Download Chapter 1

International Real Estate for
Local Markets
Overview
• Conducting business in global marketplace
– Examine different cultures needs and
expectations
• Modify marketing and selling practices
– Attract and service ethnic, immigrant and
international clients
• Develop/expand networking opportunities
• Create an inclusive business plan
Introductions
•
•
•
•
Name
Local market
International experience
Diversity Experience &
Training
• Do you have a business
plan
Globalization
Chapter 1
Objectives
•
•
•
•
Identify causes of economic globalization
List factors promoting globalization
Recognize impact of globalization
Identify effects of globalization on the
practice of real estate
Definition
Economic globalization
is the movement by countries, companies,
organizations and people toward
a single market environment
Factors Promoting Globalization
• Unrestricted Boundaries
– Relaxed restrictions on importing and exporting
– Formation of global economic communities
– Relaxed restriction on capital flow across
national boundaries
• Round-the-Clock Financial Markets
– Major stock exchanges trade 24 hours a day
– Ties financial markets closely together
Factors Promoting Globalization
• New Alliances and Agreements
• Agreements between countries lead to
interdependence of economies
• Promote facilitation of capital flow
• Agreements include
–
–
–
–
Trade
Sharing technologies and workforces
Reduced barriers to provide incentives
Equalize exposure of domestic and foreign investors
Factors Promoting Globalization
• Economic Specialization
– Production and export of specific products
and services
– Creates economic efficiencies and benefits
– Develops dependence on other countries
• Commodities not produced at home
• Oil exporting countries import
manufactured products
Factors Promoting Globalization
• Floating Currency Exchange Rates
• Global economic conditions influence
currency exchange rates
• Ties economies of nations in determining
international buying power
• World Band and International Monetary
Fund
– Large role in promoting global economy
– Provide loans, drawing rights and funding
Factors Promoting Globalization
• Increased demand
– Population growth
– Dependence on international trade to meet
demands
• Spread of Free Market Philosophy
– Encouraged private ownership
– Facilitated integration of closed economies
into Western economic system
– Promoted international investment
Factors Promoting Globalization
• Natural Events
– Direct impact on availability and price
– Trade with or aid from other countries
provides opportunities for international trade
• Dependence on Foreign Capital
– International sources to fund growth and
development
Factors Promoting Globalization
• Capital Accumulation
– Groups accumulating capital look beyond their
borders for places to invest
– Emerging markets are primary targets
• Communication and Computer Technologies
– Advances have contributed significantly
– Communication is instantaneous
– Geographic distance is irrelevant
Factors Promoting Globalization
• Non governmental Organization
– United Nations
• Problem solver
• Mediator
• Reduced ability of nations to act in vacuums
– Trade and professional organizations
• Look beyond own borders for:
– Opportunities
– Ideas
– Partners and talent
Impacts of Globalization
•
•
•
•
Countries capitalize on their strengths
Specialization in production and export
Global interdependence
Economic strength defined in:
– Trade balances
– Currency exchange differentials
– Productivity
• Adapt or lose global competitiveness
Effects on Real Estate Business
• Global investors:
– Enter and leave various international markets
– Create business opportunities
– Seek investments
– Expect real estate professionals to have
knowledge about:
• World markets
• Economies
• International business transaction
Key Point Review
• Major factors promoting globalization
– Unrestricted boundaries for capital flow
– Increased free market trade
• International economic factors have
become part of our lives
• Continued population growth will influence
and affect our lives
• Internationalization will increase real
estate opportunities
Review Question
One key factor behind globalization is:
• Reinstatement of the gold standard
• Huge increase of regulations on capital
flow
• Development of round-the-clock financial
markets
• Elimination of floating currency exchange
rates
Review Question
One effect of globalization on real estate
investment is:
• Investors look for real estate investment in
other countries
• Local banks have tighter liquidity
requirements
• Constant increase in price of commercial
properties
• Elimination of negative vacancy trends in
major markets
Discussion Questions
1. What implications of a global market are
apparent in your real estate practice?
2. What innovations, technological or
otherwise could keep real estate
brokerage practices in step with
globalization?
Capital Flow
Chapter 2
Objectives
• Describe historical precedents for the use of
foreign capital
• Identify theories of capital flow
• Describe how capital flows in global market
• Identify influences on capital flow
Historical Perspective
• Ancient Rome invested in regional
economies
• Middle Ages banks developed long-term
lending to finance widespread projects
• The New World was funded by British,
French, Spanish and Dutch
• Europe still invests in American industries
Historical Perspective
• World wars depleted capital and deterred
foreign investment
• New international monetary system
– Since WWII
– Based on international agreements
– Promote growth of world trade
• Cooperation and loans
• Elimination of exchange controls
• Stabilization of exchange rates
Capital Flow
• Fosters growth and development
• Developing countries use foreign investors
• Foreign investment increases revenue
through taxes
• Increased revenue provides services and
employment
• Cash flow to developed economies offer
better interest rate and tax treatments
Capital Flow
•
•
•
•
•
What Flows?
Why?
When?
Where?
How Much?
Theories of Capital Flow
Influences on Capital Flow:
State of The Economy
•
•
•
•
•
•
Balance of payments
GDP
Political events
Inflation rate
Cost of living
Currency value
•
•
•
•
•
•
Interest rates
Consumption
Savings
Liquidity
Business cycles
External debt
National Resources
• Economic specialization
– Specialized capabilities
– Export abundant resources/import scare ones
• Supply and demand
– Gap between domestic demand and foreign
supply
• Labor supply
– Wages
– Availability
– Skill and education
Opportunities to Invest
• Available avenues for investing
– Financial instruments
– Money market instruments
– Domestic real estate
– Foreign real estate
– Foreign Direct Investment opportunities
• More choices = more opportunities
Trade
• Export and import volume
– Balance of trade
– Determines flow of capital
• Restrictions and regulations
– Tariffs, taxes, quotas, prohibitions
– Restrict cash flow and investment
• Uniform standards
– Modern methods and quality control
– Ensure universal marketability
Today’s Global Market
•
•
•
•
•
•
Markets and transactions are larger
Changes occur rapidly and universally
Information readily available
Sophisticated financial instruments
Tax treaties more prevalent
Money managers diversify in international
markets
International Financial Markets
Capital Market
Money Market
Products
Government notes and bonds
Corporate bonds
Common stock
Mortgages
U.S. Treasury bills
Federal Reserve deposits
Negotiable certificates of
deposit
Commercial paper
Borrowers
Businesses
Investors
Governments
Governments
Finance companies
Commercial banks
Lenders
Personal savings accounts
Pension funds
REITs
Mutual funds
Commercial banks
Foreign banks
Government
Financial intermediaries
Review Question
The difference between capital markets and
money markets is:
• The type of collateral used
• Equity versus debt interest
• The length of maturity
• The level of risk involved
Review Question
International capital flow is:
• A very recent phenomenon.
• An American banking practice.
• A market aspect since ancient times.
• The fiscal policy of “liberal” Western
governments.
Key Point Review
• Foreign capital necessary to growth and
development of all countries
• Capital flows through exchange of
financial instruments
• Three capital flow theories
– Bargain Rate
– Loss Avoidance
– Market Linkage
• Forces also influence real estate
Discussion Questions
1. What are the possible dangers of relying
on foreign capital to finance domestic
real estate?
2. Do the benefits outweigh the risks?
3. Why is capital flow important to you as a
real estate professional?
Currency Issues
Chapter 3
Objectives
• Define currency and factors affecting value
• Describe flow of money in an international
real estate transaction
• Identify influences on exchange rates
– Economic
– Regulatory
• Describe exchange rate fluctuations on
real estate transactions
What is Currency?
• Medium of exchange
• Symbol of buying power
• Physical measure of value
Currency Value Factors
•
•
•
•
Gross Domestic Product (GDP)
Gross National Product (GNP)
Inflation
Money Supply
– M1, M2, M3
• Monetary Policy
• Fiscal Policy
Exchange of Currency
• Bank Draft
• Bill of Exchange
• Wire Transfer
Rate Fluctuation Influences
•
•
•
•
Balance of trade between countries
Balance of payments between countries
Exchange rate policies
Government actions
Balance of Trade and Payments
Trade Balances
Exchange rates
Investment Rates
Complex
Interaction
Balance of Payments
Economic Strength
Inflation
Gross National Product
When U.S. Pays in Dollars
• Bank Draft
• Decreases
– Supply of foreign
currency in U.S. banks
– Banks may not meet
foreign currency
demand
– Takes more dollars to
buy foreign currency
• Bill of Exchange
• Increases
– Supply of dollars in
foreign banks
– Takes fewer units of
foreign currency to
purchase dollars
Exchange Rate Policies
• Stable Rate of Exchange
• Floating Rate of Exchange
• Floating Managed Exchange Rate
Government Actions
• Tariffs
– Duty or tax
• Non-tariff
– Subsidies
– Discriminatory standards
• Spending reductions
– Decrease in government spending abroad
– Monetary and fiscal policies
Effect of Exchange Rates
• Impact of exchange rates is significant
• Currency value is part of transaction value
• Value may appreciate relative to local
market
• Value of domestic currency may depreciate
relative to international exchange
• Appreciation and depreciation may negate
one another
Timeline
1
2
3
Offer
5
Contract
6
Permanent
Finance
9
Finish
Improvement
8
Lease
Up
11
Sale
Short-term
Debt
Closing
7
10
Income
Taxed
4
Gains
Taxed
Income
Received
Effects of Exchange Rate
• Expectations may be based on exchange
rate
– Change at different points during transaction
– Effect long and short value of real estate
• May impact value of currency
– Weakening of economy
– Tightening of money supply
– Decline in value of currency itself
Effects of Exchange Rate
• Price
– Buyer may need more or less cash at closing
• Predicted and Actual Return
– Investor return may be eroded or enhanced
• Income
– Income and expenses may be higher or lower
• Taxes may vary due to exchange rate
• Financing costs may be higher
Converting Currency, Area, Price
• Information given in local measures
– Currency units per square meter per month
– Dollars per square foot per year
• Must convert between domestic and foreign
• Helps clients understand costs
C-A-T Formula
• Step 1: Convert the Currency
• Use most current exchange rate
– Xe.com real time exchange rate site
If you are converting:
Then (conversion factor):
U.S. dollars to yen
$1 = ¥104.52 (Japanese yen)
yen to U.S. dollars
¥1 =
$1
= $0.00957 (U.S. dollars)
¥104.52
Convert the Area
• Convert square feet to square meters
• Convert square meters to square feet
If you are converting:
Then (conversion factor);
Square meters to square feet
1 m² = 10.7639 ft²
Square feet to square meters
1 ft² =
1
or .0929 m²
10.7639 m²
Convert the Time Period
• When price is quoted per month:
– Multiply currency amount by 12 for
price/year.
• When price is quoted annually:
– Divide by 12 for price/month.
Key Point Review
• Value of currency is in buying power
• Exchange rates reflect currency strength
– May fluctuate over time
• Currency value, exchange rate, investment
and capital flow are interrelated
• Currency trends should be monitored for
threats and opportunities
Review Question
When the U.S. imports foreign goods and
pays for them in dollars, there is a tendency
for the value of the dollar to fall because:
• Foreign banks own more dollars than their
own currency.
• The flow of foreign currency into the U.S.
increases.
• U.S. banks have more dollars than before.
• U.S. banks have more foreign currency than
before.
Review Question
Since investors typically want to conserve their
principal, and earn a predictable and reasonable
return, they do not like governments that:
• Change often and experience ideological
extremes.
• Promote free trade.
• Stimulate capital formation.
• Obstruct monopolistic practices.
Investment Trends
Chapter 4
Objectives
• Explain principal foreign investment
patterns in the USA
• Identify preferences of major investors in
international real estate
• Identify major investment targets and
economic conditions that attract investors
Foreign Investment in USA
• 2005 foreign investment in USA
– $829.2 billion $768.2 billion in 2002
– Second largest on record
– Foreign acquisitions more than doubled from
2002
• Increased purchases of U.S. Treasury securities
• Major USA investors include UK,
Netherlands, Germany, Japan, and Israel
Areas Investing in USA
Total
Investment
Real Estate
Investment
Total
Investment
Real Estate
Investment
Total
Investment
Real Estate
Investment
All figures are in millions of U.S. dollars
2003
2004
2005
All Countries
1,395,159
36,702.7
1,520,729
38,964
1,635,291
41,066
Canada
95,707
3,153
125,503
2,859
144,033
2,818
Europe
1,001,237
16,736
1,066,908
19,204
1,143,614
20,618
Latin
America
84,134
6,120
87,259
6,254
82,530
6,194
Africa
2,196
250
1,671
261
2,564
266
Middle East
7,117
1,049
7,888
1170
9.965
N/A
Asia/Pacific
204,708
9,394
231,500
9,216
252,584
N/A
FDI Outlook
• Optimism based on:
– Accelerated global GDP growth
– Low interest rates
– Increased domestic investment and industrial
output
• Competition for FDI will increase
– Generous investment incentives
– Increased liberalization of financial
requirements
FDI Outlook
• Most attractive regions for FDI
– Asia, Central and Eastern Europe
• Primary sources of FDI
– USA, UK, France, Germany, Japan
• Overall positive trend counterbalanced by:
– Oil price volatility, new protectionism, terrorism
• Positive factors outweigh negative factors
• FDI modest compared to 1999-2000
Foreign investment in
US Real Estate
• Qualities attracting investors
– Political stability
– Economic stability
– Investment-grade properties
– No discrimination against foreign investment
FDI in USA Real Estate
In Billions of U.S. Dollars
60
51.7
49.9
50
40
30
38.9
39.5
40.2
1997
1998
1999
42.7
44.2
2000
2001
43.5
46.9
47.5
2003
2004
33.2
28.5
29.7
1994
1995
20
10
0
1996
2001
2002
2005
Comparison of FDI in USA Real Estate
2003
2006
Canada
12%
7%
Germany
15%
16%
Netherlands
12%
4%
United Kingdom
13%
11%
Caribbean
9%
7%
Japan
30%
13%
Australia
9%
13%
Foreign Buyer Preferences
•
•
•
•
•
•
•
•
Long-term perspective
High-equity positions
Acceptable, predictable returns
Quality products in desirable locations
Detailed research
Specialized advisors
Familiar markets
Greater risk
Global Investment Outlook
•
•
•
•
•
•
•
Weakened U.S. dollar
Rising importance of China
Oil prices
Moderate growth for U.S. and Europe
Deceleration of growth in Japan
Growth tapered off in 2005
Central banks are reducing or removing
policies that fuel rapid growth
FDI Potential
•
•
•
•
•
Generate employment
Raise productivity
Transfer skills and technology
Enhance exports
Contribute to long-term development of
developing countries
Investment Climates
United States of America
• Serious issues facing economy
– Higher interest rates expected
•
•
•
•
•
•
Currency depreciation
High energy costs
Trade deficit
Increasing national debt
War in Iraq
Investors may diversity into non-U.S. assets
China
• Economy expected to slow only slightly
– Tighter credit controls
– Softer global markets
• Major player in global market
– Increased consumer demand
• Making enormous investments
• Third largest market for imports
• Economy is export-oriented
Europe
• Expect modest growth
– Weak consumer spending
– Slowdown in exports
– Minimal job creation
– High unemployment
– Increased oil prices
• Euro appreciation against dollar
– Wages cut, hours increased, lower salary grid
Japan and East Asia
•
•
•
•
•
2nd most technologically powerful economy
3rd largest economy in world
Decline expected due to global slowdown
Japan changing economic picture
Multiple factors influencing forecast
– Development of overseas economies
– Demand for IT-related products
– Financial system issues
Japan and East Asia
• Southeast Asia has economic challenges
– Widespread poverty
– 60% of 3.3 billion people live on less than
USD$2 per day
– Difficult to build financial institutions
– High risks
– Limited resources
– Social and national problems
– Globalization and internal liberalization
Japan and East Asia
• Economic issues
– Trade
– Competition policies
• Social issues
– Migrant workforce
– Remittance systems
• Natural events--Tsunami of 2004
– Loss of lives, untold devastation
– Take years to recover
Australia
• Average economic growth is 3.3%
• Financial services generated 8% of GDP
• Liberal foreign investment policy
– Stable and resilient economy
– Steady increase in FDI
– Regulatory system is transparent and efficient
– Taxes and restrictions are limited or nonexistent
Mexico and Latin America
• 5th largest producer of crude oil
– Oil-related earnings = 35% government revenue
– Oil reserves exceed 12.49 billion bbl/day
•
•
•
•
•
Committed to economic and financial reforms
Projected growth 4.8% through 2006
China key export target for Latin America
Latin America investment target for China
Long-term challenges for Latin America
South America
• Expected solid pace of growth
• Good commodity prices and low interest
rates
• Single digit inflation
• Investment and consumption have
strengthened allowing for growth
• Energy producing countries will do well
• Energy importing countries will be challenged
Africa
•
•
•
•
Sub-Saharan Africa growing at 3-5%
Inflation decreasing in most countries
Oil producing countries faring well
Challenges to business include:
– Lack of quality information
– Fluctuating currencies
– Bureaucratic red tape
– Nepotism, graft and corruption
– Monopolies
Middle East
• GDP rose to 4.7 in 2004, expect 4+ in 2006
• Oil prices
– Above $30/barrel accumulate large surpluses
– High incomes boost domestic demand
• Reforms needed in investment sector
– Economic structures
– Institution promoting balanced growth
– Higher employment
– Reduced poverty
Middle East
• Political and social conditions
– Investors perceive high risks in region
– War in Iraq
• Stimulated demand for logistics and related
functions
• Boosted economies in region
– Suez Canal revenues have skyrocketed
– Tourism in Egypt has increased 34%
Obtaining Current Information
• World Trade Centers Association
• U.S. Chamber of Commerce
• CIPS Network
– Membership directory
– Cooperating associations
– Face-to-face business at NAR Annual
Convention
– Quarterly newsletters
– Customized research from NAR library
Traits of Foreign Buyers
1. Risk of overgeneralization
2. Investment patterns
Asian Buyers
• Prefer markets where minimal cultural
differences intersect with economic opportunity
• Feel most at home with other Asians
Japan
• Favor offshore real estate
• Need portfolio diversification
– Limited opportunities in Japan
– Very high land costs in Japan
– High short-term gains tax
• USA market viable investment
– Cheap land
– Relative liquidity of market
– Better tax incentives
Hong Kong
•
•
•
•
Reversion to China influenced investments
Much investment is immigration-related
Planning and holding horizons in 5 yr. range
Offshore investment expected to flourish
– Assume more risk to realize higher gain
– Investment range is $1.5 to $5 million
– More amenable to absentee ownership
European Buyers
•
•
•
•
•
•
•
Diversification significant motivation
Most European real estate is inherited
High-quality properties, good locations
Reliable returns not trophies
Secondary markets and older properties
Seek income first, then appreciation
High equity positions
United Kingdom
• Strong cash-position investors
• Heavy emphasis on exchange rate and
return on capital
• Establish local representation
• Leases in England
– Rent levels reviewed and raised apart from
contract
– Do not attach importance to letter of lease
– Look at financial strength of tenant
France, Sweden, Norway
• France
• French now invest
without involvement
of French banking
system
• Increased institutional
investment
• Sweden & Norway
• Foreign investment
increasing:
– Loosened regulations
– Heavy domestic tax
rates
Germany
• Open and close-ended funds
• Fewer opportunities in Germany
– Higher savings rate slows economy
– Cap rates of 5% to 6%
– Seek higher returns outside the country
– Tax incentive to invest in East Germany has
expired
– Investors look to new markets
Future Global Investment Trends
• Globalization is a reality
• Capital flow depends on easing barriers
and opening borders
• Europe presents a large market
• Measures to ease global business
– Single currency
– Uniform standards
– Comparable pricing
– Easier financing
Future Global Investment Trends
• Asia will be a leader in size, GDP and
purchasing power
• Asian economies starving for cash
– Looking for foreign investment
• Latin and South America have large
industrial privatization measures
– Need FDI for infrastructures
• USA stability, easy access, favorable tax
laws will continue to attract investment
Key Point Review
• FDI significant source of real estate
investment funds in United States
• Understand customs, business cycles and
political events before making an investment
• Real estate professional should be familiar
with traits and preferences of foreign
investors
Review Question
Which of the following generalizations about
Asian investors is most accurate?
• Most comfortable investing where there is a
significant Asian presence.
• Invest in areas unexplored by other investors.
• Rigidly follow leadership of big Japanese
corporations.
• Exhibit no general investment patterns at all.
Review Question
Global investment is facilitated by:
• Open borders.
• Favorable tax laws.
• Interdependency of nations.
• All of the above.
U.S. Regulations on
Inbound Investments
Chapter 5
Objectives
• Identify federal non-tax laws, restrictions,
ownership laws pertaining to U.S. real
estate
• Explain how Patriot Act affects real estate
professionals
• Explain resident status definitions
• Identify forms for U.S. tax purposes
• Comply with federal tax reporting and
withholding responsibilitieis
Philosophy of United States
• Open, free-market philosophy
• Federal regulation focuses on:
– Reporting
– Registration
– Tax compliance
• Some state and local laws apply
• Open-market attractive to international
clients
Non-Tax Laws & Regulations
• Restrictions relating to national security
– Federal lands
– U.S. territories
– Sensitive business sectors
– Investments by enemies or hostile countries
• Environment
– Flood control
– Environmental impact
– Wetlands preservation
Ownership Laws
•
•
•
•
•
•
Different types of legal structures
Legal structures to hold U.S. real property
Considerations on how to take title
Limited ownership provides reduced liability
Do not pay income tax at corporate level
Shields members from direct liability
Non-Tax Reporting Requirements
• Report acquisition to BEA within 45 days
of closing
• Agricultural land
• Non-personal, non-agricultural land
• Bank Secrecy Act
– Amounts greater than $10,000
– Includes payments by travelers’ checks
– Reported no matter who is involved in
transaction
The Patriot Act
• Financial institution requirements
– Customer ID and anti-money laundering
programs
– Enable verification and record maintenance
– Purpose: Identify specially designated
nationals or blocked persons
• Brokers should not service persons on list
• Property managers at risk if tenants on list
Professional Liability
“Any professional whose practice
involves transactions with foreigners or
foreign properties should be aware of
whom he or she is dealing with.”
David Lereah,
NAR’s chief economist and senior vice-president who
oversees regulatory and industry relations
Federal Tax Laws
• All transactions in U.S. real property are
considered sourced in U.S.
• Primary consideration is whether person is
a resident or nonresident alien
• Tax treatment is the same for:
– U.S. citizens
– U.S. corporations
– Resident aliens
• Consult tax and legal experts for details
Resident vs. Nonresident Status
• U.S. taxes citizens and residents on
worldwide income
U.S. Citizen Taxed on worldwide income;
Credits for foreign taxes paid
Resident
Alien
Taxed on worldwide income;
Credits for foreign taxes paid
Nonresident Taxed only on U.S.-sourced income
Alien
Resident Status for U.S. Taxes
• Physical Presence Test
– Present in the U.S. for 183 days or more
during calendar year
• Substantial Presence Test
– Present in U.S. for more than 30 but less than
183 days in current calendar year
– Present for weighted average of 183 days
over a 3 year period
• Current year and two preceding years
Tax on Nonresident Alien Income
• Tax imposed on all taxable income connected with
trade or business
• Income not connected with U.S. trade or business
is exempt in certain circumstances
• Passive income subject to withholding of 30% of
gross income
– Withheld, reported and transmitted within 10 days
• Tax treaties affect tax rate
• Capital gains on sale of U.S. real property taxable
regardless of time in U.S.
FIRPTA
• Gains, profits and income from sale of U.S.
real property are U.S. sourced income
• FIRPTA requires:
– Withholding and remitting 10% of purchase
price, not 10% of gain, to IRS
• Nonresident seller may apply for certificate
authorizing lower withholding
• Reports filed by settlement agent
Rules for Sale by Foreign Person
• Buyer of real estate from foreign person
must file:
– Form 8288: Withholding Tax Return
– Form 8288A: Seller’s receipt for withholding tax
– Both forms require an ITIN
– A nonresident alien Social Security number is
their ITIN
– May apply for ITIN on IRS Form W-7
Interstate Land Sales
Full Disclosure Act
• Second home market opportunities
• Developers local, out of state or country
• State and federal second-home market laws
State Laws
•
•
•
•
Requirement to register
Requirements apply to developers’ agents
State laws vary
Applies only to agent directly representing
a developer for sale of multiple units
• Rationale: Jurisdiction over developers
marketing property in their state
Registration Requirements
• Extensive
• Costly to developer
• May require annual renewal
Right of Rescission
•
•
•
•
If sale in violation of law
Right can last for years after closing
May require bonds be posted
May include specific contract and escrow
requirements
Federal Laws
• Subdivisions developers must register with
HUD
• Provide property report before contract is
signed
• Less risk for real estate professionals
• Applies to offers of 100 or more lots
• State information to be published by NAR
at www.Realtor.org by summer 2007
Deficit Reduction Act (DEFRA)
• Withhold, report, transmit 10% of amount
realized within 10 days of transfer
• Buyer directly responsible for withholding
• Withhold agent subject to civil penalties
• Exemptions include:
– Purchase price does not exceed $300,000
– Property is a personal residence
– Affidavit certifying seller is not a foreign
person
Reporting and Withholding
Responsibilities
•
•
•
•
Withhold tax amount when property sold
10% of sales price withheld for gains tax
Excess tax returned to seller
Passive income has withholding rate of
30% of gross income
• Tax treaties may modify amount of tax
• Property managers must withhold tax on
monthly payment received on rentals and
forwarded to foreign property owner
Tax Treaties
• Purpose: prevent double taxation
• Treaties may provide tax reduction
opportunities
• Treaties are always changing
• Refer to Appendix for list of treaties
State and Local Regulations
• Some states restrict or regulate foreign
land investment
• Many state have laws similar to FIRPTA
– Foreign owner may not be familiar with laws
– Refer to experts such as tax specialists
• Refer to Appendix for outline of restrictions
Key Point Review
• U.S. is an open and unrestricted market
• Federal regulations relate to reporting
• Federal tax treatment depends on resident or
nonresident status
• Income and gain received by nonresident aliens
are subject to taxation and withholding tax
• Buyers responsible for paying withholding tax
• Closing agents withhold, report and transmit tax
Review Question
For tax purposes, a foreign national who was
physically present in the U.S. for 183 days or
more during the year would be considered:
•
•
•
•
A nonresident alien.
A resident alien.
A U.S. citizen.
Completely tax-exempt.
Review Question
The withholding agent in a transaction
involving a foreign party:
•
•
•
•
Must be a Certified Public Accountant (CPA).
Must be an attorney, liable for withholding.
May be the real estate professional.
Is only liable for civil penalties, never criminal
penalties.
Local Market
Demographics
Chapter 6
Objectives
• Research and interpret data to assess
cultural attributes in local markets
• Identify opportunities to expand practice by
finding local and international clients
• Identify and develop needed services for
underserved populations in local markets
• Examine local demographic trends
Demographics
• U.S. Census Bureau
– Hispanic community fastest growing
– Hispanic home ownership 46% in 2004
– By 2030, 25% of population will be Hispanic
or Asian
• NAR research
– 1st time homebuyers
• Accounted for 4 out of ten home purchases
• More likely to speak a language other than English
Expanding Immigrant Locations
• U.S. immigrants averaging 1 million/year
• 65% located in 10 metropolitan areas (’90’s)
• Immigration growth no longer regional
– Hispanic population increased 100% in Las
Vegas in 10 years (1994-2004)
– Asian population increases since 1997
• Las Vegas—93%
• Atlanta—70%
Analyzing Demographics
• Population and
Households
• Income
• Age
• Occupation
• Ethnicity
•
•
•
•
•
Housing
Comparisons
Local Economics
Sources of Data
Using
Demographic Data
Key Point Review
• National and local demographic data
– Provides a picture of housing and investing
trends
– Help identify buyers/sellers in local markets
– Determine changes and opportunities
– Do NOT use to target specific groups
Review Question
According to Harvard University’s housing
projection research, what percentage of
home owners will be immigrants in the
coming decades:
• Approximately 2/3
• Approximately 1/4
• Approximately 1/2
• Approximately 1/10
Review Question
Under the Fair Housing Act, it is unlawful to
use demographic data to:
• Set rental rates for apartment communities
• Identify local or regional economic trends
• Assess opportunities or threats to a local
area
• Target specific groups for the purpose of
discrimination
Cultural Issues and Practices
Chapter 7
Objectives
•
•
•
•
Access and analyze information
Explain importance of relationship-building
Examine stereotypes, assumptions, biases
Recognize how inclusion increases business and
reduces risk
• Offer appropriate services
• Develop cultural sensitivity guidelines
• Recognize benefits of embracing diverse cultures
National Statistics
U.S. Population Growth Projections
80
Black alone
70
Asian Alone
Percent
60
50
All other
races
40
Hispanic (of
any race)
30
20
White alone,
not Hispanic
10
0
2000
2010
2020
Year
2030
2040
2050
Cultural Variation Observations
•
•
•
•
•
•
•
•
Self and space
Time and time consciousness
Relationships
Mental process and learning
Work habits and practices
Communication and language
Beliefs and values
Living habits and practices
Cultural Summaries
•
•
•
•
•
•
Asia
Japan
Europe
North America
Latin America
Middle East and North Africa
Assumptions, Stereotypes, Biases
• Generalizations
• Assumptions, Stereotypes and Myths
– Not safe to say “all” or “no”
– Invites others to stereotype you
– Both parties make inappropriate assumptions
– Pay attention to the individual
• Biases
– Form preferences
– Biases can become negative and harmful
Cultural Stereotype Categories
•
•
•
•
•
•
Self-Control
Outlook on Life
Racial Attitudes
Honesty/Reliability
Character
Time Orientation
•
•
•
•
•
•
Social Classes
Religion
Orientation to Nature
Group Objectives
Work Ethic
Talents and Abilities
Buying and Selling Attitudes
•
•
•
•
•
•
Colors
Numbers
Location and Orientation
Offers and Contracts
Negotiating Styles
Marketing and Advertising
Mexican-Heritage Home Ownership
• Study in Los Angeles, Houston, Atlanta
• Hispanic population youngest ethnic
minority in U.S.
• Mexicans are 67% of Hispanic population
• Obstacles to home ownership
– Live a cash-only existence
– Difficult to establish credit history
– Speak little English
– Poorly informed about home-buying process
Mexican-Heritage Home Ownership
•
•
•
•
•
High level of trust in real estate professionals
Job insecurity with long term debt
Believe their stay in U.S. not permanent
Many buy in neighborhood where they live
Prefer neighborhoods with low crime rates,
good schools, proximity to work and rising
home values
• 3.6 million more Hispanic households in
2010
Asian-American Home Ownership
• Very diverse, underserved market
• Barriers of Asian-American homebuyers
– Language/cultural
– Lack of knowledge of buying process
– Unverifiable income
– Lack of credit
– Lack of trust
Cross-Cultural Listening Skills
1. Pay attention to person as well as
message
2. Do not assume you know what they want
3. Emphasize and create rapport
4. Share meaning
5. Request information in a way that does
not bias or inhibit the response
Business Norms and Etiquette
•
•
•
•
Use good manners
Project positive attitudes
Adjust to high or low context communication
Observe basic multicultural norms and
etiquette
Behaviors to Avoid
•
•
•
•
Hands in pockets
First names
Personal questions
Asking about
family
• Crossing legs
• Soles of feet/shoe
• Personal space
• Initiating physical
contact
• Impatience
Nonverbal Red Flags
►Re-adjusting distance
►Averting eye contact
►Inappropriate laughing
►Covering face
►Silence
►Impatient
Key Point Review
• Common life activities vary among cultures
• Cultural understanding imperative in
international business
• Culture and tradition influence buying and
selling attitudes
• Active listening skills are essential
• Research cultures where you conduct
business
Review Question
Some culturally-based beliefs, traditions and
practices that may influence buying attitudes
include:
• Citizenship, city or local development plans, and
access to public housing.
• Amount of needed financing, size of building or
home, and urban or rural location.
• Kitchen & bathroom amenities, architectural style.
• Colors, numbers, and location and orientation of
the site and/or building.
Review Question
A behavior that may be offensive to others from
different cultures is:
• Clapping your hands.
• Showing the soles of your shoes or feet.
• Distributing business cards.
• Wearing a tie and business suit.
Cross-Cultural Relationships
Chapter 8
Objectives
• Explain cultural and social elements that
build relationships with clients
• Discuss high and low context cultures
• Identify key cultural areas influencing
business and personal relationships
• Examine cultural behaviors
• Adapt business procedures to
accommodate foreign clients
Building Relationships
• Critical component of business opportunities
• Relationships are key to successful
transactions
• No relationship, no business
• Understand and accept other cultures
– Recognize critical elements defining culture
– Deeply rooted stereotypes or prejudices
Language
•
•
•
•
Barrier and facilitator for interaction
Beneficial to speak a second language
Provides access to cultural undertones
Colloquial speech may have different
meaning
• Fluent speaker may edit documents
• Translation software has limitations
Religion
• Fundamental role in creating cultural
identity and behavioral norms
• Read about religion to facilitate interaction
with social standards and behaviors
• Religious tradition prescribes certain
behavior
Social Structure
• Dictates respect, speech, modes of contact,
roles and relationships
• May be fluid and change over time
• May be clear and fixed
– Status such as family origin, birthright or religion
– May be assigned a role without knowing it
– Inappropriate action may lose business
Historical Predispositions
•
•
•
•
•
•
Broadly influences everyday life
Political, social, religious beliefs
Decision-making
Placing trust in others
Disclosing information
Eye contact
Cultural Interaction Guidelines
•
•
•
•
Preparation
Communication
Business Practices
Role Behavior
Key Point Review
• Cultural differences have huge impact on
relationships and business practices
• Learning about and adapting to other
cultures prerequisite to international
opportunities
• Real estate professional must know how
to develop a relationship before business
is possible
Review Question
One factor that makes international selling
practices different from domestic practices is:
• In most countries, a transaction requires a
prior relationship.
• International clients do not care about product
benefits.
• Decisions tend to be made without
negotiation.
• Foreign investors refuse to be qualified.
Transaction Expectations
Chapter 9
Objectives
• Identify parts of international transaction
process that may differ from domestic
• List adaptations to facilitate transactions
• Clarify roles of professionals in an
international transaction
• Identify client expectations and needs
Client Expectations of Roles
• Broad spectrum of ways to complete
transactions
• Professional roles may vary
• Experienced clients will have
understanding and knowledge
• New clients approach investment in terms
of cultural experiences and expectations
Role Contrasts
•
•
•
•
•
•
Who is the client?
The Real Estate Professional
Legal Counsel
Professional Advisors
Translators
Title and Escrow Agents
The Transaction Process
•
•
•
•
•
Clearing title encumbrances
Real property interests
Use restrictions and loss of ownership
Does it have to be in writing?
And even if it is in writing…
The Client Knows Best
•
•
•
•
Know when to talk and when to keep quiet
Inform rather than persuade
Clients want to make up their own minds
Do not appear aggressive
Decision-Making Styles
•
•
•
•
Consensus, committee, levels of hierarchy
Accept and adapt to client’s practices
Be sure decisions are understood
Follow-up verbal exchange with written
confirmation or summary
– Email may be acceptable
– Card or letter is better
Negotiating Styles
• Vary as much as decision-making styles
• Some groups:
– Seek favorable results for everyone involved
– Focus on personal objectives
• Experience, insight, good listening skills
• Do not state departure plans
Funds and Tax Laws
•
•
•
•
•
Where is client’s money for transaction
Be sure money arrives in time
Banks and clients can be at fault for delays
Identify money channels to ensure closing
Get funds inside domestic borders before
closing date
• Use international tax attorney for latest
requirements and laws
Key Point Review
• International business practices and
customs vary
• Clients have different expectations
• Clients have different methods of selling,
negotiating and decision-making
• Real estate professional must be informed
regarding various methods
• Educate and inform clients
Review Question
The U.S. real estate professional should
be prepared for some resistance on the
part of an overseas client regarding the
use of:
• A counteroffer
• A notary
• An advisor
• An exclusive listing agreement
Review Question
One aspect of U.S. real estate law and
practice, which differs from the laws and
practices of most other countries is:
•
•
•
•
The concept of down payments
Title and escrow procedures
Loan application fees
Government disclosure requirements
Ethics and Equal Service
Chapter 10
Objectives
• Identify discriminatory acts under federal
fair housing laws
• Apply One America Principles and
philosophy of inclusion
• Recognize illegal practices
• Apply Equal Professional Service Model
Build on Fair Housing
• Initiate a diversity-oriented practice
• Fair housing laws establish minimal standards
• Understand fair housing laws
– Expected of all real estate licensees
– Embodied in Code of Ethics
• Fair housing laws provide full range of housing
options
• Equal Professional Service Model is solid basis for
keeping promise of these laws
Discriminatory Acts
• Refusing to sell, rent, negotiate housing
• Discriminating in terms, conditions,
privileges, services or facilities
• Falsely denying housing is available
• Failing to provide loan information
• Imposing different terms or conditions
• Discriminating the property appraisal
Steering
•
•
•
•
Steering is an illegal activity
Making choices or assumptions for buyer
Attempts to guide buyer in certain direction
Editorializing about areas client should or
should not consider
• Making housing unavailable because of
race, color, national origin, religion, familial
status, sex or handicap
Advertising
•
•
•
•
•
•
Advertising is subject to Fair Housing Act
State laws may also apply
Selective use of publications
Human models
Geographic advertisements
Equal opportunity slogans and logos
– Use logo in all advertising, on business cards
– Incorporate in Office Policies
Predatory Lending
• Practices or loan terms that:
– Deliberately deceive borrowers
– Strip home ownership equity
– Induce repeated refinancing with higher points
and fees
• NAR identifies predatory lending practices:
– Diminished personal credit standing
– Violation of federal consumer protection
statues and regulations
Diverse
Community
Opportunity
One
Celebrate
Differences
America
Principles
Responsibility
Embrace
Shared
Values
Philosophy of Inclusion
•
•
•
•
Part of One America Principles
Accept individuals from diverse cultures
Unconditional respect for all individuals
Positive regard for all individuals
– Right to be different and appreciate differences
– Extends to all individuals
• Cross-cultural relationships, social and professional
• Celebrate differences without imperative to change
NAR’s Code of Ethics
• REALTORS®
– History of supporting letter and spirit of fair
housing laws
– Pledge to conduct business in accordance
with tenets and spirit of Code of Ethics
• Article 10 outlines commitment to equal
opportunity in housing
Equal Professional Service Model
1.
Do I use
systematic
procedures?
2.
Do I have
objective
information?
Ye
s
N
o
Y
es
N
o
3.
Has my
customer
set the
limits?
N
o
4.
Have I
offered a
variety of
choices?
Y
es
N
o
Equal Professional Service Model
•
•
•
•
Systematic Procedures
Obtaining and Using Objective Information
Letting the Customer Set the Limits
Offering a Variety of Choices
Fair Housing Case Study
“You Be the Judge”
Personal Application
Key Point Review
• Fair Housing foundation documents
– REALTOR® Fair Housing Declaration
– One America Principles
– NAR’s Code of Ethics
• Standard policies and practices
– Include sensitivity to diversity
– Easier to provide professional service to
everyone
Review Question
Steering is a practice used by some real
estate professionals to:
• Match buyers and sellers in a transaction.
• Guide a client in a certain direction.
• Eliminate potential buyers who are not
seriously considering a real estate
purchase.
• Select appropriate advertising and
marketing practices.
Review Question
Fair Housing laws:
• Provide strict rules about how to run a real
estate business.
• Only apply to rental properties in major metro
areas.
• Help ensure that everyone has full access to the
housing market with no discriminatory barriers.
• May be used to qualify foreign buyers, and
eliminate possible violations of the Patriot Act.
Professional Goals
Chapter 11
Objectives
• Determine personal attitudes to improve,
change or adopt
• Create professional goals
• Examine immigration data
• Translate professional goal into specific
action statements
Professional Goals
•
•
•
•
•
•
Opportunities
Global resources
Loyal clients mean repeat business
Income opportunities
Larger audience for listed properties
Excitement and personal growth
Initiating International Practice
•
•
•
•
•
•
•
Commitment
Time
Money
Education
Networking
Adaptation
Personal Self-Assessment
Market Assessment
• Evaluate market potential for international
– Property type, size, variety and availability
– Existing foreign investment
– Local economic and demographic trends
– Accessibility and transportation
– Market size and name recognition
– Real estate market conditions
– Proximity to university and other resources
Goals and Strategies
• Local demographic trends
– U.S. Government Census Bureau
– Federal statistics (www.fedstats.gov)
– Local statistics
– Global residential property news and research
• www.globalpropertyguide.com
– CCIM Institute (www.ccim.com)
• Sample local market data
Goals
•
•
•
•
•
Services and customers
Reaching the local community
Reaching international markets
Professional development
Company goals
Specializing Guidelines
•
•
•
•
•
Personal background
Professional background
Real estate expertise
Local market opportunities
Competitors
Succeeding in International
• Traits and Attitudes
–
–
–
–
–
–
Patience
Resourcefulness
Initiative
Interest in cultures
Sensitivity
Listening and
communication skills
– Fond of travel
• Business Practices
–
–
–
–
–
–
Success commitment
Clear explanations
Respect clients’ wishes
Networking skills
Loyalty to foreign clients
Respect others business
practices
– Plan and organize
– Clear objectives
Key Point Review
• Excellent opportunities and resources for
international real estate practice
• Success requires commitment of time,
energy and money
• Assess personal biases, strengths and
weaknesses
• Translate professional goals into specific
actions
Review Question
An attractive feature of international real
estate practice is that it:
• Is an easy-entry business
• Offers significant repeat-business potential
• Does not require as much expertise as
domestic practice
• Requires little specialization or preparation
Business Plans:
Create
and Launch
Chapter 12
Objectives
• Identify variables influencing business plan
• Develop strategies for initiating or
expanding international practice
• Create specific actions to launch business
plan
Formulate a Business Plan
• Components
– Mission and goals
– Strategies to attain
goals
– Action plans to
implement strategies
• Identify variables
– People
– Resources
– services
• Inclusive practice
– Multicultural service
philosophy
– Diversity
• Strategic plans
• Practices
• Staffing
– Culturally friendly
community presence
People, Resources, Services
• Identify all people involved in practice
• Supply customer service that exceeds
customer expectations
• Resources to provide equal service
• Consider range of services to provide
Business Plan Strategies
• Increase resources for international
transactions
• Add or expand service to international
clients
• Network locally for international contacts
• Network locally for international contacts
abroad
Launching Business Plan
• No value if not implemented
• Planned actions to achieve goals
• Action plan
– Schedule of specific actions
– Addresses one objective or goal
– Who is responsible for specific action
– Identify start and stop dates
Sample Action Plan
Advertising in the Local Market
Evaluation
• Were objectives reached
– How well did you do
– What did you learn
•
•
•
•
Did project satisfy goals
How close to schedule and budget
Recommendations for future projects
What would you do differently
Key Point Review
• Business plans organize variables
– All efforts aimed at achieving specific goals
• Multiple strategies may be used
• Action plans provide:
– Direction
– Focus
– Accountability
Marketing and Selling
Chapter 13
Objectives
• Apply awareness and sensitivity of cultural
differences to marketing and selling
• Use practices that make clients feel
comfortable, informed and valued
• Identify professional skills needed for a
successful international practice
Market Profiles
• Associated with commercial or investment
properties
• Summarizes economic, demographic and
financial aspect of national and international
• Inform and educate prospective buyers and
clients
International Property Profile
• Comprehensive and detailed
– Local, state, regional, national economic
summaries
– Secondary market properties should focus on
advantages over primary markets
– Ability to buy and sell should be completely
detailed
– State, region, city, chamber of commerce or
convention bureau may have information
Property Profile
•
•
•
•
•
•
•
Comprehensive portrait of specific property
Tangible physical features and amenities
Financial and economic aspects
Tenant and management data
Surrounding area and competing properties
Reputation and prestige
Prepare copy of profile for client
International Property Profile
• Comprehensive property information
• Competitive standing with properties
outside immediate market
• Present physical dimensions in
measurements familiar to client
• Potential client information
– Do they speak the language
– Have they visited before
– Is this their first investment in country/market
Target Buyer Profile
•
•
•
•
•
Location, size and investment expectations
Historical buying patterns
Preferred property type
Motivation to buy
Effective targeting requires knowledge of
market
Marketing Plans
•
•
•
•
•
•
•
Reach all potential clients
Target buyer profiles
Budgeting and resource allocation
Identify key selling and advertising themes
Selling plan
Promotion plan and budget
Internet listings and other networks
Multicultural Marketing
•
•
•
•
•
Recognizes diverse market base
Learn about traditions and beliefs
Do not assume all minorities are alike
Use appropriate native language media
Understand cultural nuances in dress,
communication, family values
• Educate your audience
• Financial budget for revenues and expenses
– Costs run 15%-30% of revenue
Selling Plan
• Details direct and indirect contacts
– Calls to be made
– Support materials to be produced
– General activity schedule
• Primary and secondary categories
Promoting Property Internationally
• Takes more time
• Promote company, not just property
• Advertise in financial pages of targeted
cities
• Build relationships
• Greater travel and entertainment expenses
• Have brochures and print materials
reviewed by someone familiar with culture
Advertising and Fair Housing Laws
•
•
•
•
Fair Housing Laws apply
Edit ads for hidden or double meanings
Focus on features and benefits
Place ads to make information available to
all potential clients
• State and local laws may apply
Prospecting and Making Contact
• Direct prospecting:
– Personal contact
– Intermediaries/introductions
– Trade shows/conventions
• Indirect prospecting:
– Business network
Qualifying Overseas Clients
•
•
•
•
•
•
•
Uncover prospect’s objectives
Ongoing learning process
Define relationship BEFORE qualifying
Address investment requirements
Identify investment timeline
Identify client’s decision-making structure
Does investment capability correspond to
stated intentions
Qualifying Unsolicited Parties
•
•
•
•
•
•
•
Client’s background and reputation
Previous purchases
Amount of money involved
Location of money to be used in transaction
When will decisions be made
Who makes the decisions
Talking to other real estate professionals
Presenting
• Emphasize yourself and your company
– Personal business practices
– Professional ethics
– International experience
– Range of services
– Team of professionals who assist you
– Overseas offices and affiliations
Offering, Negotiating & Closing
• Know and conform to local customs
• Maintain client’s confidence in value and
fairness of transaction
• Emphasize ideas and values you share
• Exercise discretion and respect
• Pay attention to timely transmittal of funds
• Comply with federal withholding, reporting
and transmittal laws
Transnational Referral System
• International Consortium of Real Estate
Associations (ICREA)
– Support an international referral system
– Legal agreement between consenting agents
– Standardized referral procedures
– Binding dispute resolution process
– Easier to make and receive referrals
– 6-hour online Transnational Referral
Certification course
Networking
• Organize a network
• Maintain a network
• Cultivate your network
– Earn your CIPS designation
– Explore different business methods
– Check credentials/references for potential clients
– Cultural and social environment of contact
– Ask questions, explain transaction details
Key Point Review
• Match property and market profiles to target
buyer profile
• Profiles aid selling themes and educate
prospective clients
• Building relationships is key to prospecting
• Qualifying uncovers desires and motivations
• Emphasize reputation & international
experience
Review Question
An international network is best defined as:
• An international membership organization for
cooperating brokers.
• A rolodex-card system of international listings.
• A custom-made business and communication
channel used to generate prospective
international clients.
• E-mail addresses obtained from the Internet.
Review Question
In international prospecting, you have to:
• Use intermediaries to establish first
contact.
• Make cold calls.
• Entertain prospects.
• Accomplish all business at the initial
meeting.