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Mortgages, currency exchange complicates a purchase
While there may be similarities to the U.S. market when buying a home overseas, there are also unique challenges on the financial side of the purchase.
Oftentimes, Americans buying properties abroad end up financing the transaction with cash outright, experts say. If you do want to finance your home purchase, assess the options to consider how often you may be exposed to interest rate changes.
That’s because mortgage structures in foreign countries are more likely to have variable rates, or short terms if they are fixed-rate loans. It is rare to encounter financing options similar to the 30-year fixed rate mortgage, which is a “very American phenomenon,” said Boudreaux, a member of the CNBC Financial Advisor Council.
You also have to be mindful of the exchange rate on the foreign currency you will be transacting with, as well as the cost to trade your U.S. dollars. Fluctuations in rates, and the differences in banks’ rates and fees, can make a significant difference in how far your dollars go.
A bank wire is often the “least expensive way” to exchange currency, and with a large enough bank, they’ll have facilities that can reduce the cost of the foreign transfer like a favorable exchange rate, said Boudreaux.
But in most cases, the U.S. buyer will need to open a bank account in the country they’re buying real estate. And that process is not always straightforward.
For one, many banks will refuse to work with U.S. citizens because the Bank Secrecy Act of the U.S. requires foreign entities to report assets, he explained.
In addition, smaller, regional banks might not be equipped to handle that reporting, so U.S. citizens will generally need to seek larger institutions, Boudreaux said.
Before you acquire a property outside of the U.S., it’s also important to make sure you have a clear picture of what you will use it for; your tax responsibilities to the foreign country and the U.S. may change depending on that answer.
Here are three steps experts recommend you take before you become a homeowner overseas:
1. ‘Do a lot of due diligence’
When you visit the city or town where you want to buy, make sure to walk around a lot, said Bojan Mujcin, a real estate associate of Sotheby’s International Realty in Barcelona and the nearby region of Costa Brava.
“Get familiar with the city, get familiar with the streets … do a lot of due diligence,” Mujcin said.
Rent in that area for a significant time to get a sense of the place before you “buy something on a dream,” said Boudreaux. Doing so can give you a better sense of what it’s like to live in a place.
You also may want to consider the country’s political environment, as it can be important for the long-term investment value of your property, said Erin Boisson Aries, a global luxury real estate advisor of Douglas Elliman.
“Less spontaneity and more study is important,” she said. “It’s wonderful to go on vacation and have a wonderful time, but the long-term geopolitical stability is very important.”
Boudreaux agreed: “There is political risk … and we have to be prepared for what that might entail for our investments.”
2. ‘Understand what your needs are’
It will be important for you to “understand what your needs are,” Boisson Aries said.
“Is this an investment? Are you planning to retire there? Are you planning to visit and rent it out?…You have to really understand the environment you’re purchasing into,” she said.
For example, if you plan to rent out the property for long- or short-term stays, “zoning very much factors into that,” Boisson Aries said.
Rules that determine what areas are eligible for short-term rentals can change over time, Boudreaux said.
“Buying these direct properties for that purpose is something that comes with far more risks than people realize,” he said.
And if you do decide to use the property for rental or commercial use, you may have additional tax burdens in that country, Boudreaux added.
3. Contact local experts and expat communities
“Make sure you have local experts and professionals advising you” when shopping in housing markets outside of the U.S., said Boisson Aries. “There are so many variables that affect each purchase.”
Such factors can include ownership rights, zoning implications and investment opportunities, she said.
“You might go over and fall in love with the property, but without really understanding the overall market, all of the other implications to purchasing and ownership, you’re flying a little blindly,” she said. “Just as we’re experts and advisors on the ground in Manhattan … you really do need that level of expertise on the ground.”
Speak with a legal advisor in the foreign country who can help navigate tax issues and other questions you may have, Sotheby’s Mujcin said.
“You definitely always need to have some legal support from some type of lawyer in the transaction,” he said.
It’s also important to find out if there’s an expat community in the country you’re eyeing, Boudreaux said.
Usually it will consist of other Americans who have gone through a similar process who can provide recommendations and resources, he added.