent transaction.
Here are some tips for real estate agents to manage foreign investment sales effectively.
Ensure Foreign Ownership Laws Compliance
Anyone can purchase residential property in the United States — there is no requirement to be a US citizen. An Individual Taxpayer Identification Number (ITIN) is required. ITINs are issued by the Internal Revenue Service (IRS) or can be arranged through an IRS-approved certified accountant.
Foreign purchases may be tricky if financing is required. American financial institutions will not typically lend to foreign investors, unless the investors already have other property or financial interests in the United States or they are residents.
Commercial investments are under increased scrutiny by the Committee on Foreign Investment in the United States (CFIUS), which is an inter-agency committee. This group reviews certain foreign investment transactions and real estate transactions by foreign persons to determine if the transaction poses any national security risk. The scope and powers of this committee were expanded in recent years with the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). As a result, foreign investors may be required to disclose additional information under these laws.
Additionally, the US Department of Treasury’s Office of Foreign Asset Control (OFAC) prohibits trade and financial transactions with certain individuals, companies and countries without prior authorization. Exemptions may be granted on a case-by-case basis. To view the sanctions list, visit the OFAC website.
Your foreign investor client may be impacted by the Foreign Investment in Real Property Tax Act 1980 (FIRPTA) sometime in the future as well. If they purchase the property and then wish to sell it afterwards, the federal government requires that 15% of the sale price be withheld by the buyer and paid as tax to the government.
Foreign investment is definitely more complex than a local sale. You should encourage your client to do their own research and due diligence before making the purchase.
Be Upfront About The Potential Impact of Currency Fluctuations
It’s not your role as a real estate agent to keep on top of currency exchange rates, but you need to be aware that foreign buyers may be sensitive to currency fluctuations. These fluctuations may influence closings, because it’s possible the market may fluctuate so much the buyer can no longer afford the property. Your foreign buyers may request a short or a long settlement based on the currency forecast.
Remind your foreign investors that all transactions will be processed in US dollars, and it’s their responsibility to seek advice from their bank or finance company about any additional fees and charges they may incur as a result of the international transaction.
The transfer of funds from foreign banks does have the potential to be problematic. Educate your sellers on how the closing process works in the US, and ensure they have the appropriate swift codes and details needed to transfer funds.
Do Virtual Tours and FaceTime® Walkthroughs
You may never meet some foreign buyers, particularly if they’re investors, and especially during the pandemic when international travel is at an all-time low. So virtual tours are very important when dealing with foreign buyers. FaceTime and live property walkthroughs can also help to provide a realistic view of a property, and it also allows the buyer to have a more thorough look and ask questions in real-time.
Selling real estate sight unseen does pose some challenges. Read our Selling a Real Estate Property Sight Unseen blog to find out more about the risks to watch out for.
Be Clear in Your Communications
If dealing with a foreign investor, you may be faced with language barriers and cultural differences, and communication can be problematic.
Keep in close contact with the client to ensure they’re aware of how the real estate transaction process is managed in the US. Ensure all approvals are obtained in writing, and that identification is verified so you can be certain of who you’re dealing with.
Be Alert to Scams
Working with foreign buyers that you’ve never met, combined with cash payment transactions or international wire transfers can make even the most experienced real estate professional nervous. Be alert to the latest news in real estate scams.
Due diligence is paramount to ensure that you don’t find yourself facing a lawsuit or, worse, financial ruin and damage to your hard-earned reputation.
Talk To CRES
Real estate E&O insurance coverage is essential for any real estate professional. Contact the CRES team at 800-880-2747 for a confidential discussion about your insurance needs today. CRES are specialists in Errors and Omissions insurance for the real estate industry. And with CRES E&O + ClaimPrevent®, you’ll have access to a team of legal professionals 7 days a week to help you prevent lawsuits.
If our policies aren’t the best fit for you, we’ll shop from our unparalleled number of options to find you the best coverage at the best price. Just ask us! Let our real estate E&O experts do the research for you.
*Resident foreign buyers are non-US citizens, recent immigrants or non-immigrant visa holders who reside in the United States for more than six months for professional, educational or other reasons.