International Real Estate: Transactional Red Flags

This article explores the red flags that we as REALTORS® need to be aware of both for our clients’ and our own protection when conducting international transactions. We focus primarily on inbound transactional red flags. Why is this article relevant to our market? Because most of us have handled international transactions at one time or another. Many of us didn’t know that in 2005, foreign buyers purchased approximately $52 billion worth of real estate in the U.S., and in the last few years, that figure has been growing.

Major contributing factors of this unprecedented growth in foreign direct investment (FDI) are the globalizations of our economies and technological advances have made cross-border business and investment much easier than in the past. We have a free, open market. Because of the relatively weak dollar, our local real estate prices make for very attractive investments to many foreigners. Other reasons foreigners buy U.S. real estate is because they know that their investment is safe, that they have the same property rights as U.S. citizens, and in addition to seeking preferential visa status, their investments – for the most part – will grow in value.

Here Are A Few Things To Keep In Mind:

RED FLAG #1: Communication between agent and client must be crystal clear. Never assume anything, especially when it comes to a foreign person doing business here. Explain to your prospective buyer or client in detail all the variables involved in a real estate transaction: mortgages and banking customs; title insurance, residency status and its tax implications in the future re-sale; tax implications for income derived from a U.S. investment source; and much, much more. Because many foreigners do not understand the “agency” concept, make sure your client knows (and understands) who you are representing.

RED FLAG #2: Cultural Nuances. Unlike the rest of the world, we do not use the metric system, so your client will look to you to help convert square feet to square meters, miles to kilometers and feet to meters. Keep in mind that foreign buyers take a lot longer when making purchasing decisions; many will even involve their extended family in the decision process. A misspelled or mispronounced name is a good way to alienate a potential buyer, so be sure you can correctly do both. Respect their culture and customs and be careful when trying to make jokes, as many foreigners have a different sense of humor than we do.

RED FLAG #3: Patriot Act. We woke up to a different world on September 12, 2001. New legislation enacted to protect us became law shortly thereafter; the Patriot Act is one of them. Among its provisions is one that says that we must verify the identity of those foreigners with whom we are about to do business and maintain records of those verifications. Property managers are especially at risk, and one way we can make sure we comply with the law is to check the Treasury Department’s Office of Foreign Asset Control (OFAC) database for individuals or entities named in the Special Designated National list (SDN). Executive Order # 13244, enacted shortly after 9/11/01, does, by force of law, make it a criminal offense to do business with an individual whose name appears in the SDN.

RED FLAG #4: I.T.I.N. For the most part, there exist very few restrictions when a foreigner buys a property here in the U.S. Many foreign buyers purchase investment properties, which implies income-producing potential. The Individual Taxpayer Identification Number (ITIN) is an IRS requirement for any resident or non-resident alien sourcing income in the U.S.; suggest to your prospective buyer that they apply for an ITIN number (unless your foreign buyer already owns a social security number). They’re going to need one sooner or later for tax reporting purposes.

RED FLAG #5: International Transaction Tax Laws. Like us locals, nonresident or resident aliens are required by law to report any U.S.-sourced income. How much will depend on the residency status of the individual. The IRS has established a residency formula, so consult with a CPA or tax lawyer for up-to-the-minute details. Suffice it to say that a foreign non-resident buyer who later becomes a seller must be made aware of the IRS’ 10 percent withholding rule. We practitioners need to be aware of the potential risks we face with the IRS when involved in such transactions. Ignorance of the law is no excuse.

RED FLAG #6: Licensing Requirements in Other Countries. If you’re thinking about taking a listing or handling real estate transactions outside of the U.S., be aware that, unlike here in the States, many countries do not have licensing requirements. One major country that comes to mind because of its proximity is Mexico. Mexico may not have licensing requirements (except for the state of Sonora) but, if you’re not a Mexican national, in order to practice there, local law requires that you have a work permit. Consider entering into a co-brokerage agreement with an in-country professional real estate agent; choosing a member in good standing of AMPI may be a good option. Many other counties have strict licensing requirements, some even restrict the licensing exclusively to their citizens – Panama, for example. A good rule of thumb is to do your research on a particular country’s requirements before getting involved in a transaction.

In Summary:

  1. Always communicate.
  2. Respect cultural differences. 
  3. Check the SDN.
  4. Suggest to your buyer to get an ITIN number ahead of time.
  5. Keep a current list of other professionals (CPAs, attorneys, etc.) to whom you can refer your foreign buyer for additional needs.

Want to learn more?

  • Become a C.I.P.S.
  • Get your TRC designation
  • Sign up for one HAR’s international real estate courses offered this year. Check the HAR course finder for the next available class.