Buying in the US

Buying in the US, the first of a series. Folks, this is supposed to be educative rather than a look-at-me, ain’t-I-good. I’m therefore trying to set down my warts and all experiences for those interested which is going to take a fair bit of effort and a whole series of long emails.

While I write these, I may not have time to answer questions (I haven’t settled my properties yet and am still running negotiations far into the night), but post them anyway and I will get back to it.

I’d searched for a year and a half and had found nothing that met my definitions of acceptable cashflow – the property had to return at least 3% over the prevailing interest rate and council rates had to be well below 20% of gross rent.

I’d looked at commercial, I’d looked at Broken Hill and I’d looked at New Zealand (I think other forumites rather beat me to the punch there). So I looked at the US. At the same time I was reading up all I could and the Robert Kiyosaki ‘success stories’ book was a bit of an inspiration.

So I looked at the US. I searched the forum here for tips – Jeremy Laws had done stuff with some success in the old old forum, but I couldn’t locate him so I spent about 3 months searching the net every night for about 3 to 4 hours trying to find good real estate deals.

The best US site for cashflow assessment that I’ve found was which gave net operating income (NOI) which usually meant rent plus late fees less vacancy, maintenance, property taxes and other expenses. You need to know who is paying the utilities to do a proper assessment and many land agents won’t talk to you unless you are making a cash offer or are prequalified by a US bank. More on credit later, but if you’re planning to rush out and buy, and assume that you are going to easily get finance, don’t. Just don’t.

Loopnet also allows you to search by cap rate which usually is calculated as NOI/purchase price – ie. Cap rate of 15% on a $100,000 house would mean $15,000 income before debt servicing and taxes.

At the start, I made a few offers – some vendors didn’t respond to emails at all and others wouldn’t touch unqualified offers (btw, I had about $250,000 to spend and was willing to leverage to whatever hilt I could find.) Finally I struck it lucky in Florida – a block of 20 units for $800,000 and a 14% cap rate. After adjusting a few figures for reality, it looked closer to about 12.7% but that was pretty good.

Then the bank started hesitating – I was a foreigner (but not a South American, to whom they specialise in lending), the property was in North, rather than South Florida (their area of expertise), it was my first US property (well, of course it was – everyone has to have a first) etc.

Then the vendor said that the original purchaser had come back – some kid from California who had missed the deadline to buy but stood to drop $20,000 if the deal didn’t go through in already-incurred expenses. Seeing I had finance difficulties, and out of sympathy, I agreed to let this one go.
One of the lessons I learned though, was that the US vendors expect you to sign a contract specifying the price before starting negotiations on conditions etc. They also want a down payment. That casued a few confused emails before we straightened it out, but the deal fell apart before I needed to send money.

Side note: A week after the deal fell through, thanks largely to the bank, Hurricane Charlie, (followed by Francis and Ivan) all made landfall in South Florida, the bank's preferred area. Ivan made it north, but not to Jacksonville except as a reasonably heavy storm.

So I looked a bit further and I noticed that very high returns were available in Buffalo, NY. (As well as a number of other places whose agents weren’t into returning emails.)

End of Part 1
So having spent July to Mid August not buying in Florida, my attention moved to Buffalo and I researched it.

It’s a conurbation of half a million to a million made up of a number of distinct cities. Web research showed deals that couldn’t be true, like a fourplex for $8,000. I looked some more and discovered there were some pretty bad areas of town, especially in the inner east and to a lesser extent the inner west side. It’s a steel town and a manufacturing area with a big Chevy plant. None of these are good economic prospects, so the area is going through a localised depression/recession. NY is a high taxing state, which doesn’t help and my impression was that the locals couldn’t raise their eyes beyond the city limits except to dream of escape.

I found a property on sale for $84,000 and whose agent was willing to talk. I searched for a lawyer on the web looking for one who specialised in real estate and who was located in Buffalo. After some initial misunderstandings we got things going – she suggested I get a realtor of my own and that the other realtor would have to split the fee. I didn’t take up the suggestion, but I did find a building inspector.

The email traffic moved into top gear when I got a 60 page building inspection. The length was because the property was two buildings, one with three apartments and one with one. We argued about the price and it ended up as follows: $77,000 purchase price, closing costs paid by the vendor, $1000 in escrow from him in case the furnaces (for heating) packed up in the near term, $19,200 in annual rentals and about $7,000 in annual expenses before debt repayment and taxes. This wasn’t looking too shabby! All I needed was a 4.5% loan with an 80% LVR and I would really be on my way, if I could find a supply of these.

I was buying cash but tried to get finance on the web – no real luck and just about everywhere I went wanted my social security number on a automated form – sometimes the form collapsed when I tried to put in my telephone number.

My vehicle for buying was a limited liability company registered in Nevada. This was done for asset protection and tax reasons – it pretty much operates like a trust in Australia. If you’re interested, read Kiyosaki, the ATO website regarding foreign hybrids, the IRS website and you’ll get a good grounding.

Closing the contract was a mess because the vendor was trying to leave town – he was retiring – but was too cheap to hire a lawyer to finish the job when he was a lawyer himself. Negotiations started in mid August and the contract closed on 30 September – we were now international.

By that stage my wife and I had decided the US was the land of opportunity and I had booked a ticket for Buffalo – a 30 hour plane ride. I had drawn together a list of properties and had asked realtors to investigate them and get back to me – only two did, and one immediately dropped out when he found I was talking to someone else as well. So I arrived in town knowing the name of my attorney, my realtor and one potential accountant.

The plan was to set up a team to have things operate smoothly and perhaps get some other bargains. I needed an insurer, a property manager and a financier to begin with.

It was early October when I landed for two of the wildest weeks of my investing career.

I had the usual travellers tales of airport oddities and cultural dislocations but nothing to worry about. I had the devil’s own time getting a SIM card for my phone when I got there but eventually was driving, was connected and all was going well. I met my realtor and she started showing me the lower west side of Buffalo. I was very aware she was scoping me out and checking my reactions to see what I was looking for, what I found acceptable (or not) etc. She had a thoroughly prepared portfolio of properties and we started going through them. All were multifamily (as I had specified), most were duplexes and all were under $50,000. That had been bit of a misunderstanding but it was hard to search the multilist by returns (unlike loopnet, but most of these weren’t on loopnet).

End of Part 2
A friend of mine sent me a news letter from a group called Positive Foundations

An Australian group specialising in helping investors purchase Investment Properties in the US.


Buying in the US, part 3.

I met my realtor and we drove out to the lower west side. This was a poorer area, mixed race, but not actually in what I came to call the war zones. We looked at a wide range of houses, some with dog leavings on the floors, others with holes in the walls or graffiti in the bathrooms. I made it clear I was not up for a long distance renovation (“rehab”) and that we had no intention to become slumlords.

There were some good properties mixed in as well and we drove past quite a few. We also looked at Riverside, a slightly better off area next to the river. The river is largely docklands and not much has water views. The houses are built with a stone walled basement, usually a ground floor apartment, a second floor apartment and an attic. Every 25 years or so, you have to peel off the roof and replace it (known as a complete tear off). The you lay down a new roof, and over the years, either patch it or put a new layer down. You can get away with about three layers, then it’s tear off time again. (Guess how old most of these roofs were?).

Over the next few days we decided we would not go with the lower west side (doubtless there are bargains there, but getting the rent could prove tricky). The realtor wasn’t allowed to steer me away from areas, but she did say there were some where she would prefer to find an off-duty cop to accompany us (just to show the house, not to collect money) and I decided that perhaps I wouldn’t bother with any such area. We put offers in on 5 houses – pretty aggressive offers, actually.

There were two reasons – I was buying cash, and that in itself gets a BIG discount – lots of people making finance dependent offers find their finance falls through. Plus it was definitely a buyers market – some properties had been on the market for 6 months or more. I looked at what the rents were, annualised the figure and made an offer that equated to gross rental returns of 30%. E.g. if both flats were getting $400 per month, that’s $9,600 per year so my offer would be $9600/0.3 = $32,000. I didn’t actually take much notice of what was being asked, but it was usually in the range of $35,000 to $60,000 with rents ranging from $275-$450 per month. Generally speaking my offers were between 50 to 80-per cent of list price.

As I had learnt, you are supposed to make the first offer by way of written contract but the realtor had gotten into my game and decided it was better to ring the ‘opposing’ realtor, let them know what was coming and not to be offended – it was an investor making business decisions and emotion did not come into it.

So the offers I made were:

House 1 Asking 37,000 offered 27,000 result did not reply before I had spent my funds - withdrew offer.
House 2 Asking 46,000 offered 23,000 result no reply - agent did not get around to presenting offer
House 3 Asking 46,000 offered 27,000 result refused - lower than existing mortgage
House 4 Asking 39,000 offered 27,000 result sold to someone else
House 5 Asking 45,000 offered 40,000 result accepted - this one broke my 30% rule but the entire place had been redone apart from the roof and the tenants were brilliant as well.

(Results summarised here but they took days to come in, so I was progressing with properties "in play" in my mind. Also, my notebook is being typed up at the moment so some of these figures are from recollection - not house 5 however.)

By the way, I wasn’t paying the realtor, but she was acting as a buyer’s agent. The way it works in NY is that my realtor splits the fee with the listing agent but contracts to act as the buyers agent. The only time this breaks down is when the listing agent comes from the same agency. Then vendor and seller have to agree that the agents are ‘dual agents’. As a result, when I was interviewing property managers, she wanted to steer me away from ones who worked for a real estate sales firm in case she ‘lost’ me. Nice to be loved, I suppose. She was very upfront about it.

We took a day off while I interviewed accountants and found a good one and I began to interview property managers with a whole list of questions, looking for a people person who understood the ins and outs of the local legal system and could present the right mix of firmness and understanding. The realtor was researching Tonawanda (North buffalo) and other areas.

In the meantime, my LLC had omitted to file a form (I had not understood a requirement) and was not in good standing so it couldn’t trade in New York. I had to call Nebraska and find out how to fix it, paid a fortune in expedition fees only to find out later that they would only mail, not fax my certificate. Money wasted and another delay.

I also finally found out where my existing property was, visited it and spoke to the tenants. They called me the next day to say there was a letter about school tax and that the water was about to be shut off – the vendor told the water board about the change of ownership but hadn’t given them any contact details for me or my attorney, and had ignored the tax bills. School tax of about $2000 was due in 2 days time with a 7% late fee. Sheesh. I called the water, changed it over to my name and authorised payment of the account. I visited the school tax area, met some really helpful local government people, paid my money and left.

I was beginning to get a bit ragged, and feeling somewhat out of control.

End of part 3
Two clarifications:

1. School tax is a tax levied on property by the local city. It is not the only property tax. You have village, town or city tax, state tax and school tax.

2. I have my note book back, the house figures were

House 1: asked 45k, offered 32k, countered 40k I offered 35k no further result.
House 2: asked 46k, offered 29 k, land agent never got around to presenting offer to client.
House 3: asked 46k, offered 25k, refused, had a 38k mortgage
House 4: asked 35k, offered 25k, sold to another investor
House 5: asked 45k, offered 40k, agreed.
G'day Quiggles,

Absolutely magic ... I've been looking for something like this for a while.
It does indeed sound like a wild ride.
How much IP experience have you had prior to this assault ?
Patosan said:
G'day Quiggles,

Absolutely magic ... I've been looking for something like this for a while.
It does indeed sound like a wild ride.
How much IP experience have you had prior to this assault ?
If I might provide a partial answer for Quiggles- he organised the first ever Somers get together in Canberra in 2000. "The Wife" and myself were a part of this initial group. He would have had more investing experience than me then- and still does.

(Sorry Quiggles- I don't think that's one piece of information you would have provided).
You're right, Geoff.

In answer to Patosan, we've been investing for almost 5 years now. We've done one buy/reno/sell, sold another IP to pay off all private debt (more to clear our minds than anything) and we hold a family home IP and an exec flat here, a block of units at the coast and and a block of flats in Tassie (which I've still never seen).

The main thing for me has always been the research and the numbers. My wife does a lot of the people stuff, organises our systems and accounts and acts as my personal Devil's Advocate. Together we're nice, but a formidable team. :)

I should probably put all this in my profile. :D
Buying in the US, part 4. My realtor called and said that I should try Niagara Falls. Niagara Fallls is a twin city, bustling and thriving on the Canadian side and Struggletown on the US side. Their fortunes used to be the other way around before decades of mismanagement, corruption and nepotism took their toll (or so I was told). Higher rents and lower prices than Buffalo, with about the same vacancy rate, plus the PM I was appointing lived there.

It was a small neat town, maybe 200,000, maybe less with a wide variety of quality of housing. The realtor didn’t know the are either, but there were no war zones per se. There were some areas we marked off the map as fairly bad, but we started to look. Jackpot first time! A 5 family building on a road that was being completely reconstructed (good sign), with up to date electrics and heating. I was a bit concerned about the flooring in some of the bathrooms, and said so, but decided to leave it for the building inspector. Asking price was $75,000 (less than I had paid for the 4 unit I already owned).

We covered many more in the that day and the next – a house where the owner was dead or in nursing home and the daughters were going to garage sale the house belongings (including fridges and stoves by the way – in NY the land lord generally provides both and they aren’t fixtures – they don’t necessarily come with the house). There were several older people who were moving south and who didn’t want to manage their properties any more, some selling for no apparent reason, one scum slumlord trying to flog horrible properties at inflated prices, a beautiful brick place that was in perfect nick etc.

My poker face must have been in play as the realtor said, well if you didn’t think much of those we can try again. She was pleasantly surprised when I pulled out the list and started to go through it.

It read as follows

House 1 (5 unit) asking 75k, offered 65k, agreed at 67.5k
House 2 asking 50k, offered 40k, agreed – a bit above the 30% rule but again in very good condition.
House 3 asking 29k, offered 20k (aggressive offer, unwilling owner), another investor offered 25k subject to finance, I offered 25k cash, agreed
House 4 asking 25 k, offered 19k (unwilling owner), agreed at 21k
House 5 asking 50k, offered 20k (I wasn’t that interested), finally settled at 30k
House 6 asking 43k, offered 32k settled at 34k
House 7 asking 50k, offered 30k, agreed (to my realtor’s great surprise).
House 8 asking 47k, offered 30k, no response from vendor’s agent
House 9 asking 50 k, offered 30k, countered at 38k, I haven’t pursued
House 10 asking 40k, offered 33k, vendor refused to negotiate.
House 11 asking 39k, offered 27k, this property still under negotiation.

So there I was sitting with hundreds of thousands of US dollars in bids (on contracts!) hanging around. After agreeing to a number of them as listed above I pulled out from the rest, including House 11, citing my 5 day rule for the bid (agreement in 5 days or I walked away from the offer).

I was already arranging a significant transfer of funds to the attorney to pay for the house inspections – the inspector thought all his Christmases had come at once so I negotiated a 20% price cut.

Next on my list was to arrange finance, arrange insurance and straighten out my LLC structures – I hadn’t planned on buying half the USA when I came, but that was what it felt like.

End of Part 4
BTW, I've posted one photo of one of the houses i bought in the photo gallery, property photos, location other. Currently it's the top photo, but that may change. :) It's here
Perhaps you need to update the calendar setting of your DC :) I thought you were talking about some recent transactions, not of transactions 4 years ago.

Thanks for the clarification, we just call it realty tax in general, which essentially is money paid to the county for funding local police, public schools, libraries, road and park maintenance, etc. I was under the impression that council rate in Oz covers the similar lines of local expenses, or am I wrong? The "realty tax" should run at around 1% of the asssessed property value (which normally lags the market movement), but in some states there is a cap on how much the assessed value can grow annually.
In the US, and this is NOT an authoritiative answer but my impression from reading official government sites, the state and local governments caculate various budget within certain strictures. One of these is the education budget from which school tax is caluclated and paid. It's over 2% of the assessed value of the property. The other is property tax - I understand the area calculates its budget and its revenue sources, then the shortfall (why are none of us surprised that it isn't a surplus) is levied on property. :(