British buy-to-let investors cash in on repossessed US homes

Buy-to-let investors are taking ‘foreclosure bus tours’ to snap up repossessed homes in the US and Spain for as little as £30,000

British investors unable to afford buy-to-let properties in the UK are buying ultra-cheap repossessed US homes in a bid to profit from rent guarantee schemes and possible long-term capital appreciation when the American economy recovers.

The homes are selling for as little as £20,000 in cities such as Detroit, where the combination of long-term unemployment and the credit crunch has led to house price falls of 70% since 2006, with few signs of any imminent recovery.

“We had money in premium bonds and savings in this country, getting almost no returns, and we couldn’t afford to buy an investment property here. Then we heard about buying in the US,” says Lynn Duggan, a clinical co-ordinator from New Malden in Surrey.

“At first we were wary and we spoke to some US legal contacts. We were attracted by the principle of a government-guaranteed rental scheme which, if it does what it claims, will cover the purchase price of the home in seven years.”

Duggan bought a four-bedroom Detroit home for £30,000 cash in the autumn, paying an initial £3,000 deposit and the rest 14 days later. Under a US federal housing and urban development scheme, rent for some low-income tenants is paid directly to landlords – and this is what British investors are relying on to achieve high yields.

“I’m getting about 20% return in year one and about 13% annually thereafter,” Duggan says. “I pay a management fee of $100 a month but otherwise the money is rolling in.

“Obviously I hope the capital value of the house goes up, but if not in seven years’ time I’ll have covered my cost and everything I resell for is profit.”

The British firm marketing the properties is the Belgrave Group, which has set up legal teams to handle sales in Atlanta and Detroit, where the market has plummeted. Its director, Nigel Gough, says the potential return from repossessed US homes sold off by banks has always been high, but the practicalities of buying have been difficult for individual investors.

“The turnkey solution we’ve created overcomes this and meets the demand for a property sector with exceptional yields and the prospect of very strong appreciation,” says Gough.

This is not the only way British investors are cashing in on the US crash. “Foreclosure bus tours” – coach trips run by estate agents, often for visiting Britons – go to homes in areas as diverse as Las Vegas, Alabama, Minnesota and California. In those cities with major economic problems, prices may be just 30% of their 2006 highs; in more affluent areas with homes foreclosed because of individual owners’ misfortunes, prices are typically 60%.

Some cities have streets now plagued with antisocial behaviour as a result of repossessed homes being empty, sometimes for years. Even so, tour operators report strong interest from foreign investors as well as domestic buyers. “Nothing’s more exciting than giving clients a chance to own a piece of America,” says Sammy Hastings, who runs a foreclosure bus tour in the Bay Area of California.

There is also British investor interest in Spain, where the scale of over-supply of properties – including second homes in coastal areas as well as those mainly for Spanish owner-occupiers – is set to grow this year as a glut of foreclosed homes come to the market. The Spanish-language website pisosembargadosporbancos.com, showcasing homes seized by banks from defaulting owners, says there are now 100,000 foreclosed properties on sale across the country. It warns this will rise to 300,000 by the end of 2011 as a series of repossession orders begun three years ago reach their conclusions this year.

As a result of these extra homes – added to the estimated 900,000 properties across Spain awaiting buyers – asking prices, which have already dropped 20% to 50% in some places, are expected to fall further this year. Websites such as property-abroad.com and top-tour-of-spain.com list hundreds of homes costing £40,000 or less, and many for just half that. Spain is a tougher investment challenge than the US because the Spanish rental market is also in the doldrums. This is because there is a glut of homes for sale in cities and tourist areas whose frustrated owners are letting them out until they can find a buyer.

Stephen Harman, a businessman from Manchester, has bought a three-bedroom villa near the popular village of Frigiliana, a short drive from Malaga, for under £65,000. “It was repossessed and on sale for almost £90,000 but I bartered,” he says. “It’s a lovely holiday home and I can hold on to it indefinitely. I’ll rent it out as and when but I accept rents are low. I’m hoping sales prices will eventually rise again.”

Two other major countries where house prices have dropped in recent years – Portugal, where the Royal Institution of Chartered Surveyors predicts more falls this year, and Ireland, where average values have plummeted from £265,750 in 2008 to £164,000 now – have not seen similar international interest in foreclosure sales, although they may do if price reductions accelerate.

Meanwhile, the US is making the running as the new opportunity for Britons who still have an appetite for buy-to-let. At least those getting involved know there are possible downsides.

Lynn Duggan says: “I admit that I’ve invested in a photograph of a house on a website. I’m never going to see it and there must be some risks. No one wants to lose £30,000 but an investment that size is not a disaster if it goes wrong.

“Detroit’s lost its car industry but other businesses are starting up – electric cars and new technology. In 10 years’ time, who knows what the place will be like? It would be nice to make a profit if it comes back.”

Graham Norwood

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