Editor’s note: This is the second in a two-part series. Read Part 1.
Once you attract a global buyer, the next issue is how to close that buyer. The requirements and the challenges are often quite different from those you’ll encounter when you work with domestic buyers. Are you up for meeting them?
When it comes to working with global buyers, one of the most dangerous assumptions you can make is that the rules that apply to working with global clients are the same as they are for domestic clients. Below you’ll find a list of pitfalls as well as recommendations on how to handle these very challenging situations.
The one universal buying sign
How can you tell whether a global buyer is ready to write an offer? It’s simple: When your clients step away from you and begin speaking to each other in their own language.
The one mistake that can kill your deal and referrals forever
Global buyers are paranoid about privacy. Unlike in the U.S. where we talk about the real estate we own or the great deal we negotiated, this is completely unacceptable behavior for most global buyers. In fact, many will choose to work with an agent who does not speak their language in order to keep their transaction private.
Discussing money and career is taboo
Did you know that it is considered the height of rudeness to ask someone from the U.K. about whether they can qualify for a loan or what type of work they do? This is true for a large proportion of buyers from all over the world.
The way to handle this issue is to explain that many contracts require the buyers to produce a letter from their bank stating that they have been preapproved to buy within a particular price range. Ask whether it is possible that their bank could provide such a letter.
If the answer is "no," you probably will have to proceed without the letter. Nevertheless, almost all global buyers will have sufficient funds to close the deal.
Different lending requirements
If you are working with a global buyer for the first time, it’s important to know that the lending requirements are quite different from those for domestic purchasers.
To illustrate this point, many lenders require a down payment of 30 to 40 percent, a minimum of $100,000 on deposit at the bank, plus a year’s worth of payments, taxes and insurance on deposit. Global buyers are also charged a higher interest rate.
Before writing an offer with a global client, it’s important to make them aware of these requirements. Alternatively, if they have a business banking relationship, they may be able to obtain a loan from that institution at better rates and terms.
How they take title is critical
It is absolutely critical that your global buyers visit a tax specialist who works with offshore owners. The reason is that the way your clients take title can have a profound effect on how much they owe in taxes. For example, if the buyer is purchasing in California and takes title as an individual, up to 46 percent of all the buyer’s global income may be subject to California state taxes.
One strategy that some offshore investors employ is to take title to the property using an LLC, which is owned by a foreign corporation. In most cases, this arrangement results in no tax income tax.
Furthermore, if the buyer is purchasing an investment property, he must take specific steps to be able to claim the mortgage interest deduction as well as depreciation. Failure to take these steps means that the owner cannot claim these very valuable deductions. Moreover, the FIRPTA (Foreign Investment in Real Property Tax Act) requires buyers to withhold 10 percent of the sales proceeds if the seller is a foreign person.
Two caveats here: Remember that it is illegal for you to give tax advice and that your clients must take these steps prior to the time that they write an offer.
One of the most confusing areas for most global buyers has to do with disclosures. Most don’t understand that a disclosure is not a seller guarantee or warranty as to the condition of the property. Do your best to explain this and suggest a home warranty policy for an extra protection.
Appraisals and offering prices: AVMs are your friend
While you may love to hate AVMs (automated valuation models such as Zillow’s Zestimates), these tools can be your friend when it comes to negotiating with someone offshore. Besides Zillow, three other AVMs include Corelogic’s ePropertyWatch (great for locating pre-foreclosures), Chase’s Home Evaluator Tool, and the one that will probably be the most useful to you provided it is available in your state, Moveup.com.
What makes Moveup.com so valuable is that you can actually see the comps and delete comps that are not appropriate to the subject property. To illustrate this point, I was tracking a property in California that dropped $70,000 in value last summer for no apparent reason. All four models showed the drop. Moveup.com, however, showed the actual comparable sales they used. It turned out that a comparable property had sold for $41 per square foot. Two months later, it resold for $299 per square foot. It was this lower sale that was throwing off the other three AVMs.
Since both domestic and foreign buyers tend to believe the Internet over an agent, check the values on each of the AVMs mentioned above and compare them to your comparable analysis. Choose the AVMs that support your MLS comps and share that resource with your buyers.
If you would like to learn more about the legal and financial issues facing global buyers, click here.