American property: be careful what you buy

As James Ferguson recently noted, we think there’s currently a good long-term buying opportunity in American property. The value of the housing stock has dived by 34% – that’s a $7trn drop – since the peak in 2006. Housing has rarely been more affordable, US banks are tentatively easing conditions on mortgage lending, and buyers are creeping back into the market, says the National Association of Home Builders.

However, that doesn’t mean you should buy any old property. In particular, you shouldn’t be tempted by agencies offering you the chance to secure double-digit rental yields by buying repossessed houses at rock-bottom prices. As Tanya Powley notes in the Financial Times, various such US foreclosure schemes – focusing on properties in particularly hard-hit areas, such as Detroit – have seen investors left with derelict, untenanted properties “and thousands of dollars of additional costs”.

The interest in foreclosures has been around since at least 2010. Schemes to buy foreclosed (the American term for repossessed) houses, refurbish them, and rent them out, have been promoted by British firms, including Assetz International, Experience International and Axis Property Investment.

Typically, an investor would pay a lump sum that was meant to include refurbishment costs, legal fees and property transaction costs. The property would then be rented out through a government scheme within 90 days.

 

It sounds too good to be true, and it was. Several couples tell the FT that they invested thousands of pounds in one such scheme, only to find that they were left with property tax bills, repair costs, and properties with no tenants. Meanwhile, the firms that marketed the scheme lay the blame at the door of the group responsible for sourcing and refurbishing the properties, American firm NSUK LLC.

The obvious lesson is that there’s no such thing as a free lunch. Any investment claiming to offer double-digit returns with minimal risk – particularly in these days of 0% interest rates – should be viewed very sceptically indeed, if not ignored. But it also highlights a basic feature of property investment. Just as with buying a share, you need to do your homework first.

If you’re buying a house, that means doing the legwork and knowing your area. It’s one thing to buy a holiday house in an attractive town that you visit regularly – it’s quite another to pile into an inner-city slum that you’ve never visited. As one Australian property investor told ABC Online, “if you go to an area in Detroit with a 20% return, you’re going to need a handgun to collect the rent”.