Guide to Buying U.S. Real Estate
Whether you’re dreaming about the daily rounds of golf in the sunny confines of Palm Springs or spending your days poolside in a beautiful Florida estate, owning real estate in the U.S. Sunbelt is an aspiration for many Canadians. Warm weather and robust retirement communities are a few examples of the many benefits of U.S. property ownership. For these reasons and more, we’ve written the ultimate guide to buying your perfect getaway home.
The financial commitment and complexities of buying US property has historically deterred Canadians, but with the right guidance and knowledge, you can reap the benefits of a US home. The current economic climate, with low interest rates and relatively lower US housing prices since the 2008 economic crisis, has made this the perfect time to buy your dream home.
Finding a Reliable Realtor:
Although often overlooked, hiring a reliable and knowledgeable realtor is imperative to a pleasant buying experience. Prospective real estate investors often make the mistake of using a listing agent or a traditional real estate agent instead of using a buyers’ agent. Buyers’ agents are different in that they solely represent the interests of the buyer (unlike a listing agent who is representing the best interests of the buyer and seller, which is quite contradictory). We recommend hiring a buyers’ agent with previous experience working with Canadian real estate investors.
Location, Location, Location:
Firstly, research potential communities and areas you would like to live in. America’s top snowbird destinations are Florida, Texas, California, Arizona and Hawaii, but retirement communities exist everywhere. While you research, consider questions such as: Do I want to vacation in different destinations or would I prefer to settle down in one? Will I be having family visit and if so, is the home big enough? How far is the airport? Are there local services that will maintain the property while I’m not there? Once you have refined your search to 2 or 3 communities, visit each one. A property purchase is a large financial commitment, and some characteristics of the community or property are difficult to assess remotely. Finally, you need to ensure that the title on the property is clear. We recommend you hiring a cross-border lawyer or an escrow agent to do a title search. In summary, these are the steps you need to follow when deciding on your southern home:
- Research retirement properties online
- Narrow it down to 2-4 communities based on your wants and needs
- Take some vacation time to visit each property
- Hire a lawyer or an escrow agent to do a title search on the property
In light of the Canadian dollar's declining valuation, Canadian snowbirds might want to take a look at this article on tips for how snowbirds can manage the pain of the rising Canadian dollar.
Type of Real Estate Transactions:
- Traditional Sale:
The traditional sale is the most common method of buying a property. It involves two parties – the buyer and seller. It’s important that the amount of the mortgage does not exceed the sale price. In this case, the seller is at their sole discretion in selling the property and does not need a third-party approval since the proceeds from the sale more than cover the repayment of the mortgage and other expenses.
- Short Sale:
A short sale occurs when the seller is under financial stress (is late on interest payments, has lost their job, etc.) and is forced to sell the property for less than the mortgage amount. In this situation, the buyer normally receives favourable buying terms in exchange for potential complications and an extended timeline. This is due to the fact that the sellers in these situations require lender approvals on the selling price. We recommend finding a realtor who has had experience dealing with distressed properties and can assist with both compliance and negotiations.
A foreclosure occurs when the lender evicts the current homeowners due to their inability to pay their mortgage. Lenders are not in the business of owning property so they proceed to sell the home in an as is condition. Bank properties are usually the fastest deals to close but since the homes usually haven’t been lived in for long durations, there are numerous costs to bring it up to living standards.
Ways of Owning US Real Estate
When buying US real estate, there are two ways to take title to the property, directly as an individual or indirectly through an entity. Both methods have pros and cons and we suggest talking to an advisor to review your goals and limitations to determine which option is best for you.
- Direct Ownership
The simplest way of owning a property is to title the property directly under your name or your and spouse’s name. Ownership is not limited to two individuals or spouses, but if you want to name other individuals on the property we recommend using an entity to avoid future legal issues such as a co-owners bankruptcy or lawsuit. If you want the property to be directly transferred to your child after your death without the expenses and complications of a probate, we recommend drawing up a beneficiary deed. There are two types of states, community property states and common-law states. Each one has different ways of owning properties, with associated pros and cons
Common Property States:
Community property: In community property states, married coupled can take ownership of property with each individual having half interest in the property and can transfer their interest by a will or death but will not avoid probate.
Community property with rights of survivorship: This is similar to a regular community property but when one person in the marriage dies, their half of the property will be directly transferred to the other person while avoiding probate.
Joint tenancy: Most common way for a couple to own a property is as joint tenants. When one person dies, the survivor will own the entire property and avoid probate.
Tenancy by the entirety: This is similar to joint tenancy with the key difference being that each joint tenant can deal with their interest in the property however they wish. If one of the joint tenants wishes to convey their interest in the property, it can be conveyed and the joint tenancy can be destroyed.
Tenancy in common: This type of ownership allows for multiple owners to be listed and ownership to be split in unequal percentages. The property however does not transfer directly at death and thus is subject to probate.
- Indirect Ownership:
Indirect ownership, through Canadian or US entities such as corporations, LLC’s, partnerships and trusts, is not recommended under normal circumstances for couples. There are numerous complexities, time-requirements and costs. It can however provide benefits such as avoiding US non-resident estate taxes. Using Canadian entities is recommended in very few situations and using US entities is only recommended in situations where asset protection is a driving force. We suggest you speak with a trusted advisor to see if an indirect ownership makes sense for your situation.
Financing Your Purchase:
As important as getting a reliable realtor is to purchasing your U.S. home, an experienced financial advisor is just as critical to insuring you’re financially stable after financing your property purchase. It’s important to consider how investing in US real estate will affect your finances and income during retirement. In respect to financing, plenty of options are available to you including:
- Cash: If you’re liquid enough, purchasing a house outright is the simplest method
- HELOC, refinancing or LOC: If you don’t have enough cash, getting a home equity line of credit, refinancing your existing home or getting a line of credit from a Canadian bank are also great options
- Mortgage: Although getting a mortgage with a US bank can be difficult as they have no records of your credit history, there is the option of working with an American bank who has a Canadian counterpart such as TD or BMO (who can take your Canadian credit history into account)
There are many other associated upfront and ongoing costs with purchasing real estate in the US, such as travel costs, maintenance costs, utilities, property taxes, and insurance. To help subsidize these extraneous costs, you should consider renting your property out in the months you won’t be living there. Keep in mind that you will need to factor in the income taxes you will need to remit to the US Internal Revenue Service (30% of gross rental income). You do have the option to file a special form which will allow you to claim expenses and reduce the amount you owe as well as claiming foreign tax credit on your Canadian tax return to avoid double taxation. Once again, we highly recommend you consult with a trusted financial advisor to discuss your various financing options.
One of the biggest differences between buying real estate in Canada and the US is title insurance. It’s highly recommended that you purchase title insurance to protect your interest in the real estate from defects and lawsuits. The one-time cost of title insurance varies but, it should be no more than 0.5% of the purchase price. In addition to title insurance, Canadians should also purchase travelers’ insurance and home insurance. Read our article on why you should get travelers’ insurance and what to look for when choosing the right company: (link). Home insurance is also critical as US homes, especially in places like Florida and California, are susceptible to a wide-range of potential issues such as hurricanes, floods and termites.
When purchasing a property in the U.S., your foreign exchange requirements will increase drastically. Your home purchase, as well as your recurring expenses will need to be made in the U.S. dollars. As property purchases are expensive, saving even 0.5% on your exchange rate can lead to savings of thousands of dollars on such large amounts. Ensure you compare exchange service providers, such as Knightsbridge Foreign Exchange, in order to get the best possible exchange rate. Knightbridge offers favourable exchange rates in Windsor and most of the major cities in Canada. As you will be converting currency on a recurring basis to pay recurring expenses, finding a reliable exchange provider can save you significant amounts of money over using your local bank in the long run.