Elyse Umlauf-Garneau is a Chicago-based freelance writer and former senior editor with REALTOR® Magazine.
Earn money with international referrals and sales.
September 1, 2006
The world, as Thomas Friedman has taught us, is flat and getting flatter all the time.
Globalization is a fact of life in every segment of the economy. In real estate, you see flattening in the growing number of sales in which practitioners reach across borders to transact business. Some of that cross-border activity is the result of the success U.S. franchises have had exporting their brands to other countries. Another key has been the strong relationships built over decades between the NATIONAL ASSOCIATION OF REALTORS® and foreign real estate organizations.
“People don’t realize how much of this business is available,” says John Mike, CIPS®, CRS®, a salesperson with Prudential Florida WCI Realty in West Palm Beach, Fla. In addition to selling property to buyers from Europe, South America, Central America, the Middle East, and South Asia, Mike has referred clients to Italy and the United Kingdom. Mike is NAR’s President’s Liaison to the United Kingdom.
“Second homes are being built and bought by Americans in places—Dubai, Croatia, Nicaragua—that people would never have considered 20 years ago,” says Ruth Krinke, CIPS, CRS®, broker-associate with Steamboat Real Estate Inc. in Steamboat Springs, Colo. Krinke is 2006 chair of the NAR International Operations Committee and President’s Liaison to Sweden.
Mercy Stirling de Dueñas is a salesperson with RE/MAX Legacy Puerto Peñasco in Puerto Peñasco (known by English speakers as Rocky Point), Mexico, where luxury beachfront condos cost about $300 per square foot. In the last six months, she’s sold more than $4 million of referral real estate. Dueñas says half her business is referrals, including many from U.S. practitioners. Her split with referring brokers is 25 percent.
In another international hot spot, Panama, practitioner Felix Carles says about 25 percent of his business comes from international referrals, including many from the United States. Carles is president of the real estate company Bienes Raices y Seguros Carles, S.A., and a founding member of ACOBIR, Panama’s national real estate association.
Buyers are attracted to “a high quality of life at better prices than in the United States,” says Carles. He says prices on prime beachfront properties run 40 percent to 60 percent less than those in the United States. Moreover, the country is exploding with development; it uses U.S. currency, English is widely spoken, and there aren’t restrictions on foreign ownership.
Use your talent on a bigger stage
Taking your practice international may be simpler than you’d imagine. You can capture a share of the business flowing across borders without being multilingual or ferrying clients through a transaction overseas. Much global business stems from your ability to build relationships and exchange referrals—skills you already possess.
During trips to the United Kingdom, for instance, Prudential Florida WCI’s Mike meets with local real estate brokers to introduce himself and discuss potential opportunities.
Being part of an international franchise may give you a leg up. RE/MAX International Inc., based in Denver, has offices in 63 countries. Although the company doesn’t track international referrals, Peter Gilmour, senior vice president of international franchise sales and brokerage, says they’re becoming more common. “We know there’s significant business between Europe and the United States. We also have a lot of business with Mexico, Panama, and the Caribbean. Outside the United States, we see a lot of referral activity between Australia and New Zealand and between South Africa and New Zealand.”
“Even though each office is independently owned and operated, there’s a certain corporate culture that unites us,” agrees Dueñas. But Dueñas’ networking extends beyond the RE/MAX family. She’s a certified real estate instructor in Arizona, teaching real estate practitioners there about Mexican investment. Through that work, she says, “I receive referrals from associates who don’t know anyone from their own companies down here. People would rather refer business to someone they’ve met.”
Of course, networking alone won’t make you an international player. You also need to understand factors that affect real estate investment here and abroad, including fluctuating currencies. Most of Krinke’s international business is inbound referrals buying property priced from about $250,000 to $750,000. How much they’re able to spend often depends on the strength of their currency against the U.S. dollar, she says.
For outbound referrals, it helps to have a familiarity with foreign ownership rules and real estate practices. “It makes it easier to work with international clients and colleagues and gain their confidence,” says Krinke.
In Mexico, for example, there’s no licensing law, though the states of Sonora, Sinaloa, and Guanajuato require real estate practitioners to be registered. Dueñas recommends working with practitioners who belong to the Mexican Association of Real Estate Professionals (known as AMPI—the equivalent of NAR), because they follow a code of ethics. AMPI also has registration and education requirements and is a member of the International Consortium of Real Estate Associations (www.worldproperties.com), an alliance of 26 national real estate organizations, including NAR. To address the dynamic and tangible business between the United States and Mexico, NAR recently formed a joint venture with AMPI through which all AMPI members will become international REALTORS®.
In Panama, practitioners are licensed, says Felix Carles, whose organization, ACOBIR, is also an ICREA member. “Panamanian real estate practitioners understand their obligation to do a clean, transparent real estate deal,” he says.
That’s not true in every country, say NAR international staff. Practices in many places are far less regulated and transparent than in the United States. Commonly accepted practices in some countries, even if legal, aren’t what a U.S. buyer might expect.
For inbound clients, Krinke says, “you need to be able to explain U.S. differences using terminology your clients are familiar with.” For example, buyers from other countries may not understand terms such as “listing” and “co-op.” Requirements, such as the need for title insurance, may be unfamiliar to them, and the players may be different. In some countries, for instance, real estate practitioners act as notaries and there are no lawyers involved in the transaction. To be sure international clients understand what they’re signing, Krinke delivers a line-by-line explanation of every contract and document.
Krinke also recommends clients establish U.S. bank accounts to manage financial aspects of a property, such as rent, taxes, and repairs. That way they don’t have to continually convert foreign currency into dollars. Since the Sept. 11, 2001, terrorist attacks, however, this has become a somewhat daunting affair. The banks must go through a procedure called “know your customer” before they’ll open accounts.
Familiarize yourself with—and be prepared to explain—the wrinkles of the Foreign Investment in Real Property Tax Act, better known as FIRPTA. The federal law requires a buyer to withhold 10 percent of the sales price of a property if the sellers are foreign. In addition, most states have their own withholding. For example, California requires 3.33 percent be held back. Typically, the escrow or title agent handling the closing transfers the money directly to the Internal Revenue Service and state coffers. If the seller is foreign and the buyer fails to withhold, the buyer may be held liable for the tax.
An aim of FIRPTA is to make it difficult for foreign owners to avoid paying taxes. The withholding is a prepayment of the ultimate tax, so sellers may be entitled to a refund if the withholding is too much. The sellers are required to file an income tax return to compute the actual tax due and claim the withholding payment. (A complete discussion is in IRS publication 519, Chapter 8.)
There are a number of FIRPTA exemptions that can be obtained. The most common, according to the IRS, is for buyers purchasing a property for use as a home at a price of not more than $300,000. Sellers can also obtain exemptions for tax-free exchanges and property sold at a loss.
To help fellow practitioners succeed in the international referral business, Krinke provided input toward the development of a course for ICREA called “Transnational Referrals Made Simple.” Through the course, real estate professionals learn to integrate international referrals into their business using ICREA’s Transnational Referral Protocol. The protocol includes a standardized referral contract and spells out the process for receiving commissions and resolving compensation disputes.
Assemble a team
Whether you’re making outbound referrals or selling to foreign buyers looking for properties in the United States, don’t go it alone, say practitioners who work in the international arena. “There are many complexities, and it’s important to create a support network,” says Mike. That network should include
- Translators. Although foreign buyers and practitioners typically have a good command of English, Mike says, there may be language barriers that only a translator can help you overcome. That’s why he often teams up with a fellow practitioner who speaks a client’s language.
- A qualified accountant. Accountants familiar with real estate and foreign nationals can help foreign clients with filing tax returns on rental income and advise them on 1031 exchanges and capital gains taxes. Foreign nationals, for example, aren’t automatically allowed to deduct their expenses from the rents; they often have to make a special election to do that. Similarly, Americans selling foreign property may be required to pay taxes on gains at home and abroad; the accountant can identify potential tax consequences before your clients hit foreign soil. For foreign buyers here, an accountant can also advise on what type of title best fits clients’ needs. Certain wealthy foreign buyers, for instance, may want to set up a foreign corporation as the titleholder, says Thomas Spott, CPA, a partner with Spott, Lucey & Wall Inc. CPAs in San Francisco (www.SpottLuceyWall-CPAs.com). “U.S. citizens are exempt from estate tax on the first $2 million of assets (for 2006). But non-citizen nonresidents have only a $60,000 exemption. Say a foreigner owns a U.S. property worth $1 million. When he dies, his estate will owe estate taxes on the value of the property minus $60,000—regardless of whether there’s a mortgage on the property. If the property is owned by a foreign corporation, however, he can give his children shares in the foreign corporation and incur no estate tax.
- A qualified attorney. Since 9/11, the U.S. government has become stricter about how long foreigners can stay in the country. An attorney specializing in immigration and visa issues can keep you up-to-date on current regulations and can advise foreign buyers, before they purchase property, on how they can ensure regular access to their property.
- A mortgage specialist. Foreign buyers are far more likely than their U.S. counterparts to pay cash for a property because foreigners typically don’t have the credit history required to qualify for a mortgage in the United States. Still, a recent NAR survey of international buyers in Florida showed that more than half did obtain a mortgage. For those purchases, be able to recommend a lender who specializes in working with nonresident borrowers. “International borrowers need a valid entry visa, proof from their employer that they’re working, and at least three credit references. Then we ask for 20 percent down,” says Cesar Arguelles, area manager of international lending for Citigroup in Miami.
To be sure you’re working with seasoned professionals, don’t be afraid to ask attorneys, accountants, and lenders about their international experience. An accountant, for example, should have worked with more than 15 foreign clients, Spott says. “One or two isn’t enough to demonstrate an expertise.”
The domino effect
As you build your network, you’ll begin to see international business fall into place. “Once you make a personal connection, people share your name among associates. One connection can lead you to a huge network,” says Mike.
Larry Kramer, CRS®, a salesperson with John L. Scott Real Estate in Seattle, agrees. “Once you’ve done a good job for foreign clients, they pass your name on,” he says. One satisfied Japanese client recently led him to a second.
Kramer has been in real estate nearly 30 years, but the international specialty is relatively new for him. “Doing international referrals adds an interesting dimension to the business, and it’s a fairly untapped market,” he says. He has already completed several transactions with Chinese, Japanese, and Indian clients and is finishing work for the Certified International Property Specialist designation, which is offered by NAR. He aims to make international 20 percent to 25 percent of his business.
And you don’t have to live in Florida or along the Pacific Rim to be an international specialist. Krinke says people would be stunned at the number of foreign buyers there are across the country. Think medical personnel at local hospitals, business executives, consulate employees, and foreign university professors.
“Even if you’re only focused on a little residential community, at least be aware that there’s an international referral system in case your uncle wants to move to Nicaragua,” Krinke says. “Why not be the one to refer him? It’s just good business to be in the know.”
An emerging segment of international real estate sales is the second-home market. NATIONAL ASSOCIATION OF REALTORS® research shows that second homes are increasingly popular with U.S. consumers, particularly baby boomers.
In other countries, beachfront, golf, ski, and mountain properties often can be purchased at a fraction of the cost of comparable properties in the United States, says Carlos Fuentes, CCIM, CIPS, director of the commercial division at VET Realty in Lutz, Fla., and NAR President’s Liaison to El Salvador and Guatemala. The most popular region for second-home investment is Latin America, where about 30 percent of all Americans who live abroad reside, he says.
But Fuentes cautions that clients who want to invest in vacation property in another country need to understand the challenges and risks:
- Finding information. MLSs are just now emerging in many foreign markets, so finding comparables and historical data can be difficult. Your networking skills can help. Form partnerships with local practitioners who belong to one of the cooperating associations in the REALTORS® International Network. Through the network, NAR partners with 70 organizations in 55 countries.
- Learning the country’s practices. Foreign ownership, title transfer, and other rules vary. Title insurance is a must, especially in Latin American countries, where properties often lack title and some countries recognize “squatters’ rights.” Multinational companies such as First American Title and Stewart Title have major operations in countries where Americans invest abroad. At the International Consortium of Real Estate Associations Web site, worldproperties.com, you’ll find detailed information on business practices in member countries.
- Navigating political and economic unrest. National and global events can unexpectedly depreciate a nation’s currency. Armed conflict can make property inaccessible or put buyers in danger. Peter Gilmour, senior vice president of international franchise sales and brokerage for RE/MAX International in Denver, says the company’s Israeli franchisees have been severely affected by recent fighting there. Such conflicts, however, typically affect only the immediate region, he says.
One fun challenge is finding the best combination of great location and bargain price.
Mexico’s proximity, lower relative cost, laid-back lifestyle, and abundance of resort properties make it by far the largest market for American buyers, Fuentes says.
It’s tougher to find bargains in Europe, he says, though those who bought property there before 2000 have enjoyed dramatic appreciation thanks to the euro’s recent appreciation against the U.S. dollar. Emerging Asian markets such as China and India report booming prices, although these are unlikely second-home destinations for most Americans because of the distance and cultural unfamiliarity.
International Living (www.internationalliving.com), a magazine devoted to finding the best bargains in international living, pegs these as the 10 global “hot spots” for Americans looking for vacation homes in other countries.
- Buenos Aires, Argentina. The Argentine peso, after nearly a decade pegged to the U.S. dollar, has leaped from a low of 19 cents to around 34 cents. But bargains still abound. For investors willing to move quickly, the opportunities in this cosmopolitan city are promising.
- Chiang Mai, Thailand. Chiang Mai, Thailand’s arts and crafts center, was founded in 1296. The land is a patchwork of misty hills, rice fields, and jungle, and the city’s surrounding province is home to numerous hill tribes. It’s possible to buy attractive two-bedroom homes for less than $50,000.
- Costa Maya and Laguna Bacalar,Mexico. The Mexican government is committed to transforming Costa Maya into its next great tourist destination by installing millions of dollars worth of infrastructure, including new roads, telephone and electricity networks, houses for employees, marina and beach installations, and docks for cruise ships. Property prices are on the rise and may one day rival the prices in Acapulco and Cancún. The Mayans called Laguna Bacalar the “Lake of Seven Colors” and believed it was a magical place. Today, the area is an undiscovered gem. But, as development continues in the Riviera Maya region, this lake will begin to receive attention.
- Dubrovnik, Croatia. A former city-state that once rivaled Venice, Dubrovnik dates back more than 1,300 years and is considered by many to be “The Pearl of the Adriatic.” With Croatia seeking membership in the European Union, prices are likely to climb in the next several years.
- La Ceiba, Honduras. La Ceiba, the third-largest city in Honduras, has grown along with its ecological tourism and agricultural industries. La Ceiba residents enjoy Carribean beaches, mountains, and rivers. Construction prices start at just $35 per square foot for a simple, wooden house.
- Montenegro. This small country in southeastern Europe borders the Adriatic Sea between Albania, Bosnia, and Herzegovina. Prices are less than $75 a square foot, although Russian buyers have pushed up prices for oceanfront lots. In a good location near the shore, houses typically sell for $150 to $200 per square foot.
- Pacific Coast of Nicaragua. Pacific Coast property in Nicaragua remains one of the world’s best bargains. This dramatic coastline has rugged shores, cliffs and rocks, crashing surf, hidden coves, and pinkish white sand. Residents enjoy beaches reminiscent of Costa Rica or southern California, but at one-quarter or one-tenth the cost, respectively.
- Panama City and Volcán, Panama. Panama is typically categorized as a Third World country, but the infrastructure, diversity, and sophistication of the country, especially in Panama City—with a metropolitan population of more than 1 million—tell a different story. The turnover of the Panama Canal in 1999 brought a glut of first-class properties to the market. Volcán, located in the Chiriquí province in the west, offers spring-like climate year-round, fresh mountain air, and beautiful scenery. Buyers will spend half as much to own here but will miss some of the amenities and infrastructure of nearby Boquete.
5 foreign relations tips
How do you build an international clientele? The same way you build your business with locals, say practitioners in the know. “You can’t sit at home and wait for business to come,” says Ruth Krinke, CIPS, CRS®, broker-associate with Steamboat Real Estate Inc. in Steamboat Springs, Colo. “Practitioner-to-practitioner referrals produce my business.”
- Expand your network, and your knowledge, through continuing education courses.
- Look for opportunities in unexpected places. Krinke struck up a conversation in a grocery store with two Europeans who were living in Australia and touring Colorado. Australians have now become Krinke’s largest international clientele.
- Let people know you do international business. Larry Kramer, CRS®, a salesperson with John L. Scott Real Estate in Seattle, snagged one international deal through an East Coast practitioner he knows.
- Attend export and import trade shows and foreign consulate events to connect with individuals and companies relocating to the United States or overseas.
- Stay abreast of business practices, currency fluctuations, and news of countries where you do business.
Where to get started
CIPS Network (REALTOR.org/international). The Certified International Property Specialist Network is NAR’s international real estate specialty group. It offers the CIPS designation, which is held by practitioners who’ve taken the coursework to develop an expertise in international real estate. You can search for a CIPS network member by country or specialization.
International Consortium of Real Estate Associations (www.worldproperties.com). This alliance of national real estate associations around the world represents more than 2 million real estate professionals worldwide. The organization aims to promote members’ businesses through business support products and services and by improving the way business is transacted across borders. NAR is a founding member. Through ICREA’s Web site, broker members find and send referrals and market their services. Consumers can search for property and Transnational Referral Certified brokers around the globe.
NAR Conference (REALTOR.org/convention.nsf). The 2006 REALTORS® Conference & Expo in New Orleans, Nov. 10–13, will provide a number of international education and networking opportunities. Attendees will also see an international second-home exhibit, the SIMA-USA Showcase (www.sima-usa.net), featuring developments from overseas markets popular with U.S. buyers.