1. How does property ownership in the US differ from China?
In China, urban land belongs to the government. When people say they have bought a house using lifetime savings, they are saying they have leased the property from the government for 70 years. Property laws have not been established long enough for Chinese owners to know what will happen when the 70 year term expires.
In the US, there are no limitations for foreign investors as far as homeownership is concerned. Majorities of residential buildings in the US have a land component and a building. So the purchase price includes permanent ownership of the land.
One obligation for property ownership is property taxation, which is about 1% of assessed value in California (generally purchase price with minor adjustments) for each year. The part of ownership cost in the US will include annual property tax while in China taxes are paid when transaction happens. However, several cities in China have started to implement annual property taxes as well so the difference could diminish over time.
2. Why would I want to purchase a property in the US? Why San Francisco?
Most international buyers want to purchase in the US for the following reasons:
- Diversification of their assets - Due to the uncertainties in China, many people who have the means would like to have some assets abroad. US is the ideal place for the diversification purpose.
- Education of their children - Many well-to-do Chinese parents want their children to attend high schools or colleges in the US. It will make financial sense to purchase a home so children can have a permanent home in the US. Instead of paying for rental, the property is actually an appreciating asset. Please keep in mind it will be important to find the right location because it matters even more when schools are involved.
- Lifestyle changes - Air quality and food safety are two main concerns of an average Chinese citizen today. At some point, it does not matter how much money a person has, he or she will still need to breath in the same air. Some people choose to move abroad for better life style and better quality of life.
- Investment - US market, like any other market, is cyclical. If purchased at a right time, real estate can be a very lucrative investment.
3. Major steps of buying a house
Establish a target price range. It is extremely important to figure out your finances and understand whether you can do an all cash purchase. As an international buyer, although it is possible to obtain a loan, the process might be lengthy and troublesome. Most recently, a large number of San Francisco properties were sold to international buyers recently simply because they are all cash offers and no contingencies. Sellers prefer all cash offers because of their certainty. If a loan is needed, get a pre-approval from a lender.
Search the available listings within your price range in various neighborhoods to familiarize yourself with the trade-offs by location, unless you are already clear as to what you are seeking. Many international buyers purchase properties in the US so their children can attend schools here. If that's the case, it will be essential to understand the school system and available schools. Most research can be done remotely although it will be necessary to visit some areas to get a general feel of the place.
- Find an agent that is familiar with your target area and is well-versed in all aspects of evaluating properties and negotiating purchase contracts, when you are starting to get a good sense of what you want. Finding the right agent is important because good real estate agents are backed up by a support staff of escrow coordinators, assistants, inspectors and attorneys that guarantee you a level of service that is unavailable elsewhere.
- Go through a thorough evaluation of the seller's disclosures with your agent, when you have found a house that you would like to purchase, and after the agent has done his preliminary analysis of the pricing of the house relative to other properties. Based on market conditions, (how many days properties are typically on the market, how many disclosure packages have been picked up or read online, number of committed offers, etc.), your agent should be able to estimate how much you will need to offer to get the property.
- Negotiate a price. If the seller decides to work with your offer, there is commonly a counter-offer made that alters the price, the terms of the offer or both. The initial counter-offer can be accepted or responded to with another counter-offer. This process continues until both sides have a deal that they can live with or it becomes evident that there is not going to be a meeting of the minds.
- Make an initial deposit, typically to the escrow company that acts as the repository for deeds and funds associated with the transaction. The amount of the deposit varies, though in California, when working in active markets, the deposits tend to be the full amount that can legally be attached by the seller if the buyer defaults. This amount, called liquidated damages, is 3% of the purchase price, and can be in the form of a personal check. Later deposits to escrow may need to be in "good funds" form, which means that there is no uncertainty as to the funds being received by the escrow company (cashier's checks or wire transfers satisfy this requirement).
- Have experts examine the property and provide appropriate reports, if the contract has contingencies with respect to the condition of the property. A general structural inspection is the most common one, though there are many others that specific properties may warrant. Among these are: roof, soils, septic, boundaries, underground tanks, structural pests (if the seller has not provided a report), and so forth. When the inspectors have determined the condition of the property, the buyer may decide not to proceed (i.e., to exercise the contingency), to renegotiate based on what is found, or simply to release the contingency and proceed with the deal.
- When all contingencies have been removed, the final step in the process is called closing. The seller and buyer both signs appropriate paperwork and the escrow company complete all necessary working to complete the transfer of ownership.
4. I am a buyer. Do I still need an agent? What can an agent do for me and how much do I need to pay?
Yes absolutely. An agent can help you to navigate the local market. San Francisco is very different from many other cities. There is no subdivisions and standard price ranges. Each neighborhood and each house is unique. The best part of the arrangement is there is charge to the buyer. It is typical for the seller to pay for agency fees so buyer can get representation free of charge. Considering the magnitude of the investment, it is only prudent to find an agent.
5. How long does it take to purchase a property?
Although the local buyers have the luxury of looking for months at a time, international buyers generally have very limited amount of time. In addition, San Francisco is a very fast moving market. A house in a desirable neighborhood can be sold during the first week if priced correctly. To purchase a house in San Francisco, it will be necessary to spend at least a week or two in the city to understand what's on the market and make an offer.
6. I am not planning to use the property for several years. What do I do with it in the meantime? How much money will I spend on property taxes and etc?
First of all, there is no point to let the property sit idle and you can rent it out. It is fairly easy to rent out a property in San Francisco but you should consider using a property management firm. Regular expenses include property tax, insurance, and regular maintenance.
Let me give you an example here. Assuming you have purchased a $1M single family home and you can probably expect $60K in yearly rent or $5K per month. Your yearly property tax bill is 1% or $10K and your property management fee is 10% or $6K. Let's add another $5K in insurance and maintenance. You will net $39K in income. Please don't forget one major reason for your purchase is potential appreciation and the total annual appreciation can be significantly higher than rental income.
7. What happens when I sell?
Property transaction fees are high in the US. It will generally cost the seller 7% of total selling price in transaction fees. So I personally do not recommend you purchase a property in the US if you are planning to sell it in the near future. Generally speaking, you should plan on holding the property for at least five years to have the benefits of appreciation. Again, selling in San Francisco can be a very quick process. There is such a shortage in properties and you should not need to worry about sitting on your property for a long time.