The Lumina, a luxury condo development taking shape in San Francisco’s South of Market neighborhood, is popular with overseas buyers.
Lumina sales associate Yang Chen (right) talks with Donna Li of Mountain View, who may face foreign buyers with cash.
When Linda Vida sold her house in the Oakland hills this summer, she was hoping for a buyer who would live there, put kids in the local schools and “give back or participate in the community,” she says.
However, “as is very typical these days, a woman from China paid all cash for the house, and is not going to live in it but is going to rent it out for a while,” said Vida, who moved to Colorado. The buyer, a professor in Shanghai, paid $1.022 million, $27,000 over the asking price, for the home on Bay Forest Drive.
“In the end, she was the strongest buyer because she didn’t want to negotiate over nickel-and-dime things,” Vida said.
Although the Bay Area has always attracted foreign home buyers, anecdotal evidence suggests that their numbers are growing, creating even more competition in areas where demand has far outstripped the supply of new homes. The boom is partly because of globalization, but mostly a result of the tremendous buildup of wealth in developing countries, especially China, which had 2.4 million millionaires in 2013, up 60 percent from the year before, according to the Boston Consulting Group.
Many of these millionaires want to diversify their assets outside of what is still a communist country, send their kids to U.S. schools or have a place to escape if China’s smog gets even worse. Buyers from China are reluctant to talk about their purchases publicly, but real estate agents say they prefer new or nearly new homes or condos in good school districts with great views (don’t we all).
“Maybe 20 percent of the deals in San Francisco and the Peninsula are cash overseas buyers,” said Allen Ching, president of the San Francisco/Peninsula chapter of the Asian Real Estate Association of America. “I can only see that increasing.”
The Lumina, a 656-unit luxury condominium project going up in San Francisco’s South of Market area, has a Chinese equity partner, Vanke, and is marketing units in China. It already has contracts for 156 units that will open for occupancy in July. Of those, 10 percent went to buyers living outside the country, said Carl Shannon, a regional director with the project’s developer, Tishman Speyer. By comparison, less than 1.5 percent of the 650 units at the Infinity Towers, a Tishman project that sold out in 2011, went to foreign buyers.
Nobody really knows how many U.S. homes are sold to foreigners. Buyers are not required to disclose their citizenship or residency status on the escrow and title closing documents filed with a county recorder’s office. Some foreign buyers purchase homes in the name of a limited liability corporation. Most have property tax bills sent to a U.S. address of a friend, relative or attorney.
The loan application for Fannie Mae and Freddie Mac mortgages asks whether the borrower is a U.S. citizen or permanent resident alien, but lenders are not required to release this data. However, borrowers can’t get a Fannie or Freddie loan unless they are living here lawfully as permanent or nonpermanent resident aliens.
Trade group survey
One widely quoted estimate of foreign purchase activity ownership comes from an annual National Association of Realtors survey. It asks agents whether their most recent transaction involved an international buyer, then uses their answers to estimate total sales to foreigners.
Based on responses from 3,547 agents, the report said that for the 12 months that ended in March, foreign clients purchased $92.2 billion worth of existing U.S. homes, up 35 percent from the previous 12 months. Foreign purchases represented 7 percent of total dollars spent on existing homes in the latest period. About half of these foreign buyers live outside the United States; the other half are recent immigrants or here on temporary visas.
Canadians purchased the largest number of homes (19 percent), but China accounted for the largest dollar volume of international sales (24 percent). In California, 62 percent of foreign buyers came from Asia, whereas in Texas, 59 percent came from Latin America.
“In very, very specific places, (foreign buyers) are important, but in the overall scheme of things they are not,” said Richard Green, director of the University of Southern California Lusk Center for Real Estate. In Southern California, hot spots include Irvine, the Los Angeles County cities of San Marino and Arcadia, and “the San Gabriel Valley in general,” Green said.
Across the Bay Area, “the percentage of foreign buyers is probably 15 percent, and Chinese is probably half of that,” said Mark McLaughlin, chief executive of Pacific Union. “If you go to Palo Alto, north of 25 percent (of buyers) are Chinese. In San Francisco, it’s 15 to 20 percent Chinese. In Marin, it’s probably 3 percent. In Sonoma, it might be zero.” Berkeley gets some foreign buyers because of the University of California.
Pacific Union, based in San Francisco, spent $400,000 this year and will spend the same amount next year on corporate marketing in China. It built a Chinese website, hired a full-time “concierge” in China and advertises in Asian papers. Mclaughlin visited China four times in the past 12 months.
Marketing in Asia
DeLeon Realty of Palo Alto also created a division to market in Asia. “We hired someone who grew up in China to promote our listings to the Chinese community,” says founder Ken DeLeon. His firm bought a 14-seat Mercedes bus to take Asian buyers on tours of Peninsula homes for sale.
It’s not unusual for foreign buyers to take a one-week home-buying trip to the Bay Area. Some purchase sight unseen. Lota De Castro, an agent with Paragon Real Estate Group in San Francisco, said she closed on a King Street studio with a buyer in Singapore who “transacted the business by e-mails and phone calls and (has) not physically seen the unit.”
Some foreign buyers see houses not as a place to live, but as investments outside their home countries. “They look at real estate as an asset class,” says Jeffrey Needham, a senior vice president in San Francisco with HSBC, a global bank.
About 60 percent of foreign buyers paid cash, compared with one-third of domestic buyers, according to the 2014 Association of Realtors survey.
Although some buyers get a mortgage shortly after purchase, for those trying to move money abroad, getting a loan defeats the purpose, said Gregg Lynn, an agent with Sotheby’s International Real Estate in San Francisco.
Often their plans for the home are “open and flexible,” Lynn said. They might use it as a vacation home initially, and eventually rent it out.
Angela Cheung, president of Pillar Capital, said that in 2011 and 2012, she sold 27 units in San Francisco’s Millennium Tower (about 7 percent of the total) to foreign, mostly Chinese buyers. She is managing them all now as rentals for her clients.
Some Chinese are purchasing Bay Area homes so their kids can attend school here. DeLeon had a client “buy a million-dollar-plus home in Palo Alto for a 2-year-old who they anticipate getting into Stanford,” he said.
Patrick Lam, a Century 21 broker, said he represented a Chinese couple who bought a home in San Francisco’s Sea Cliff district last year for $2.6 million cash so they could put their son in kindergarten here, even though the father works in China.
Stanley Kwong, an adjunct professor of international business at the University of San Francisco who lives in Sea Cliff, said almost half the buyers in his neighborhood are “tech guys in hoodies” and close to the other half are from Asia. Many are former factory owners in China who are now buying old auto-parts factories in Detroit or pork farms in Iowa. But they don’t want to live in Detroit or Iowa, so they buy a house in San Francisco. Or they might be setting up a firm to invest in U.S. real estate, “and part of that investment is $6 million for a house,” he said.
Some foreign buyers are coming into the country under the EB-5 program, which lets a limited number of foreign citizens obtain a green card if they invest at least $500,000 or $1 million, depending on location, in a business that creates or preserves at least 10 U.S. jobs. The program has become wildly popular with Chinese investors, who exhausted their allotment of EB-5 visas for fiscal 2014 before the end of the year. It was the first time any country used up its annual allotment.
Vaughan de Kirby, an immigration attorney in San Francisco, said there is pressure to expand this program, which could attract more Chinese buyers.
So could a new reciprocal China-U.S. visa policy that President Obama announced in Beijing this month. Both countries now issue tourist and business visas good for 10 years and student visas good for up to five years. Previously, the visas were valid for only one year. The new policy does not change how long visitors can remain in the United States, but it does eliminate the hassle and expense of renewing visas each year, making it easier to enter and leave the country.
California could also see more buyers as China loosens its currency controls. China limits the amount of foreign currency its citizens can convert to $50,000 per person per year, making it hard to accumulate enough to buy a U.S. home. There are several workarounds.
Chinese business owners who have branches in Hong Kong or Taiwan can easily transfer money from there to the United States. Another way is to give $50,000 each to any number of friends, relatives or employees and have them convert it for you. There are underground banks that move money out of the country for a fee.
Foreign buyers short on dollars might be able to get a mortgage here, although it can be difficult because they don’t have credit scores. HSBC lends money to foreign buyers, relying on international credit sources. But it requires bigger down payments (30 to 50 percent) and lower debt-to-income ratios than it does with domestic buyers.
Perry Wong, a managing director with the Milken Institute, predicts that China will relax its foreign exchange restrictions. “China’s capital controls are weakening by the day,” he said. Just this month, China began a pilot program that — for the first time — lets mainland residents buy stocks on the Hong Kong exchange and allows investors outside the mainland to directly buy stocks listed on the Shanghai exchange.
It’s impossible to quantify the impact foreign buyers are having on home prices, but experts say it’s much less than the tech effect. International buyers “don’t really compete (in) entry-level markets,” Wong said.
In the short term, foreign buying “may raise prices a little bit,” said Ken Rosen, chair of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. But over the longer term, “it also may encourage some supply.”