Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
I've seen very many posts here on BP from foreign nationals on how different (and often frustrating) the US banking system is, compared to their own. Non US citizens have meager institutional options when seeking to finance investment real estate here in the US.
Which leads me to wonder why more foreign investors don't actively seek out (or seek to create) deals financed by the seller. Is there some obstacle I'm not seeing?
Admittedly, these deals are far easier to structure when you're here on the ground in a US market, but they are far from scarce. (A quick search on "owner finance" in Atlanta Craigslist just yielded 645 matches.)
So, what am I missing? Can anyone offer some insight?
A foreign investor is only insulated from subsequent dances with exchange rates if s/he establishes an incorporated entity in the U.S.A. to hold their investments - they will have to pay U.S.A. taxes at the corporate rate, but can chose if and when they repatriate any retained earnings.
If, say, a Canadian were to purchase a U.S.A. rental property in their own name or as part of a {flow-through} partnership, their earnings (minus a withholding by/for the IRS) will be repatriated and taxed in Canada. While the exchange rate will benefit them during the repatriation, when the have to turn around an purchase a second U.S.A. property, they exchange rate will take another bite.
I'm another Canadian who seeks a vendor carry (owner financing) whenever possible. While it does exist in Canada, it is nowhere near as common as in the U.S.A.
Las Vegas, NV · Member since 2014 · 25 posts · 5 votes
10y
Hi Mitch
Being a foreign national, I can tell that yes, there are obstacles :
- First one is ignorance : lack of information and education
In our country (France), owner financing does not exist. And in the USA, once you get to know, a bit, the market, you realize that there are many financing options. So before you seek something, you need to know that it does exist ....... You then need to get educated and informed by the right people which leads to the second obstacle
- Fear : who to trust ?
Craiglist for me is not a way to find owner financing or any other types of investments/financing. Investing internationally is not easy and we even need to be more cautious. Websites like craiglist are from the crowd and in the crowd, you find more easily crooks ....
As a foreign investor, I am actively seeking owner financing. The current exchange rate is at 30%. That's a big chunk out of any investment. I would gladly entertain an owner financing arrangement. But I need the down payment as a note from the owner and then I will get financing through TD or PML. I have already investigated my avenues and foreign investors also have to put down a bigger payment to get financing from the banks that will loan to us. I have only found 2.
Another obstacle is the fact that the banks won't use the income from the property to qualify. So, if we go with PML to buy, there are challenges on the refinance.
Any guidance and help is appreciated.
Do owners who finance offer a long term arrangement with low down payment with an agreement that more money will be contributed when the dollar exchange becomes more reasonable? I doubt it. But that is the challenge I am finding.
Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Isabelle W. thank you for your comments! I did not realize owner finance doesn't exist in France. I agree: you can't seek what you don't know exists.
Regarding your comments about fear, I see owner financing as representing a lower risk than many of the other options available to foreign investors. Rather than dealing with skilled and shrewd loan brokers, you're instead just working with a seller to solve a problem.
Sellers who are most receptive to a financing offer need to sell but can't, often because they lack sufficient funds to make necessary repairs or to engage an agent. In some cases they have little or no equity, and no desire to hold onto the property, but they do have great financing already in place. Or, perhaps they own the property free-and clear, but want a fast sale and don't need all their funds at closing.
Loan professionals are mostly in business to collect fees (interest, points, application fees, etc.), whether you make money on your deal or not; sellers like those above just want their problems fixed. They don't mind you getting what you want, as long as they get what they need. You can negotiate with sellers as equals, which is hardly ever the case with banks.
Yes, sadly, villains are out there, but I like your chances with sellers far better than with most lenders and banks.
Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
10y
@John Turner, thank you for your response! Currency conversion dynamics can be a huge factor in foreign investment, one I had largely overlooked.
Yes, that exchange rate does takes a big bite, but that's possibly where owner financing could be beneficial. Some owner financed deals can be structured with very low down payments. While you might have to inject some funds for repairs, the long-term plan would be to quickly get the property producing positive cashflow. From then on, you're largely insulated from exchange rate drama (since you'll be servicing the debt, collecting rents, and paying expenses, all in US dollars), at least until you sell.
Also, while in theory you probably could structure an owner financing deal with a variable rate tied to the US/Canada exchange rate, you're probably better off keeping it simple and easy for a non-pro seller to understand.
Speaking of which, how does that work with conventional lenders to foreign nationals? Do you have to pay interest rates comparable to those of the country in which the property sits, or do you pay rates more like those of your home country? Or does that depend on where the lender is located?
A foreign investor is only insulated from subsequent dances with exchange rates if s/he establishes an incorporated entity in the U.S.A. to hold their investments - they will have to pay U.S.A. taxes at the corporate rate, but can chose if and when they repatriate any retained earnings.
If, say, a Canadian were to purchase a U.S.A. rental property in their own name or as part of a {flow-through} partnership, their earnings (minus a withholding by/for the IRS) will be repatriated and taxed in Canada. While the exchange rate will benefit them during the repatriation, when the have to turn around an purchase a second U.S.A. property, they exchange rate will take another bite.
I'm another Canadian who seeks a vendor carry (owner financing) whenever possible. While it does exist in Canada, it is nowhere near as common as in the U.S.A.
Do you think from a currency standpoint it is better to own US in a corporation? I went through this dance with my cross-border accountant and he insisted that a flow-through limited partnership was the way to go so that is what I am currently using.
How you choose to hold your U.S.A. properties really depends on your personal situation and foreign exchange (FX) is only one consideration. Other factors to consider:
your personal marginal income tax bracket;
how you hold your Canadian assets (i.e. if you have Canadian real estate, do you hold it directly or in a CCPC);
your mid- to long-term plans in the U.S.A. market (are you planning to reinvest your earnings to buy more property);
From a currency perspective, every time you exchange currency, someone else gets paid - how much depends on how/where you convert your currency (i.e. at your bank branch, via an FX exchange, etc.).
It depends on the country where the loan originates.
I had a quote of 2.64% for a 4 year term on my principal residence in Canada just today.
The US starts around 4% but then you have to add 30 to 40% for the exchange if I use Canadian money for the payments.
So, ideally I need to borrow as much as possible for my deals and pay it off as the dollar improves.
Thanks for that insight!
Given the high total costs of US financing, it would seem that getting the seller to accept payments on any portion of the total price would be a win. Take, for example, a home priced at $100K which might be typically be purchased with an $80K bank loan and $20K down.
If the seller doesn't need all their money at closing, you might be able to get a $50K bank loan, still put $20K down, but create a seller second mortgage for $30K. If that second mortgage rate is low enough (say 5%), you'd be far better off with this approach.
Plus, if the seller was just going to toss their sale proceeds into a bank CD anyway, they'll make way more from the second mortgage note (at least at current rates).
A foreign investor is only insulated from subsequent dances with exchange rates if s/he establishes an incorporated entity in the U.S.A. to hold their investments - they will have to pay U.S.A. taxes at the corporate rate, but can chose if and when they repatriate any retained earnings.
If, say, a Canadian were to purchase a U.S.A. rental property in their own name or as part of a {flow-through} partnership, their earnings (minus a withholding by/for the IRS) will be repatriated and taxed in Canada. While the exchange rate will benefit them during the repatriation, when the have to turn around an purchase a second U.S.A. property, they exchange rate will take another bite.
I'm another Canadian who seeks a vendor carry (owner financing) whenever possible. While it does exist in Canada, it is nowhere near as common as in the U.S.A.
Good point! Additionally, that incorporated US entity could then go out of its way to have zero (or minimal) earnings, either by making additional principal payments on existing debt, or by purchasing additional properties.
Once a "beachhead" has been established in the US, it seems wise to use the proceeds from that initial property to reinvest in the local real estate market, thereby side-stepping some of that foreign exchange frictional cost.
Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
10y
it is hard enough to foreclose on us citizens, foreign nationals add even more twists. The underwriting for an owner financed loan would have to be much steeper and the cost of ligation can be much higher Ban ks want at least 30% down and six month escrow accounts How much more for the owner financed properties with out the benefit of a team of lawyers.
Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Account Closed, your foreclosure and underwriting concerns are valid, but that's going to vary hugely from state to state. Here in Georgia, our foreclosures are non-judicial: four weeks of notice in the county organ, then auctioned off on the courthouse steps. Given your comments, I assume that's not the case in Nevada.
Lender · Playa del Carmen, México · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Account Closed, that 120 days is pretty scary! That would certainly be a factor.
In this seller financing scenario, the foreign investor would be the one being foreclosed on. So, if they wanted to make things less scary for the seller, they might agree to record a quit claim deed at closing returning the property to the seller, and then draft the note such that, upon any default, said deed would be executed.
If the investor does default, things would have really gone sideways for them: They would have just forfeited sweet, low-cost, non-qualifying, non-recourse financing. At very least they should be willing to give the house back to the seller. Dragging things out at that point benefits neither party.