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Last update - 21:09 18/09/2008 Beware of that dream home in the Rockies By Arik Mirovsky Tags: U.S., financial crisis  People who think they know a thing or two about the real estate market think they've found the next wrinkle: property in America. Prices there have plunged in the last couple of years, especially after the subprime crisis turned into a full-blown global credit crunch. Mortgage (and other) banks are stuck with homes after foreclosing on bad loans, and they're dying to dump them. Has this situation created opportunity for the man-in-the-street investor? Can you really make money from investing in American housing? Probably not. Very few are likely to pull off good deals. Those who are are mainly Israelis who either live in the United States or visit frequently. Advertisement If you are starting to get itchy, in the belief that bargain-hunting season has begun, first look at the record of people who have bought houses and land in the U.S. and Canada over the last ten years. All too many lost their pants even before the latest meltdown began. From the late 1990s to the beginning of the decade, Israeli investors bought between 300 to 1,000 homes a year in North America, according to local realtors. Many thought they were making the deal of their lives. Not a few of those deals wound up in court, with the shattered buyers complaining about fraud. The problems originated mainly in a combination of false representations by the sellers (or realtors), and overly superficial checks by the buyers. Some buyers didn't even bother to fly over to the U.S., or Canada, to check the asset before signing the contract. In his "Madrich Lehashka'ot Nadlan Behul" (Guide to Investing in Real Estate Overseas), written about these very cases, Profimex (Israel) General Manager Elchanan Rosenheim lists four reasons why property investors lose money: (1) Greed. (2) Insufficient knowhow or outright ignorance. (3) Trusting unreliable people. (4) Bad luck. In the cases he describes of Israelis investing in overseas property, says Rosenheim, bad luck played a very small role. Rosenheim presents an example of a sting. A group of Israelis bought 25 apartments that an Israeli contractor had built in Manhattan. The builder promised them rental income that would reflect an 11% rate of return in the first year. What the Israeli investors did not realize was that the price they were paying for the apartments was about 30% above the norm for that area. Nor did they realize that their purchase money would be used, in part, to subsidize the high rent in the first year. And at the end of the first year, the subsidy ended, rent was low, the buyers were stuck with loans they were having difficulty repaying, and the apartments were worth less than they had paid so they couldn't recoup their money by selling. Then there's the example of the Israelis who bought properties in Toronto in 2001. Again the sellers inflated the anticipated rate of return. The buyers didn't know (because they didn't bother to check) that at the very same time there was a building boom in Toronto. No less than 141 residential projects were going up, with tens of thousands of apartments. In other words, a glut loomed. The Israelis ultimately sold the apartments they'd bought, at a loss. Six years ago, MAN Properties Real Estate Consultants carried out a survey for its associate, the international property chain CB Richard Ellis, looking at Israeli demand for housing outside the country. CB Richard Ellis wanted to know whether it should bother trying to market to Israelis. The survey looked at 100 Israelis who had bought properties outside the country between 2000 and 2002, and the results were very sorry indeed. About half the buyers had run into trouble. They'd paid prices 15% and more above the standard. Almost all the transactions involved projects under construction (they were buying apartments "on paper"), which often led to extra costs because of changes in plans and so on. The MAN survey also uncovered a slew of scams, usually involving promises of high returns for a limited period of time, financed through overpricing the assets. "People didn't realize that when the locked-in lease was over, they'd have to find new tenants," says Jacky Mukmel, partner at MAN. "Suddenly they realized that the market value of the apartments was much lower than what they'd paid." Remote lack of control Aside from charlatans and smooth talkers, people buying property far from home face objective difficulties. In any case, costs can decimate profit margins: maintenance, insurance, purchase taxes, lawyers' fees, and so on. Then there are the agents' fees and management fees. And in the real estate market, there's an absolute rule: The farther away the landlord is, the more problems there are for him and the property, too. A remote landlord can't get to know his tenants. He doesn't know if they're taking care of the property or breeding wolverines in the bedrooms fed on the rabbits bred in the closets. He doesn't know whether they pay their rent on time. Naturally, there are also success stories. Some Israelis who bought properties in Las Vegas sold them after five years at a handsome profit. The real estate bubble in the U.S. worked in their favor. There have also been quite a few success stories from real estate investments in eastern Europe - apartments bought at the lowest point of the market in Prague, Budapest and Warsaw. But the risks in remote investing are legion and the losses may be a dreadful trauma to small investors. Mukmel relates that seven or eight years ago, MAN encountered a lot of small-time marketers trying to hawk properties in the U.S. and Canada. But after being burnt, Israelis by and large learned the lesson and stopped working with that sort. "They learned the hard way that to buy an apartment there, you have to live there, or at least be in touch with somebody reliable there," Mukmel says. And in any case, before so much as twitching a pinkie at a deal, check it thoroughly. Do due diligence. Some people think it sounds a lot cooler to say "I bought a house in Tampa" than to say "I bought an apartment in Arad." And to be sure, "there are opportunities in the U.S.," Mukmel begs to qualify. "There are opportunities all the time. But you have to be there and know the market well in order to grab them. Interestingly, if you bought an apartment in Israel at the start of the decade you generally would have done a lot better than if you'd invested in the U.S." Bookmark to del.icio.us   On second thought Palin disinvited from protest against Iran after Hillary Clinton cancels appearance. Price of freedom Hamas official: For Shalit, Israel must release prisoners, reopen Gaza crossings.   1.   Buying Overseas Real Estate 07:10  |  Millicent 19/09/08   2.   Become a local 21:05  |  H 19/09/08   3.   Imprudent 17:00  |  Gordon 20/09/08

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