Snowbirds Beware
By Anna GIAMPÀ
For many Canadians, owning property in a foreign country has instant appeal. The notion of someday retiring to your own little piece of sun-soaked paradise makes our wrathful winters almost bearable. Experts agree that this is a favorable time to snatch up properties in Sunbelt states like Florida. However, snowbirds eager to jump on the investment bandwagon shouldn’t let the allure of recessionary bargains blind them to the legal and financial complexities involved in owning property outside their home turf.
My husband and I learned this lesson the hard way. It happened about a year ago, when the Canadian dollar was coasting comfortably near par with the greenback and the U.S. real estate market was crashing. It was, by all accounts, an ideal time to buy a home in Florida. Though we are avid real estate investors in Montréal, we weren’t looking for property deals during our vacation. But, with almost no effort, a deal as sweet as Florida OJ seemed to find us. During a brief eight-day trip and with very little research or preparation, we nabbed a two-bedroom condo in Hallandale Beach, at a price about 40 percent below the previous year’s market values.
Although we’re only in our early thirties and retirement is a long way off, as entrepreneurs, we have the luxury of flexible schedules and the financial freedom to travel frequently. My husband and I share a passion for real estate but when it comes to investments we tend to evaluate opportunities quite differently. I use a cost-benefit analysis based on factual data while my husband prefers to make decisions based on gut feeling.
At the time, we both felt the deal seemed too good to pass up. I crunched the numbers and my husband, the consummate visionary, slowly started to sell me on the dream. He promised that we’d be able to take advantage of cheap airfare and get away every few weeks. He talked of inviting friends and family on holiday trips. “It’s the perfect place to vacation when you have kids,” he claimed. We don’t have any kids. Nonetheless it didn’t take long for me to buy in, reassured by the fact that if we couldn’t optimize the condo, we would just sell it. And, having our own place in Florida meant we wouldn’t have to stay with the in-laws anymore.
So we pounced on it, making a conscious decision to learn whatever we needed to know later. We were banking on the possibility that the market had bottomed out and the downward trend in housing prices couldn’t possibly hold for much longer. Unfortunately for us, since closing last March, the average condo price in South Florida plummeted by 38 percent. And, had we done our homework, we would have been much better prepared to manage the added expenses and responsibilities that Florida real estate ownership entails. Snowbirds beware: without the proper planning even the sweetest deals can turn sour.
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Buyer’s Market
We aren’t the only ones anxious to take advantage of Florida’s sagging real estate market. A growing number of Canadians are swooping in on property bargains in the Sunshine State. According to a survey by the Florida Association of Realtors (FAR), Canadians now lead the list of foreign real estate buyers, accounting for 27 percent of home sales in the state, up from just seven percent in 2005.
Norman Lebel is a Remax real estate agent in South Florida. He explains that the large inventory of homes on the market means investors have more room to negotiate. “Normally foreign buyers are competing with local buyers,” he says. “But, these days, the locals aren’t buying.”
To hear more from my interview with Norman Lebel, click here for Soundslides.
In the case of Canadian Claudette Forget, a retired Quebec government administrator, buying her home in Hallandale was not a move she made hastily. Forget, 64, and her husband, Andre Melançon, had spent their winter holidays in the neighboring town of Hollywood for about 40 years. The couple started thinking about investing in Florida when Forget retired in 2006. Soon after acquiring their condo at Irvington Gardens in January 2008, Forget became President of the Condo Association.
“Prior to investing, we rented a similar condo to make sure we liked the area,” she explains. Forget says that one of the best things she did was to research the local real estate market before buying. “We signed up on a realtor’s website and came across a two-bedroom, first floor corner unit while reviewing the daily property listings on the site,” she says. It took several months but the couple eventually found their dream condo.
Talking to Forget made me realize that although my husband and I hadn’t planned our investment in the same way she and her husband had, we ended up paying similar prices for similar condos. I didn’t believe it at the time, but it appeared my husband’s gut was not way off.
For a closer look at real estate market inventory trends, click here for Line Graph.
Soaring Loonie
“The fact that the sale price was reduced by $60,000 from the previous year and that the exchange rate was 20 percent lower (than it was a year ago) convinced me that it was a good time to buy,” says Forget. This factor motivated us to buy when we did as well.
Mike McKenzie is the Communications Director for the Canadian Snowbirds Association, a not-for-profit advocacy organization dedicated to defending and improving the rights and privileges of traveling Canadians. McKenzie explains that the significant devaluation of the loonie over the last 12 months is not stifling Canadian investments. “A lot of people are under the impression that this is a bad year for snowbirds,” he says. “But we’re not seeing that.”
Many Canadians bought U.S. dollars when it was at par, insulating themselves from currency fluctuations, McKenzie explains. “Furthermore, seasoned snowbirds are familiar with a 62 cent dollar, so an 83 cent dollar is not so bad, especially when prices are so attractive.”
To hear more from my interview with Mike McKenzie, click here for Audio Story.
According to FAR, the statewide median sales price for existing condos was $109,300 in February, down 37 percent from February 2008 when it was $173,900. Prices have dropped 51 percent since the peak of the housing boom in 2006. “I wish I had known that the market would go down so fast,” says Forget. “But, I know that it will go up again by the time we are ready to sell, in ten or 15 years.”
Interest Rates
Following last summer’s meltdown in the credit markets banks have tightened their lending standards, making it harder for people to get a mortgage. But for those who need and are able to secure financing, low interest rates make real estate bargains even sweeter. According to reports by residential mortgage market leader Freddie Mac, average interest rates on 15 and 30-year fixed mortgages hovered around five percent during the month of January. These rates are the lowest the firm has observed in nearly 40 years.
For a closer look at the subprime mortgage crisis, click here for Timeline.
Inflation
Despite low housing prices and cheap credit, some Canadians are justifiably concerned with the rising cost of living in Florida. “Even tomatoes are more expensive than they were a year ago,” says Angelina Rosetti, 65. She and her husband Clemente Ventrone have spent winters in Broward County since 1992. Despite the current downturn, their property is worth four times more than what they paid for it nearly 20 years ago. Their property value may be up but their winters in Florida have become more expensive.
McKenzie attests that inflation is definitely affecting snowbirds right now. “People won’t go out for dinner or go golfing as much but they’re still going (to Florida),” he explains. “It’s not impacting travel patterns but snowbirds won’t spend as much while they are down there.”
For a closer look at Destinations of Canadian Real Estate Investors in Florida, click here for Pie Chart.
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After my husband and I passed screening and got approved by the condominium association board, we were able to finalize our offer to purchase within a couple of days. But, we were far from closing the deal. We hadn’t lined up pre-approved financing and we didn’t have the liquidity to pay the condo in cash. To make matters worse, the seller needed to close quickly. So we moved fast. Within three days we set up U.S. bank accounts and inquired about getting a mortgage. To our surprise, the process for obtaining home financing in Florida is quite different than what we are used to in Canada.
For a comparison of U.S. and Canadian mortgages, click here for Sidebar.
Mortgages
John Irons, a Regional Mortgage Manager for RBC Bank in Florida indicates that the biggest challenge for Canadians seeking financing is time. “It normally takes between 30 to 60 days to get a mortgage in the U.S. because regulations and requirements are a lot different here,” he says. “We need to verify credit scores, income and liquidity and prepare elaborate documentation before we can approve a loan.”
To hear more from my interview with John Irons, click here for Soundslides.
In our case, the loan approval process could take up to five weeks! After weighing our options, considering our time constraints and speaking with our accountant, we chose to re-mortgage one of our Canadian properties and pay the condo in cash. Aside from being faster, this would also protect us from the effects of unpredictable fluctuations in the U.S. dollar.
Property Taxes
One of the things we did know was to inquire about the amount of property taxes we would have to pay on the condo. The seller was eager to show that she was paying only $600 per year on an assessed value of just over $140,000. Not bad, but what did this mean for us?
McKenzie explains that investors often overlook the importance of property taxes when making investments in Florida. With real estate market values so low, property taxes have decreased accordingly. “But, you need to figure out what your taxes are going to be when the market bounces back,” he says.
Aside from the risk of escalating tax costs, property value increases for Canadians are higher than rates applicable to Florida residents.
“A lot of snowbirds know about property taxes and think ‘how bad could it be’, but the effect is significant,” says McKenzie. “It is not uncommon to see nonresidents paying three to four times more in property taxes than their Floridian neighbours.”
Florida residents also known as homesteaders, have an advantage thanks to a state constitutional amendment enacted in the 1990’s to encourage people to move there. “Homesteader property tax increases are capped at three percent a year or at the inflation rate, whichever is lower,” says Lori Parrish, a Broward County Property Appraiser. The cap is set at ten percent for non-homesteaded residents. While this is not an issue when market values are low, when home prices rise, like they did between 2001 and 2006, out-of-staters get stuck with huge tax bills.
To hear more from my interview with Lori Parrish, click here for Audio Story.
A week after closing, I explored the Broward County Property Appraiser website. An automated system estimated the non-homesteader projected tax cost on our purchase price of $165,000 at approximately $2,800. We hadn’t anticipated that curveball.
Unlike me, Forget checked the website before making an offer. “I believe the two-tier system is unfair, but that is the price to pay to benefit from the good things in both countries,” she says. In our case, the added expense suddenly doubled our annual budget for maintaining the property. Thankfully, we’d have a few months before we’d have to pay the tax bill.
Insurance
We hadn’t considered insurance costs either but we eventually learned it is essential in a state frequently hit by natural disasters.
“It’s not easy to get insurance on your Florida property,” says McKenzie, “especially if you are buying a property in a high-risk area.” But not getting insurance can be more costly than paying high premiums: vacation homeowners are not eligible for government aid in the event of a disaster.
Condo insurance bylaws may vary by county but typically, the condominium association purchases insurance on the building and premises and owners are responsible for insuring the interior of their respective condos. While insurance on condo interiors was not legally required when we purchased our condo, a statute change that went into effect on January 1, 2009 now forces everyone in Florida to carry unit owners insurance on condominiums.
“Insurance costs may range from several hundred dollars to several thousand, depending on the value of condo furnishings and the extent of coverage,” explains Forget. She recommends that prospective owners obtain an estimate for adequate coverage prior to purchasing.
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Lesson Learned
Buying a condo was certainly more expensive and more demanding than what we had anticipated. We realize now that winging it made for unnecessary frustration, but, despite the setbacks, the outcome of our decision has been generally positive.
While we had hoped to rent the condo to friends and family to cover some of the unexpected costs, a year has gone by and we haven’t had any takers. And, unlike my husband, I’m a little disappointed with the falling real estate values. My analysis proves, however, that even if we’d waited, with the devaluation of the Canadian dollar, our condo would have cost us about the same amount today as it did a year ago.
The best thing however, is that our vacations are more frequent and less expensive than they used to be. Granted, our travels aren’t taking us to new and exotic places anymore but we do appreciate having all the comforts of home while we are on holiday. Ironically, whenever we go to our condo, in a neighbourhood swarming with seniors in knee-high socks, we don’t feel like we’ve retired too early. Instead, we feel like newlyweds again. And you can’t put a price tag on that.
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