Don’t let funding issues derail international deals

Rules for mortgages, transfer of funds complicate transactions involving offshore clients

In a previous article, I explored some factors that shape the expectations of Chinese clients when investing in real estate, and reviewed a few “rules of thumb” for capturing and nurturing business with this market segment.

As a follow-up, I want to explore a few of the most common financing challenges that our Chinese clients — as well as other offshore investors — have when buying property in North America. Having an understanding of these hurdles will help you prevent them from becoming major impediments to your clients achieving their goals.

Derailed train image via Shutterstock.
Derailed train image via Shutterstock.

Regardless of how deep-pocketed they may be, Chinese clients who require (or desire) financing for a residential or commercial real estate investment will face more stringent prequalifying criteria. It is important to educate your offshore clients that they will not be able to access the high-ratio mortgages they read about in the news.

Noncitizen residents will require a larger down payment to obtain a mortgage; in North America, it is generally 35 to 45 percent of the purchase price. In Canada, nonresident buyers must put down at least 50 percent to obtain mortgage financing.

One thing that can smooth the financing process for offshore clients is having a formal bank letter of reference from the client’s financial institution in their country of origin. This letter does not disclose confidential financial information, but affirms that the clients are in “good standing” with their home bank.

Closely related to the mortgage financing issue, locating and transferring funds is a common challenge for offshore clients. Again, notwithstanding the significant wealth a client may have, it is often an arduous process for them to move the funds into position such that they can move forward with a real estate transaction.

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Generally speaking, Chinese clients can’t walk into a branch office of Industrial and Commercial Bank of China branch in Shanghai and transfer $1 million for a home purchase to a Bank of America branch in San Francisco. Chinese government controls limit the amount you can transfer directly from China to North America to $50,000 a year.

Generally speaking, Chinese clients can’t walk into a bank in Shanghai and transfer $1 million for a home purchase to a bank in San Francisco.

There are a number of ways to transfer larger amounts of money, but they involve various intermediaries and can be time consuming. Failure to factor this in can impede your ability to move forward with a property acquisition.

If offshore clients require a mortgage, they must have the funds in a U.S. or Canadian bank account prior to closing. In some cases, the money has to be located in an onshore account 30 or 60 days prior to the mortgage being granted.

If you negotiate a deal that involves financing, and your clients transfer in the funds from China two days before closing, that mortgage may not be granted, even if it has been preapproved. This means the deal could collapse, which in turn can lead to a lawsuit.

Regulations vary from jurisdiction to jurisdiction. But the bottom line is that you need to understand the compliance landscape before you enter into the deal cycle, or your client’s ability to close could be seriously impeded.

For the real estate agent, being cognizant of these factors, and prudently and discreetly clarifying funding issues with offshore clients early in the process, will help prevent costly delays in the future.

Jonathan Cooper is vice president of operations at Macdonald Realty Group (MRG). Based in Vancouver, British Columbia, MRG has 20 offices and 1,000 staff and Realtors, and offers a full range of real estate services across the province, including residential and commercial brokerage, property and strata management, and project marketing.

Hear more of his views on working with international buyers at Real Estate Connect San Francisco, where he’ll participate in a Friday, July 12  panel disucssion, “Long Distance Relationships: How to Reach, Market & Close Global Business.”


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