For Israelis, the White Picket Fence Hides Big Risks

Young Israelis are increasingly snatching up residential property in the U.S. for investment, but experts urge caution.

The deal the saleswoman on the phone was offering seemed too good to be true: a 1,500-square-foot house in Phoenix, Arizona. The house, Suli told me, had four bedrooms and two bathrooms on one floor and sat on a 6,500-square-foot lot. And the price? $78,000 including broker's fees and renovation costs. It could be rented out for $800 to $900 a month, Suli said. That means even after the company's 8% management fee, the new owner would earn a return of 11% a year.

The house was in a great neighborhood for families near downtown Phoenix, with good schools and real estate prices in the neighborhood have been on the rise for a long time, Suli continued. "A property like this one would have sold for $60,000 to $70,000 just a few months ago, but prices have been going up, and it looks like that will continue," she said.

If you consider that under good circumstances, the yield on residential investment property in Israel is about 5% a year, and frequently more like 2.5% to 3%, the Phoenix house is tempting. So it’s no surprise that more and more young Israeli couples, some of which may be having trouble paying for an apartment here, are sinking their meager savings into houses in the United States. $78,000, or NIS 280,000, for a house in Phoenix is just a quarter of the average cost of a new four-room apartment in Hadera.

The American dream

North American real estate industry sources say over the past year they have seen a sharp rise in the number of young Israeli couples seeking to invest in residential real estate. In actuality, though, real estate abroad can be among the riskiest investments. There are fraud schemes targeting unsuspecting investors and well-meaning but unprofessional sales people in the field. But Israelis have shown interest nonetheless.

"Up to now, the investors have been relatively well-to-do people in their 50s and up who already see retirement approaching," said Yisrael Harris, the owner of the real estate firm BNH, which operates primarily in the Cleveland area, particularly in the relatively wealthy and largely Jewish suburb of Beachwood. "Twenty to 30 percent of our inquiries come from young couples in Israel who don’t own a home. It began with a trickle about a year ago and has gotten much stronger lately."

According to Harris, who himself lives in Beachwood, in an average month his office is involved in five home sales for investment purposes to young couples, some of which don't own their own apartments. Many of these customers, he says, are ultra-Orthodox.

“In the ultra-Orthodox community, it is customary [for parents] to buy an apartment for a young couple or at least to help them in a major way,” he said. “But at the current price of housing [in Israel] couples prefer to use their savings that would go to buy an apartment with a mortgage in Israel to buy a house in the U.S. free and clear of a mortgage, and then pay for their rent in Israel through the return they get on the house."

Many of the houses being bought in the U.S. by Israelis had been foreclosed on during the years of the subprime mortgage crisis, and now the banks are looking to sell them cheaply, Harris explained. "People are looking for something solid but that will generate quick results, and they count on the fact that the market will be going up."

Younger Israeli buyers, Harris says, generally don't come to Cleveland to check out their property before they purchase it, but he tries to give them as much information as possible. "It's now possible to find a great deal of data on the Internet. The American counterpart to [the Israeli classified advertising website] Yad 2 is zillow.com, which operates using maps. You can click on a specific house and get complete information on its entire sales history or in the area."

The financial hurt locker

Yet Elhanan Rosenheim, the chief executive of Profimex, a company that has been widely involved in real estate investment abroad, warns that even cautious young investors could find themselves losing their entire investments. "Getting into the real estate market abroad is like a minefield," he said. "Anyone who wants to cross through it should do so with the army engineering corps."

He claims that more than 90% of the companies marketing real estate investments abroad are running scams. "They talk about 15% returns, 18% returns. There is no such thing. Anyone promising returns like that is simply committing deception."

Moshe Friedman, one of the owners of a firm called Proper, which has been active over the past three years in investments in the U.S., says buying a property without thoroughly investigating is unwise. His company has been involved in selling row houses costing around $100,000 in Baltimore and elsewhere in Maryland. He too reports growing interest among young Israeli couples.

One of them is Dudi, a 28-year-old Bnei Brak resident who works as a religious scribe and teaches at a seminary for married yeshiva students. He says he bought a row house in Baltimore two years ago for $92,000, and after a 13% management fee paid to an American company for taking care of the property he has been getting an 11% return on his investment, which in turn covers his rent in Bnei Brak.

Having not seen the property, he says he bought it based on information provided to him by the real estate agency. "But my father knows Moshe [Friedman] and trusts him, and for the time being I'm satisfied," he said. Dudi intends to buy a home in Israel, but needs to find something that suits him and his wife and four children. In the interim, he hopes the value of his property in Baltimore goes up.

Promex's Rosenheim says a significant proportion of the companies selling homes at temping prices have acquired them for much less and reap huge profits at the buyer's expense. "In the U.S. at this point, there are houses worth a dollar,” he said. “You could go to the bank and buy 1,000 houses for $1,000. Afterwards, those houses are marketed in Israel for NIS 30,000 and NIS 40,000, and they tell stories about yields of 20%."

Rosenheim advises Israelis to steer clear of such investment in the U.S. altogether. But for those who insist, despite the risks, he has a few pieces of advice, including the following. "Firstly, good real estate deals are always made by locals. If you encounter someone selling property [in the U.S.] from Israel, you can assume in advance that it's garbage,” he said. "Personally, I have never met anyone who was promised a 10% return and who actually got it. If that were possible, the locals would have jumped at the chance in a big way. Relatively speaking, New York is recommended as a place to invest and yields there are 3%. As a general rule, secure investments do not yield more than 4%."

Reuters