Earlier this week, Calgary made headlines as recording the second coldest temperature on the face of the earth, second only to a weather station at the South Pole. Is it any wonder that many Canadians are casting a wistful eye toward the sunny southern states?
Canadians already own $50 billion worth of Florida property, having scooped up $2 billion worth of land last year alone. Half a million Canucks spend at least a month in the state each year, and we top the list of foreign investors.
The temptation to buy a vacation property in Florida has never been greater, as low interest rates coincide with a strong loonie and a very, very depressed U.S. real estate market.
Logically, it may seem like a great time to buy a vacation property in Florida. But those in a rush to get the biggest bang for their buck should tread carefully. There are more factors at play than financing.
Besides, prices may not have hit bottom yet, said Canadian personal finance author Gordon Pape, speaking at the Distinguished Advisor Conference (DAC) 2010 in Orlando.
Pape quoted from a study conducted by noted American economist and academic Robert Shiller, which says housing prices across the U.S. may yet fall by up to one-fifth in value, although that doesn’t necessarily apply to premium property.
“We may have another 20% coming across the U.S.,” said Pape. “Having said that, there’s some evidence that for premium properties, in places like Florida, we are pretty well bottoming out.”
Pape, who himself owns property in Florida, shone some light on the dark side of buying property in the Sunshine state. A vacation property at a bargain price is an enticing offer, he said, but buyers must beware of the downside before diving in. “There’s no need to go rushing in. There’s a window of opportunity open here which is probably going to be open for a little while.”
That window, he said, is a year and a half wide. What may seem like a good value for money now may be a better value for money down the road.
The other temptation is the current low interest rates in the U.S. “Interest rates in the U.S. are very low right now; you can get 30-year fixed-term mortgage for 4% to 4.5%, locking in the rate for 30 years.”
Gated communities in Florida are particularly cheap. Overbuilding during the boom years in the earlier part of the decade meant there was a lot more inventory than interest when the market collapsed. Waterfront properties, though, held up better, are remain subject to quick sales and foreclosures, he said.
Pape recommends clients take time to understand the geography and climate by spending some time in the state. Florida has three distinct climate zones: temperate north, tropical south and a transitional area dividing the two. Property prices are quite low in areas like the north-western Panhandle, which is located along the storm tracks. “You want to choose your location very carefully,” he said.
Every prospective property buyer looks for value for money. And there are many ways that it can come in Florida. “There are places in every region of Florida where you are going to find value,” said Pape, proposing buyers take time to look around for distress sales and repossessions.
The geography itself can lead to higher costs of ownership, as hurricane season usually means flooding, and that means higher property insurance premiums.
Thanks to our colder climate, Canadian buyers often fail to consider mould as significant problem either. However, when buying property in Florida, it is critical to look out for infestation, as eradication can be quite expensive.
Property taxes in Florida are another trap, and a big one. Floridians are known to stick it to outsiders. “Anybody from out of state who buys property in Florida is slammed with property taxes,” Pape said. “You have got to look at this property tax issue very carefully.”
These taxes change annually, excluding principle residents of the state, and jump significantly – in some cases almost quadrupling. These taxes are not rolled back even when the value of property falls.
Pest control, gardening and pool maintenance, and healthcare coverage all add to the cost of ownership and use.
Still, Pape said a vacation property in Florida can be a great asset and a future retirement home. Thousands of Canadian snowbirds make Florida their home every winter. “You escape Canadian winters, which is a huge advantage,” said Pape. “A 55ºF temperature in Florida is a heck of a lot better than zero degrees and a blizzard in Winnipeg, Toronto or Calgary.”
Capital appreciation on Florida property remains a long-term proposition, though, and buyers should not expect a “quick flip”.
“You wouldn’t want to buy a property now thinking you’re going to resell it next year and make a big bundle of money. That’s just not going to happen,” he warned. “Don’t buy if short-term profit is your main goal; if you’re buying as a lifestyle consideration then it’s certainly something to look at.”
Navigating the U.S. banking system could also pose considerable challenges. Many U.S. banks are unwilling to lend to foreign buyers. The best bet is to use a Canadian bank that is operating in Florida, said Pape, and there is no shortage of those.
Another useful financing tip: allow enough processing time. “It is a very complex verification process,” said Pape. “You have to allow at least 45 days from the time of a mortgage application to closing because of all the different layers that the U.S. government has put into place.”
Surprisingly, between 60% and 65% of Canadian buyers pay cash for their property, but cash payments are very closely scrutinized under the U.S. anti-terrorism and anti-money laundering laws. All sources of capital must be verified, and Pape suggested that buyers make sure the cash sits in a single account for at least 90 days prior to closing.
Finally, he stressed buyers should avoid investing in condos. “RBC wouldn’t provide any financing for condos or co-ops; they won’t even consider it.” The reason, he said, is that many condominium associations in Florida, especially the newer ones, are in a deep financial trouble. “Avoid condos,” said Pape in no uncertain terms.
(11/26/10)