Why don't more foreign investors seek owner financing?

Question

I've seen very many posts here on BP from foreign nationals on how different (and often frustrating) the US banking system is, compared to their own. Non US citizens have meager institutional options when seeking to finance investment real estate here in the US.

Which leads me to wonder why more foreign investors don't actively seek out (or seek to create) deals financed by the seller. Is there some obstacle I'm not seeing?

Admittedly, these deals are far easier to structure when you're here on the ground in a US market, but they are far from scarce. (A quick search on "owner finance" in Atlanta Craigslist just yielded 645 matches.)

So, what am I missing? Can anyone offer some insight?

Roy N. · Answer

@Mitch Messer

A foreign investor is only insulated from subsequent dances with exchange rates if s/he establishes an incorporated entity in the U.S.A. to hold their investments - they will have to pay U.S.A. taxes at the corporate rate, but can chose if and when they repatriate any retained earnings.

If, say, a Canadian were to purchase a U.S.A. rental property in their own name or as part of a {flow-through} partnership, their earnings (minus a withholding by/for the IRS) will be repatriated and taxed in Canada.  While the exchange rate will benefit them during the repatriation, when the have to turn around an purchase a second U.S.A. property, they exchange rate will take another bite.

I'm another Canadian who seeks a vendor carry (owner financing) whenever possible.  While it does exist in Canada, it is nowhere near as common as in the U.S.A.

Account Closed · Answer

Quick Facts

-  Judicial Foreclosure Available: Yes

-  Non-Judicial Foreclosure Available: Yes

-  Primary Security Instruments: Deed of Trust, Mortgage

-  Timeline: Typically 120 days

-  Right of Redemption: Yes

-  Deficiency Judgments Allowed: Yes

Isabelle W. · Answer

Hi Mitch

Being a foreign national, I can tell that yes, there are obstacles :

- First one is ignorance : lack of information and educationIn our country (France), owner financing does not exist. And  in the USA, once you get to know, a bit, the market, you realize that there are many financing options. So before you seek something, you need to know that it does exist ....... You then need to get educated and informed by the right people which leads to the second obstacle

- Fear : who to trust ?

Craiglist for me is not a way to find owner financing or any other types of investments/financing. Investing internationally is not easy and we even need to be more cautious. Websites like craiglist are from the crowd and in the crowd, you find more easily crooks ....

Isabelle

Account Closed · Answer

if that's legal I would go for that good thinking

Account Closed · Answer

it is hard enough to foreclose on us citizens, foreign nationals add even more twists. The underwriting for an owner financed loan would have to be much steeper and the cost of ligation can be much  higher Ban ks want at least 30% down and six month escrow accounts How much more for the owner financed properties with out the benefit of a team of lawyers.

Mitch Messer · Answer

@Steven Picker, that 120 days is pretty scary! That would certainly be a factor.

In this seller financing scenario, the foreign investor would be the one being foreclosed on. So, if they wanted to make things less scary for the seller, they might agree to record a quit claim deed at closing returning the property to the seller, and then draft the note such that, upon any default, said deed would be executed.

If the investor does default, things would have really gone sideways for them: They would have just forfeited sweet, low-cost, non-qualifying, non-recourse financing. At very least they should be willing to give the house back to the seller. Dragging things out at that point benefits neither party.

Mitch Messer · Answer

@Steven Picker, your foreclosure and underwriting  concerns are valid, but that's going to vary hugely from state to state. Here in Georgia, our foreclosures are non-judicial: four weeks of notice in the county organ, then auctioned off on the courthouse steps. Given your comments, I assume that's not the case in Nevada.

Mitch Messer · Answer

Good point! Additionally, that incorporated US entity could then go out of its way to have zero (or minimal) earnings, either by making additional principal payments on existing debt, or by purchasing additional properties.

Once a "beachhead" has been established in the US, it seems wise to use the proceeds from that initial property to reinvest in the local real estate market, thereby side-stepping some of that foreign exchange frictional cost.

Mitch Messer · Answer

Thanks for that insight!

Given the high total costs of US financing, it would seem that getting the seller to accept payments on any portion of the total price would be a win. Take, for example, a home priced at $100K which might be typically be purchased with an $80K bank loan and $20K down.

If the seller doesn't need all their money at closing, you might be able to get a $50K bank loan, still put $20K down, but create a seller second mortgage for $30K. If that second mortgage rate is low enough (say 5%), you'd be far better off with this approach.

Plus, if the seller was just going to toss their sale proceeds into a bank CD anyway, they'll make way more from the second mortgage note (at least at current rates).

Roy N. · Answer

@Cal Ewing

How you choose to hold your U.S.A. properties really depends on your personal situation and foreign exchange (FX) is only one consideration.  Other factors to consider:

• your personal marginal income tax bracket;
• how you hold your Canadian assets (i.e. if you have Canadian real estate, do you hold it directly or in a CCPC);
• your mid- to long-term plans in the U.S.A. market (are you planning to reinvest your earnings to buy more property);

From a currency perspective, every time you exchange currency, someone else gets paid - how much depends on how/where you convert your currency (i.e. at your bank branch, via an FX exchange, etc.).

Why don't more foreign investors seek owner financing?

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