Buying a U.S. hideaway

When the U.S. real estate market crashed in 2008, Andrew Vitch was finally able to act on a longtime dream of his: buying a house in Florida. He’d always wanted to own a winter hideaway, so when housing prices started falling he saw his opportunity. “The sub prime mess burst and prices were declining,” he says. “So we bought a villa.”

Four years after the housing crisis began Canadians are still scooping up U.S. property. According to a recent Bank of Montreal survey, 23% of foreign buyers of U.S. real estate are Canadian—more than any other nationality.

If you’re looking for deals, you may want to start in Florida and Arizona. The U.S. Federal Housing Finance Agency’s House Price Index for Florida, which measures the average price change in repeat sales or re-financings by state, indicates that home prices are about 40% below where they were in Q1 2007. That’s a significant discount considering U.S. house prices overall are only about 15% below their pre-recession levels.

Still, while there may be some attractive deals in the U.S., Canadians need to be cautious. Vitch, who owns Sunny Point Resort in Muskoka, Ont., says that buying a home in the States isn’t like purchasing property in Canada. The closing process, tax structure and the way mortgages are issue are different in the U.S., he says. To complicate things further, each state—and often every county—has different rules.

Mortgage troubles

On the surface, the purchasing process is the same no matter where you are. You find an agent, hit the open houses, make an offer and hopefully you’ll end up owning a home. The trouble is you may not be able to get a mortgage from a U.S. bank to actually pay for the house.

For this reason Cleo Hamel, a senior tax analyst with H&R Block, says that a lot of people use their Canadian line of credit to pay for their new place. “It makes the most sense because in many cases people already have a line of credit in place that they can access quite easily,” she says.

Cameron Roach, the Rosseau, Ont.-based author of Buy Florida: A Guide for Canadians, says that it is becoming easier for Canadians to get a mortgage than it was when the financial crisis hit, but you’ll likely have to pay a bit of a higher rate and you may have to put more down. However, he says the best option is still paying cash.

Mortgage terms in the U.S. are different than in Canada, Roach explains. In Canada homeowners usually go with a five-year term. In the U.S. you can get a 30-year for around 4.5%. It’s a great rate, says Roach, but Canadians will likely have to pay more because foreign buyers are a greater risk.

Since you can’t get a mortgage from a Canadian bank for a U.S. property—unless the bank has branches in the U.S.—many avoid the hassle of securing an American mortgage and just pay cash.

Vitch was one of them. He had originally planned to take out a $300,000 mortgage through the U.S.-branch of his Canadian bank, but he wasn’t prepared for the extra paperwork. “I called my contact in Canada and said what the heck is this?” Vitch says. “I didn’t do a 14 page application when I was loaned $1 million on my resort.” In the end, he decided to avoid the hassle by using his line of credit instead.

Closing Time

Vitch has plenty of experience buying property in Canada (besides owning a resort he had owned several rental units in St. Catharines, Ont.), but when it came time to close on his place in Florida he says he “freaked out.”

He says he was particularly confused by the fact that he didn’t need a lawyer to close the deal. In the U.S., the closing process is often taken care of by an escrow holder. One party acts as the liaison between the buyer and seller. That person is responsible for transferring title and handling the cheques. Vitch also points out that the seller is responsible for making sure the title is clear, which is something usually handled by the buyer’s lawyer in Canada.

Another big difference is the time it takes to close. Roach says that many closing are a month or less—if someone’s buying a foreclosed home, the deal could go through in just a couple of weeks. Vitch had only 30 days before he took possession; it usually takes twice as long to close on a home here.

Because the closing process was so foreign to Vitch, he ended up getting advice from a lawyer, which Roach says was the right thing to do. “For Canadians, it’s smart to use a lawyer,” he says. “The seller may want to use an escrow service, but get your lawyer to deal with that.”

Paying the taxman

No matter what country you buy a house in, you’ll always have to pay property tax. But, in the U.S., the amount varies by state and county. Florida alone has 640 local governments and each has authority over property taxes. In some areas of the country’s non-residents can see their property taxes increase by as much as 10% a year, while residents only have to worry about a 3% increase. Vitch hasn’t had a problem with taxes; he pays about 2% on the value of his house and that hasn’t changed since he bought it.

There are other things to keep in mind when buying property in the U.S.—Canadians will have to pay capital gains tax to Ottawa when the property is sold while Uncle Sam will ask you to declare any rental income—but these differences shouldn’t make or break your decision to buy.

In fact, once you figure out the U.S. market, you may find yourself wanting to own even more U.S. real estate. “I would like to buy more,” says Vitch. “But my wife and I are still talking about it.”