International Real Estate for Local Markets. (formerly Essentials of International Real Estate) Course Manual

Transcription

1 International Real Estate for Local Markets (formerly Essentials of International Real Estate) Course Manual Certified International Property Specialist Network National Association of REALTORS ext US & Canada International Operations Division Internationally 430 North Michigan Avenue Fax: Chicago, IL USA v2007

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3 In Memory of A. Alexander Bul CIPS, CPM, CRE (formerly Essentials of International Real Estate) is dedicated to the memory of Alex Bul, who passed away on November 24th, 1991, at the age of 69. Alex was president emeritus of the Henry S. Miller Management Corp. and a former Dallas Assistant City Manager. He also headed the Ryan Reilly Center at the University of Texas. Alex was a true leader in international real estate education. In addition to teaching for ASREC, ULI, IREM, FIABCI and BOMA, he taught many education sessions at National Association of REALTORS annual meetings. Alex was instrumental in developing this course and the CIPS designation. He was a member of the International Operations Committee's subcommittee on education, marketing, and publications, and a vital member of the curriculum development work group. Alex was always available to his students and colleagues, and he could always be counted on for excellent instruction due to his experience in managing Dutch pension fund real estate investments. This course is a continuation of the excellent work he started.

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5 Table of Contents Introduction 1-1 SECTION 1: Conducting International Business Chapter 1: Globalization 1-3 Chapter 2: Capital Flow 1-9 Chapter 3: Currency Issues 1-21 Chapter 4: Investment Trends 1-37 Chapter 5: U.S. Regulations on Inbound Investments 1-63 SECTION 2: Professionalism in a Diverse Marketplace Chapter 6: Local Market Demographics 2-1 Chapter 7: Cultural Issues and Practices 2-9 Chapter 8: Cross Cultural Relationships 2-41 Chapter 9: Transaction Expectations 2-49 Chapter 10: Ethics and Equal Service 2-61 SECTION 3: The World of International Real Estate Chapter 11: Professional Goals 3-1 Chapter 12: Create and Launch A Business Plan 3-21 Chapter 13: Marketing and Selling Practices 3-35 Appendix Appendix - 1 Glossary Glossary - 1 Resources Resources NATIONAL ASSOCIATION OF REALTORS Table of Contents 1

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7 Introduction International Real Estate for Local Markets is the first of six international courses developed by the international section of the NATIONAL ASSOCIATION OF REALTORS (NAR). This course is designed to introduce real estate professionals to the basic skills and knowledge necessary to facilitate international real estate transactions. This is one of the courses required to earn the Certified International Property Specialist (CIPS) designation. The course is designed to benefit experienced international professionals, individuals with real estate experience who are considering international specialization, and the NAR general membership. Course Objectives As the first CIPS course, International Real Estate for Local Markets introduces participants to the unique dimensions of international practice. The course is designed to create an awareness of: Globalization of economies International capital flow Effects of currency exchange on transactions Basic principles and trends in international investment U.S. regulation of inbound investment Cross-cultural relationships Diversity and inclusive real estate practices Fair Housing Act and its effect on marketing and selling practices Roles and expectations in international transactions 2007 NATIONAL ASSOCIATION OF REALTORS Introduction 1

8 Course Overview International Real Estate for Local Markets is presented in three sections beginning with Section 1: Conducting International Business. These chapters provide information necessary to work in the global marketplace including: o International business environment o Sources and flow of capital o Currency o Investment trends o U.S. Regulations on unbound investments Section 2: Professionalism in a Diverse Marketplace, is a study of diversity and fair housing practices in the local market designed to raise awareness and sensitivity to multicultural issues. A growing understanding of these issues provides a sound foundation for working with different cultures and the needs and expectations of these individuals during the buying and selling process. Topics covered include: o Local Market Demographics o Cultural Issues and Practices o Cross-Cultural Relationships o Transaction Expectations o Ethics and Equal Service Section 3: The World of International Real Estate focuses on preparing to work and succeed in the global economy. Topics addressing these issues include: o Professional Goals o Create and Launch a Business Plan o Marketing and Selling Practices Participants will learn to: o Modify marketing and selling practices to attract and service a multicultural constituency o Develop and expand opportunities for networking in the local and international markets o Create a culturally inclusive business plan Introduction NATIONAL ASSOCIATION OF REALTORS

9 Activities and Class Procedures This course incorporates a variety of activities designed to involve students, such as work group assignments, group presentations, exercises and discussions. Participants are strongly encouraged to ask questions and engage in class discussions and group exercises. Due to the range of experience levels among students, there is great opportunity to learn from one another. Your active involvement will only enrich your learning experience over the course of the program. Final Exam At the end of the course, participants will be given an open book multiplechoice exam to test and reinforce achievement of the course's learning objectives. Following successful completion of the course, each student will receive a CIPS course certificate in 6 weeks. Resources The appendix of this manual contains many resources for expanding on the material presented in this course. These resources are as up-to-date as possible. It is the real estate professional s responsibility to remain current on trends and issues in the ever-changing real estate market. The following websites are useful resources for the CIPS courses. They are: CIPS Network/National Association of REALTORS : Denver University Global Real Estate Project: burns.dcb.du.edu International Consortium of Real Estate Associations (ICREA): NATIONAL ASSOCIATION OF REALTORS Introduction 3

10 Introduction NATIONAL ASSOCIATION OF REALTORS

11 Section 1: Conducting International Business Introduction Chapter 1: Globalization Chapter 2: Capital Flow Chapter 3: Currency Chapter 4: Investment Trends Chapter 5: U.S. Regulations on Inbound Investments 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-1

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13 Introduction Overview The International Real Estate for Local Markets course begins with an overview of globalization in the real estate market and the accompanying factors which apply to conducting business in the new global marketplace. The study of diversity and fair housing practices in an ever-changing local market is designed to raise awareness of practitioners which will lead to increased sensitivity to multicultural issues, practices, and traditions. This new awareness will provide a sound foundation for working with ethnic groups, immigrants, and foreign nationals in a global economy. Participants will have the opportunity to: Examine different cultures and the needs and expectations of these cultures during the buying and selling process Modify marketing and selling practices to attract and service ethnic, immigrant, and international clients Develop and expand opportunities for networking in the local and international markets Apply what they have learned by creating an inclusive business plan The course addresses the international business environment including the sources and flow of capital and currency, investment trends, and government influences on foreign investment. A variety of issues will be examined, including laws, regulations, and taxes that are associated with an inbound real estate investment NATIONAL ASSOCIATION OF REALTORS Section 1-1

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15 Chapter 1: Globalization Overview This lesson introduces concepts of modern economic globalization: what it is, how it has come about, and how it affects the international real estate professional. Objectives Upon completion of this chapter, the participant will be able to: Identify the major causes of economic globalization List factors promoting globalization Recognize the impacts of globalization Identify the effects of globalization on the practice of real estate Application An awareness of the trend toward a single world economy enables practitioners to take advantage of ever-increasing opportunities for business with a variety of cultures. Understanding the economic and cultural decision-making processes of different social groups is a valuable tool for initiating, enhancing, and succeeding in international transactions NATIONAL ASSOCIATION OF REALTORS Section 1-3

16 Globalization Economic globalization is the movement by countries, companies, organizations, and people toward a single market environment. Historically, people have understood an economy as a system functioning within a single country. Today, world economies have evolved into regional and global networks. The net effect of a free market economy is that all the sub economies of individual countries are tied into a single network of supply and demand for products, services, capital, and resources. Included in this global system of supply and demand is the demand for real estate. Factors Promoting Globalization Unrestricted Boundaries for Capital Flow and Investment Restrictions on importing and exporting capital have been relaxed to increase international business Global economic communities (such as the European Common Market) and international trade agreements (such as the North American Free Trade Agreement) have been formed Restrictions on capital flow across national boundaries, such as in certain Asian markets like Hong Kong and Singapore, are limited or nonexistent Round-the-Clock Financial Markets Stock exchanges in London, New York, and Tokyo, trade 24 hours a day tying the major financial markets closely together New Alliances and Agreements Various types of agreements between countries lead to interdependence of economies and facilitation of capital flow. Nations and groups may agree to: Trade Share technologies and workforces Specialize Reduce taxation or other barriers and provide incentives Equalize the exposure and treatment of domestic and foreign investors 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-4

17 Refer to the Appendix of this manual for a general list of groups and agreements. As you develop your practice, you will compile your own list of helpful organizations. Economic Specialization Countries specialize in the production and export of certain products and services to gain a competitive advantage Specialization creates economic efficiencies and benefits Specialization develops dependence on other countries for commodities not produced at home o Middle Eastern countries export oil to much of the world o In return, they import most manufactured products Floating Currency Exchange Rates Rather than fixed exchange rates, countries now allow global economic conditions to influence currency exchange rates This practice has increasingly tied the economies of nations to one another in determining international buying power. The World Bank and the International Monetary Fund play a large role in promoting a global economy through loans, drawing rights, and funding. When I m traveling in Russia and the former Soviet Republics, I can often access my through the Internet more easily than I can make a phone call. -CIPS instructor Increased Demand Caused by Population Growth As populations grow, demand for goods and services increases The end result is a dependence on international trade to meet needs The Spread of Free Market Philosophy Liberalization of attitudes and the influence of world banking organizations have: o Encouraged private ownership in the former Warsaw Pact and Communist-controlled countries of Eastern Europe o Facilitated the integration of formerly closed economies into the Western economic system o Promoted international investment by pension funds, mutual funds, and other financial vehicles 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-5

18 Natural Events Natural events affecting the environment and climate, have a direct impact on the availability and price of products and services. Dependence on trade with (or aid from) other countries often provides new opportunities for international trade. Dependence on Foreign Capital Many countries must look beyond their borders for sources of capital to fund domestic growth and development Funding for projects rely on international investment o Electric power plants in India o Three Gorges Dam on the Yangtze River in China (said to be the largest civil engineering project of the 20th century), Capital Accumulation As nations and investor groups accumulate capital, they increasingly look beyond their borders for places to invest Emerging markets are primary targets Communication and Computer Technologies Advances in communication and computer technology have contributed significantly to globalization Communication is instantaneous and geographic distance is irrelevant. Examples include: o The Internet o Laptop computers o Fax machines o Cellular and portable phones o Electronic funds transfers o Translation services o Video telephoning o Speech-to-document translation o International databases o Satellite teleconferencing 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-6

19 Nongovernmental Organizations The United Nations (U.N.) has increased its role in international relations Participation by the U.N. to help resolve international conflicts and act as a mediator in international events has reduced the ability of nations to act in vacuums of self-interest Thousands of trade and professional organizations (including NAR) have begun to look beyond their own borders for opportunities, ideas, partners, and talent Companies and organizations employ people around the world Impacts of Globalization Countries continue to capitalize on their strengths by specializing in the production and export of particular goods and services Specialization creates a global interdependence among nations Economic strength is defined in terms of trade balances, currency exchange differentials, and productivity Countries must adapt to the trend or lose global competitiveness The pressure to open societies to free market trade has begun to transcend political systems, ideologies, and cultural identities Effects of Globalization on Real Estate Business Global investors enter and leave various international markets to create business opportunities and seek investments particularly in real estate. International investors expect real estate professionals to have knowledge about world markets, economies, and international business transactions NATIONAL ASSOCIATION OF REALTORS Section 1-7

20 Key Point Review Major factors behind globalization include: o Unrestricted boundaries for capital flow o Increased free market trade o Formation of global alliances o Expanded technology The critical factors that led to an international world economy have become part of our daily lives As the population of the world continues to grow, globalization will continue to influence and affect our lives Internationalization will increase opportunities for real estate professionals who want to expand their horizons Discussion Questions 1. What implications of a global market are apparent in your local real estate practice? 2. What innovations, technological or otherwise, could you suggest to keep real estate brokerage practices in step with increasing globalization? 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-8

21 Chapter 2: Capital Flow Overview This lesson introduces the concept of capital flow across national borders. Objectives Upon completion of this chapter, participants will be able to: Describe historical precedents for the use of foreign capital Identify theories of capital flow Describe how capital flows in today s global market Identify major influences on capital flow Application Foreign clients rely on local real estate professionals to provide information, select potential investment properties, and perform many of the services needed to buy and sell real estate. Practitioners need to have a working knowledge of the international economic system to meet the expectations of foreign clients NATIONAL ASSOCIATION OF REALTORS Section 1-9

22 Historical Perspective Capital flow is the movement of: The international flow of capital is not a new phenomenon o Ancient Rome was a heavy investor in regional and local economies o In the Middle Ages, the rise of banking houses and the mercantile system helped develop the concept of long-term lending to finance widespread commercial enterprises o The foundation of the New World (the Americas) was a result of funding from British, French, Spanish, and Dutch stock societies, trading companies, and governments o Europe continued to invest in American industries, such as mining, textiles, chemicals, transportation, public utilities, and public works systems, throughout the nineteenth century World wars depleted available capital and deterred foreign investment Since World War II, a new international monetary system has emerged o New system is based on international agreements to promote the growth of world trade through: Cooperation Elimination of exchange controls Stabilization of exchange rates Loans to assist nations with balances of payment deficits Foreign investment is now a major component of most economies in the world 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-10

23 Overview of Capital Flow Capital flow: Fosters the growth and development of economies o Developing economies use the capital of foreign investors to finance growth through expanded production, new or existing o Increased production increases employment which increases consumption resulting in industrialization and high productivity o Foreign investment increases revenues through taxes o Increased revenue allows government to provide needed services and employment o Foreign investment spurs domestic competition in improved financial systems and services and sound banking management o Foreign investors look for better profits from investments abroad o Cash flow to developed economies offer better interest rates and tax treatments which boost profit ratios What Flows? Capital flow consists of currency, assets, capital goods, debt, and credit Real estate is regarded as a capital good or an asset that has the capability of producing income Why? Capital flow is essential to fostering the growth and development of economies The effects of capital flow can be measured in: o Changes in trade balances o Current balances o Creditor or debtor status o Accumulation of capital o Need for foreign capital infusion 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-11

24 When? Capital flow occurs in every international transaction o Acquisition and disposition processes o Receipts of income o Payments of fees o Expenditures on improvements and operating expenses As economies grow, money is available to develop more resources, which creates demand for new skills, provides new jobs, and attracts workers Where? At the international level, exchanges of long- and short-term assets occur through the foreign exchange market Market is comprised of buyers, sellers, and intermediaries How Much? The amount that flows depends on a number of elements o Transaction amount o Exchange rate o Sources of funds Theories of Capital Flow Economists have developed several theories to explain capital flow. While examining the theories of capital flow, remember that no one theory works all of the time. There is no simple formula for examining economic conditions to determine whether capital is likely to flow in or out. A few basic theories are presented below. 1. Bargain Rate Theory Capital flows to the point of relative weakness o A stronger currency will flow into a market with a weaker currency because it has more buying power o Prices are perceived to be at bargain rates o To remain competitive in the global economy, it is not uncommon for a country to devalue its currency to encourage investment from other nations 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-12

25 2. Loss Avoidance Theory When a nation s currency declines (has less buying power than another currency), foreign investors avoid buying that nation s financial assets, such as stocks, bonds, and other securities There is a fear that the financial assets may also decline in value and may erase any advantage that might be gained from exchange rates 3. Market Linkage Theory This theory is based on the belief that economies are linked by a single global system which says global markets rise and fall together o Since the late 1990s, the U.S. dollar has been declining, and the U.S. trade deficit has been increasing o The trade balance has improved with regions that maintain floating exchange rates, such as the European Union and Canada o The total deficit has worsened with the economies that peg their currencies to the U.S. dollar, namely China, Hong Kong, and Malaysia o Lower U.S. dollar values, compared to the euro and Canadian dollar, mean U.S. exports are less expensive than European and Canadian exports o This affects Europe s and Canada s competitive standing in the world economy o The central banks of China and Japan are the primary lenders for financing the U.S. deficit o If they lose confidence in the U.S. and invest in euros instead of dollars, the global dynamic will change 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-13

26 Influences on Capital Flow Regardless of the theory, most economists recognize the following factors as among those that influence where and why capital flows. State of the Economy Balance of payments o Determines a nation s status as a net debtor or net creditor with respect to other nations o Investors use these statistics to follow trends in an economy o Improving economies attract investment Gross Domestic Product (GDP) and Gross National Product (GNP) o The overall production of a nation reveals the health of its economy o Rising GDP and GNP rates indicate a growing economy and opportunities for investment Political events o General stability of a government and its ability to influence the business climate has a positive influence on the flow of capital from foreign investment Inflation rate, cost of living, and currency value o Changes in the value of a domestic currency can attract or ward off foreign investment Interest rates o This percentage indicates the cost of borrowing money and the amount that can be earned through lending it o High interest rates discourage borrowing and reduce capital flow Domestic consumption/savings o The level of disposable income in banks or other savings instruments, which is available for lending o High savings rates increase the amount of money available for lending Liquidity o Describes the relative ease of converting different types of assets to cash in a given economy o Highly liquid assets are relatively easy to convert to cash 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-14

27 o The amount of time an investor must hold an asset is a serious consideration when making an investment Business cycles o Trends in supply and demand will indicate the direction of capital flow in or out of a market The following table illustrates changes in external debt for the ten countries with the highest external debt in the world. Comparison of 2002 (Top) and 2006 (Bottom) External Debt Top 10 Countries in Billions (B)/Trillions (T) US dollars U.S. Brazil Mexico Australia Argentina China Russia Indonesia S. Korea Turkey 862B 251/b 191B 176.8B 155B 149.4B 149B 135B 128.2B 118.3B 10.04T 176.5B 178.3B 585.1B 109B 305.6B 287.4B 130.4B 249.4B 195.6B Source: CIA Factbook 2002 and 2006 National Resources Economic Specialization o The specialized capabilities such as natural resources or skilled labor o More lucrative to export abundant resources and import scarce products or services Supply and Demand o The gaps between domestic demand and foreign supply, and vice versa o These are opportunities companies look for when investing Labor Supply o Wages and other factors, such as the availability, skill and education of the workforce. o These considerations determine where and when capital is invested 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-15

28 Opportunities to Invest Investment choices o All of the available avenues for investing accumulated capital such as financial instruments, money market instruments, domestic real estate, foreign real estate and other foreign direct investment o More choices create more opportunities for investment Trade Export and import volume, balance of trade o The volume of transactions and the status of net exports vs. net imports o Closely watched indices for determining the flow of capital Restrictions and regulations o Tariff barriers o Presence of taxes, limitations, quotas, and government prohibitions o These may restrict cash flow and/or investment Uniform manufacturing and professional standards o Use of modern production methods and quality control o Ensure universal marketability and the flow of goods across borders o These standards ordinarily attract investment 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-16

29 Capital Flow in Today s Global Market Compared to the past, today s flows of capital and real estate ownership are international in scope because: Markets are larger Transactions are larger Changes in market conditions occur more rapidly and more universally Information about market conditions is more available Financial instruments and structures are more sophisticated and more institutionalized Tax treaties are more prevalent Money mangers of huge corporate capital pools and pension funds reduce investment risks by diversifying in international markets Banking and real estate laws now control and protect capital flow in international markets Changes in financial institutions have created a relatively controlled environment for international capital flow o International Monetary Fund o International banking system o Agreements on foreign exchange International Financial Markets Capital Markets Capital markets exchange long-term assets o Maturity greater than one year o Government notes and bonds o Corporate bonds o Common stocks o Mortgages Participants in capital markets include: o Borrowers such as businesses o Investors o Governments 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-17

30 o Lenders o Pension funds o Real Estate Investment Trusts (REIT) o Mutual funds o Real Estate Mortgage Investment Conduits (REMIC) Real estate o Long-term capital flow o Considered a stabilizing force o Will become more volatile as securitization grows Money Markets Money markets exchange short-term assets Maturity less than one year Money markets financial instruments o U.S. treasury bills (T-bills) o Federal Reserve Bank deposits and other federal funds o Negotiable certificates of deposit o Bankers acceptances (letters of credit for international trade) o Commercial paper (unsecured corporate IOUs) Money market participants (Borrows) o Governments o Non-financial corporations o Finance companies o Commercial banks o Other depository institutions Money market participants (Lenders) o Commercial banks o Non-financial corporations o Governments o Foreign banks o Financial intermediaries o Individuals (usually through intermediaries) 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-18

31 Key Point Review Foreign capital continues to play a necessary role in the growth and development of all countries Capital flows through the exchange of financial instruments in international capital and money markets There is no simple way to predict the direction or magnitude of capital flow between two countries Three theories help explain capital flow o 1) Bargain Rate Theory o 2) Loss Avoidance Theory o 3) Market Linkage Theory. Economic, social, and political factors influence international capital flow The forces that influence capital flow also influence real estate Discussion Questions 1. What are the possible dangers of relying on foreign capital to finance domestic real estate? Do the benefits outweigh the risks? 2. Why is capital flow important to you as a real estate professional? 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-19

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33 Chapter 3: Currency Issues Overview Relationships between the value of currency, the value of real estate, and the flow of capital are complex and significant. This chapter explores the impact of these issues in an international real estate transaction. Objectives Upon completion of this chapter, participants will be able to: Define currency and the factors affecting its value Describe the flow of money in a basic international real estate transaction Identify economic and regulatory influences on exchange rates Describe how exchange rates affect real estate transactions Application Currency exchange values influence international transactions Changes in exchange rates affect the value of a property at various stages of real estate investment and ownership A real estate professional may be called upon to advise clients of any threats or opportunities in light of currency fluctuation 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-21

34 How Currency Works The creation of capital depends on the use of a system of money o The process requires freeing money which might be spent on the production of consumer goods o This money can be applied to the building of factories, equipment and other capital goods o Money is a way to measure capital What Is Currency? Currency is a medium of exchange o Goods and services are exchanged for money o Money can later be used to buy other goods and services Currency is a means to preserve, move, and enhance wealth o A temporary storehouse of purchasing power o The proceeds of one exchange are stored in money until the time of another exchange or sale Currency is a symbol of buying power o It is a numerical representation in units that can be added, subtracted, multiplied, or divided o The total units quantify buying power and/or exchange power Currency is a physical measure of value o A commodity o Currency can be purchased and/or exchanged to make more money o Institutions, as well as individuals, buy and sell currencies for profit o When exchanged, currency is a very liquid commodity Factors Influencing the Value of Currency The value of a currency in its own economic system is subject to daily influences 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-22

35 Some of those influences include the following: 1. Gross Domestic Product (GDP) The GDP is the value of all goods and services produced in a country during a given period The GDP includes production by foreign-owned facilities within a country The GDP does not include production by domestic companies abroad The GDP is a widely used measure of a nation s total economic performance in a year 2. Gross National Product (GNP) GNP measures all production of a country s firms, regardless of where the firms are located 3. GDP and GNP Factors When monetary value is added at any stage of production, both GDP and GNP increase Over time, these figures show cycles of expansion or contraction in an economy A decrease per capita would indicate that production did not keep pace with the population for that particular period of time These figures are compiled for all economies, and should be one of the trends you examine if you do business overseas Neither GDP nor GNP accounts for the underground economy The underground economy is a significant part of how things get done 4. Inflation The rise in costs of equivalent goods over time People have money to spend but goods are not readily available Competition for limited goods causes people to pay more to buy them The price is inflated and the value of the currency declines The price of goods over time can reveal changes in the value of a currency within an economy 5. Money Supply The money available for productive use in an economy The Money Supply categories shrink and grow at different rates 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-23

36 Attitudes of spenders, savers, borrowers and lenders impact the amount of money available for investment In the United States of America the money supply is represented and defined as follows o M1 Money Supply Currency and coins held by the public Demand deposits (checking accounts) owned by the public at commercial banks Other cashable deposits such as cashier s checks, bearer bonds, credit card cash advances, and automatic teller machines o M2 Money Supply Consists of M1 money supply plus: Money market mutual fund shares Savings deposits and certificates of deposit under $100,000 Overnight repurchase agreements o M3 Money Supply Consists of M1 and M2 money supply plus: Time deposits larger than $100,000 Repurchase agreements with maturities greater than one day Institutional money market funds 6. Monetary Policy A measure taken by governments to change or control: o The degree of liquidity of an economy s wealth o Inflation The availability of money has a direct bearing on: o Capital formation o Capital flow The supply and demand of money and goods can change the value of a currency within an economy A government must be able to affect the supply of money in a country The United States uses the following money policies: 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-24

37 o The Federal Reserve Lowers its discount rate for banks Lower rates allow them to borrow more money They may then lower the rate at which they lend money A lower interest rate makes borrowing more attractive to the consumer This increases the money supply o Liquidity Requirements determine how much of a bank s assets must be kept available on demand The more money banks must keep liquid, the less they have to lend out on a long-term basis This decreases the money supply o The Federal Reserve buys and sells securities in the open market Buying securities Adds money to the member bank s reserves Adds money to the seller s account by putting more money into the system This increases the money supply Selling securities Draws down the money supply Puts money in the Federal Reserve reserves This decreases the money supply 7. Fiscal Policy Federal taxation or spending policy designed to: o Increase employment o Stabilize pricing o Maintain growth in the economy Government purchases may be increased, and taxes may be reduced to release more disposable income into the economy Exchange rates o Determine the amount of one currency a person can obtain in exchange for another o Fluctuate and are an important factor in international transactions 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-25

38 o Are influenced by: GDP Inflation rate Buying power Money supply o Influence the timing and cost of international transactions Currency Exchange When different currencies are involved in a transaction, they must be exchanged in some way Three mechanisms of exchange include: 1. Bank Draft In a transaction in which a French exporter is selling goods and services to a Canadian importer, the Canadian importer buys a draft from a Canadian bank. This bank has a correspondent relationship with a French bank. The draft is a check, payable to the French exporter in euros, drawn from the Canadian bank s commercial account in the French bank. The French exporter deposits this check in his bank account and receives payment in euros. French Exporter Sells goods or services to Canadian Importer Euros Paid to French Exporter Draft is presented to French bank where funds are drawn from the Canadian bank s commercial account in the French bank Buys draft from Canadian Bank. Draft is payable to the French Exporter in euros NATIONAL ASSOCIATION OF REALTORS Section 1-26

39 2. Bill of Exchange In the same transaction, the French exporter issues a you owe me document in Canadian dollars and sells this bill of exchange to his French bank for euros. The French bank sends the bill of exchange to its correspondent Canadian bank, which presents it to the Canadian importer for acceptance (signing). The Canadian importer must then deposit Canadian dollars into the French bank s account at the Canadian bank. French Exporter Issues a You Owe Me (Bill of Exchange) document in Canadian dollars Sells the bill of exchange to his French bank for euros French bank Sends the bill of exchange to its correspondent Canadian bank Canadian bank Presents bill of exchange to Canadian importer for acceptance Canadian Importer Deposits Canadian dollars into the French bank account at the Canadian bank 3. Wire Transfer Funds are electronically transferred between banks Timing of the transaction is very important In an afternoon or overnight transfer, there could be a change in the currency rate before the funds arrive There may also be fees or tax charges on the transfer Influences on Rate Fluctuation Foreign exchange is an important component of international business Develop a relationship with an expert in the field of currency exchange Tracking the following elements can provide insight into how exchange rates are likely to change: o Balance of trade between countries o Balance of payments between countries o Exchange rate policies o Government actions 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-27

40 Balance of Trade and Payments The exact connections among trade balances, investment rates, balance of payments, GNP, inflation, economic strength and exchange rates are complex. Following is example of how trade might affect the exchange rate. o When the United States pays for foreign goods in dollars the payment: Decreases the supply of a foreign currency in U.S. banks when a bank draft is used A low supply of a foreign currency in U.S. banks may not be able to meet the demand for the foreign currency It may then take more dollars to buy a certain amount of the foreign currency Increases the supply of dollars in foreign banks when a bill of exchange is used A high supply of dollars in foreign banks may mean it takes fewer units of the foreign currency to purchase dollars Exchange Rate Policies Stable Rate of Exchange o Despite current economic conditions, governments simply declare the exchange rate Some governments have forced a stable rate of exchange against the U.S. dollar Floating Rate of Exchange o Supply and demand determine the exchange rates Floating managed Exchange Rate o System designed to keep their currency within a specific range o Allow market conditions to determine the rate Occasionally intervene to stabilize it The European Union, for example, has followed a policy of maintaining relatively stable rates among member countries by floating its currency rate together as a group against the U.S. dollar 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-28

41 Government Actions Investors appreciate stability and are wary of governments that change often, are unstable, or experience large, unpredictable swings in ideology Governments cannot control foreign exchange rates but they can influence them When a government has a chronic trade deficit, importing more goods than it is exporting, it comes under pressure to control trade A government can control trade through: o Trade barriers: o Tariffs a duty or tax levied upon goods transported from one customs area to another Tariffs raise the prices of imported goods, thus making them less competitive within the market of the importing country o Non-tariff: Subsidies to exporters Discriminatory standards applied to imports Agreements among countries to limit the trade of certain items Import quotas Exchange controls The rate of exchange on profits from imports and exports o Spending reductions Decrease in government spending abroad Foreign aid Gifts Guaranteed loans Monetary and fiscal policies Restriction of the money supply to raise interest rates and lower prices and incomes 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-29

42 The Effect of Exchange Rates on International Real Estate Transactions The impact of exchange rate fluctuations is significant o Currency value should be seen as part of the transaction value o Real estate professionals who can identify and track the trends and influences on rate fluctuations are very valuable to their clients Real estate derives its market and income-producing values from market demand for the type, location, size, and quality of a property o In under-built markets, demand exceeds supply and the value appreciate o In over-built markets, supply exceeds demand and the value declines Real estate value is determined by exchanging ownership for currency o Fluctuation of exchange rates can affect the value of real estate at the time of the transaction A foreign investor buys a property for a certain price at a certain time When selling the property, the investor may discover: The value of the real estate has appreciated relative to the local market The value of domestic currency has depreciated with respect to the international exchange The appreciation and depreciation may negate one another Result: Failure to achieve long-range investment objectives 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-30

43 Consider the following hypothetical timeline for a transaction: Offer Contract Closing Short-term Debt Permanent Finance Finish Improvement Lease Up Income Received Income Taxed Sale Gains Taxed Expectations of value, costs, return on investment, may be based on the exchange rate at each point of the transaction o Values may be realized or destroyed by a fluctuation to a different rate at the next point of the transaction o The potential of exchange rate fluctuations significantly influence short- and long-term effects on the value of real estate The value of real estate can impact the value of a currency o A decline in real estate values can cause a devaluing of the assets of owners, lenders, and investors As seen in recent years in Japan, the overall effect can be: weakening of the economy tightening of the money supply and a possible decline in the value of the currency itself 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-31

44 Price To close, a buyer may need more or less cash than was originally anticipated due to a fluctuation in the exchange rate o A Swiss buyer has agreed to pay $1,000,000 for a property in the United States o The price is equal to 1,440,000 Swiss francs at the time of the contract (US $1 = CHF 1.44) o At closing, the exchange rate is US $1 = CHF1.5 o The buyer now needs to convert 1,500,000 francs instead of 1,440,000 to dollars o The dollar has strengthened against the Swiss franc Predicted and Actual Return If a property has performed as expected, an investor s financial return may be eroded by a change in the exchange rate Income The actual income received may be less than expected or required and expenses could be greater due to changes in the exchange rate Tax Taxes due on previously received and spent income may have to be paid at a higher exchange rate Financing Costs A change in the exchange rate between the time of application and closing may revalue a loan so that the effective interest rate, and the principal itself, may be more costly for the borrower to repay Exchange also affects balloon payments, takeout loans, and annual debt service Converting Currency, Area, and Price Information about markets is typically given in local measures 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-32

45 o Real estate prices are quoted in a country s currency units per square meter per month o In the United States of America, prices are given in dollars per square foot per year A real estate professional must be able to convert between domestic and foreign prices These skills help clients understand what the property, fees, and related services cost in their own currency C-A-T Formula Step 1: Convert the Currency Currency exchange rates are reported in the number of foreign units equal to one domestic unit Currency should always be calculated with the most recent exchange rate In this example, assume Japanese yen ( ) = 1.00 U.S. dollar ($) To convert: Use (conversion factor): U.S. dollars to yen $1 = (Japanese yen) Yen to U.S. dollars 1 = $ = $ (U.S. dollars) Example 1 To convert 850 yen to the equivalent in U.S. dollars: 850 $ = US $8.13 or 850 = US $ Example 2 To convert US $15.30 to yen 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-33

46 $ = 1, or US $ = 1, Step 2: Convert Area The most commonly used unit of space measurement outside the United States is the square meter To convert: Square meters to square feet Square feet to square meters Use (conversion factor): 1 m² = square feet 1 square foot = m² (or 1 ) Example 1 Property: An office space is 1,250 square meters. Question: What is the equivalent in square feet? 1,250 m = 13,455 sf. Example 2 Property: An office space is 20,000 square feet. Question: What is the equivalent in square meters? 20,000 sf = 1,858 m 2 OR 20,000 sf./ = 1,858m 2 Example 3 Once you know the area conversion formula you can convert o The price or rent per square foot to the price per square meter o The price or rent per square meter to the price per square foot To complete the price conversion to a new area denomination, multiply the given price by the area conversion factor Property: An apartment rents for 50/m 2 /month Question: What is the rent in square feet? 50 x = 4.65/sf./month Step 3: Convert the Time Period Simplest of all conversions is between months and years 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-34

47 o If a price is quoted per month, multiply the currency amount by 12 to get the price per year o If a price is quoted as an annual amount, divide by 12 to get the price per month Putting It Together: Currency, Price per Area, and Time Conversions Using the three forms of conversion, it is possible to change a price quoted in Japanese yen per square meter per month into a price in U.S. dollars per square foot per year. Example 1 Given: The rental rate on office space in Kobe, Japan, is 1,000 yen per square meter per month. The exchange rate is 1 USD= Question: What is the equivalent of that price in U.S. dollars per square foot per year? Step 1: Convert currency = US $9.57/m2 / month Step 2: Convert price per unit of area (m 2 to sf.) US $ = US $0.89/sf./month Step 3: Convert time period US $0.89/sf/month 12 months = US $10.68/sf./year Sample problems and a conversion chart of square measures are available in the Appendix NATIONAL ASSOCIATION OF REALTORS Section 1-35

48 Key Point Review The value of a currency resides in its domestic buying power, and its usefulness as a medium of domestic or international exchange Exchange rates reflect the comparative strength of economies, and may fluctuate over time Currency value, exchange rate, investment, and capital flow are interrelated, and have a major impact on international real estate transactions Trends in currency value and exchange rates should be monitored for any threats or opportunities facing participants in an international real estate transaction Discussion Questions 1. How does an exchange rate fluctuation affect the value of your money deposited in your bank 2. What is your opinion about governments using tariff and non-tariff measures to control the international flow of capital 3. Assume that the U.S. dollar is currently appreciating against the euro. Your client from Germany is interested in buying real estate in the United States. How would you explain the risks caused by an exchange rate trend in which the dollar is appreciating against his/her currency? 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-36

49 Chapter 4: Investment Trends Overview Chapter 4 presents international real estate investment trends for inbound transactions in the United States including sketches of selected investor groups and markets throughout the world. Objectives Upon completion of this chapter the participant will be able to: Explain principal foreign investment patterns in the United States of America Identify preferences of major investors in international real estate Explain major investment targets and the important economic conditions that attract investment Application Understanding trends in international investment is a necessary skill for real estate professionals engaged in international transactions Awareness of political and economic activity around the world provides insight for potential investments 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-37

50 Foreign Investment in the United States Foreign acquisition of assets in the United States in 2005 o $829.2 billion, up from $768.2 billion in 2002 o The second largest on record after $1,046.9 billion in 2000 o Foreign official acquisitions of assets more than doubled from 2002, to the highest level on record o The increase was largely due to purchases of U.S. Treasury securities Areas Investing in the United States Total Investment Real Estate Investment Total Investment Real Estate Investment Total Investment Real Estate Investment All figures are in millions of U.S. dollars All Countries 1,395,159 36, ,520,729 38,964 1,635,291 41,066 Canada 95,707 3, ,503 2, ,033 2,818 Europe 1,001,237 16,736 1,066,908 19,204 1,143,614 20,618 Latin America 84,134 6,120 87,259 6,254 82,530 6,194 Africa 2, , , Middle East 7,117 1,049 7, N/A Asia/Pacific 204,708 9, ,500 9, ,584 N/A Source: U.S. Department of Commerce, Bureau of Economic Analysis, International Economic Accounts. Foreign Direct Investment Position in the United States on a Historical-Cost Basis, 2003, 2004, 2005 In 2006, the largest European investors were the United Kingdom, the Netherlands, Germany, France, and Switzerland In the Asia Pacific regions, the largest investors were Japan and Australia Israel and Kuwait were the major investors in the Middle East Outlook for Foreign Direct Investment (FDI) In January 2004, the United Nations Conference on Trade and Development (UNCTAD) issued its report, Prospects for Foreign Direct Investment and 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-38

51 the Strategies of Transnational Corporations, Key projections from this report are summarized below: 1. Prospects for global FDI are positive for both the short term ( ) and the long term ( ). This optimism is based on the acceleration of global GDP growth, relatively low levels of interest rates in major capital exporting countries, and the increase in domestic investment and industrial output. All these factors result in a sense of confidence in the economy for investors. 2. Competition for FDI will become fiercer in the years to come. Countries are expected to offer more generous investment incentives and increase liberalization of financial requirements and/or constraints. 3. Asia and Central and Eastern Europe are considered the most attractive regions for FDI. It is anticipated that lower levels of FDI will be made available for Western Europe, Africa, and Latin America. Top recipients of FDI will likely be China, India, South Africa, Egypt, Brazil, Mexico, Poland, Russia, the United States, and the United Kingdom. 4. The United States, the United Kingdom, France, Germany, and Japan will continue to be the main sources of FDI, and will be joined by China and South Africa. 5. The overall positive trend of FDI will be counterbalanced by a number of risks, such as oil price volatility, the rise of new protectionism, which will impede trade and outward FDI, and terrorism threats and conflicts. 6. Overall, the positive factors are expected to outweigh the negative factors, but the amount of FDI will be modest in comparison to the period of NATIONAL ASSOCIATION OF REALTORS Section 1-39

52 Foreign Investment in U.S. Real Estate Foreign investment in USA real estate still has all of the qualities that have attracted foreign investors for years o Political stability o Economic stability o Inventory of investment-grade properties o A system that does not discriminate against foreign investment The following chart illustrates recent trends in foreign direct investment in U.S. real estate o Until 1996, the position in real estate had been declining from its high point of $35 billion in 1990 o In response to the conditions caused by the Asian crisis of 1997, investors were attracted to the stable appreciative economic conditions of the United States o After the terrorist attack on September 11, 2001, there was a slight decline in FDI o In 2003, foreign investment increased, due in part to the weakened U.S. dollar U.S. prices more attractive to foreign investors Data source: U.S. Dept. of Commerce, BEA, Int'l Accounts Data: Foreign Direct Investment Position in the United States on a Historical-Cost Basis, NATIONAL ASSOCIATION OF REALTORS Section 1-40

53 Comparison of FDI in USA Real Estate Canada 12% 7% Germany 15% 16% Netherlands 12% 4% United Kingdom 13% 11% Caribbean 9% 7% Japan 30% 13% Australia 9% 13% Common Preferences of Foreign Buyers in the United States Over time, international professionals have perceived a number of consistent common preferences for offshore investment in U.S. properties This section examines general standards and practices and specific characteristics Long-Term Perspective Flight capital is foreign investment money placed in markets for conservation and safety of investment Long-term investments in countries like the United States and Canada are viewed as politically and economically secure and stable High-Equity Positions Foreign investors tend to buy properties outright or procure minimal financing Primary motive is placement of capital and not to experiment with: o Leverage o Unpredictable interest o Exchange rate fluctuations 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-41

54 Acceptable, Predictable Returns Foreign investors are not necessarily looking for bargains They want reasonable rates of return and assurance that future income streams will remain steady and/or increase Quality Products In seeking reasonable, predictable returns over the long term, foreign investors usually invest in high-quality property Recent trends indicate investors are considering secondary markets and slightly lesser quality properties as well Desirable Locations Foreign investors have invested in major metropolitan areas, such as New York City, Boston, San Francisco, and Washington, D.C. Beginning to expand into other areas, including suburbs, where they have experience and familiarity with the market Cultural patterns often affect location preferences Detailed Research Foreign investors: o Do extensive research o Pay attention to detail o Prefer information be presented in writing Specialized Advisors Foreign investors utilize the expertise of local or foreign specialists These specialists provide more information about the: o Market o Investment o Tenants o Management Familiar Markets Foreign investors tend to invest in markets where there is other foreign investment, particularly from their home country Greater Risk Experienced and successful investors with established portfolios will consider higher risk ventures, such as rehabilitation or conversion projects 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-42

55 Global Investment Outlook Key factors influencing global economies in 2005 and 2006 are: o Weakened U.S. dollar o Rising importance of China in economic and financial markets o Price of oil Moderate financial growth, ranging from 3% to 4%, is predicted for the United States and Europe Japan is expected to have the most noticeable deceleration in growth, down to approximately 2% from 4% Expectations for Canada s growth are approximately 2.5% Mexico s growth is targeted at 4% Economists and market watchers believe the outlook, on a global basis, is good Growth tapered off during 2005, especially for the United States In the United States of America and China, central banks are in the process of reducing or removing monetary policies that helped fuel rapid growth Foreign direct investment has the potential to: o Generate employment o Raise productivity o Transfer skills and technology o Enhance exports o Contribute to the long-term economic development of the world s developing countries Countries seek to leverage FDI for development 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-43

56 Investment Climates The United States of America The USA is expected to experience moderate growth Serious issues adversely affecting its economy o Currency depreciation If decline goes too far: Stock and bond markets get nervous Housing markets will weaken Growth will slow sharply Imports will decrease Protectionism pressures will rise Unemployment rate will rise o High energy costs Threatens inflation and unemployment USA produces 7.61 million bbl/day (2005) USA consumes million bbl/day (2004) o Trade deficit that reached $750 billion in 2006 o Increasing national debt External national debt is defined as the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services USA is the largest debtor nation in the world June 30, 2006 estimate of national debt is 10 trillion 40 million dollars Payment on the debt decreases available money for war in Iraq Hostilities may spread Threaten oil supplies Continued increases in oil prices Global investors with very large investments in the United States may be hesitant about future investment o Investors may diversify into non-u.s. based assets 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-44

57 Higher interest rates are expected o Felt most directly by the housing market o High rates will have a moderating effect on market China China s economy, which has been growing at rates from 7% to 9% is expected to slow only slightly due to: o Tighter credit controls o Softer global markets Will continue to be: o Major player in the global market o Making enormous investments o Gaining in global industrial markets China is the world s third largest market for imports o Third largest exporter behind Germany and the United States o Growing economic ties with other Asian nations o Strengthen the region s financial growth and influence China s economy is export oriented o Disproportionately aimed at the United States Exports are about five and half times imports from the United States Creates a considerable trade imbalance The United States, the International Monetary Fund (IMF) and Europe, have been very tolerant of this imbalance If attitudes change, and trade-threatening legislation is enacted, it could have deep effects on financial markets In January 2005, The World Trade Organization (WTO) quotas on textiles and clothing were eliminated. The WTO estimates that eliminating the quotas would raise China's share of U.S. clothing imports to about 50% from 16% in 1995, and China's share of European Union imports to 29% from 18%. Europe European countries have been experiencing modest growth o Weak consumer spending o Slowdown in exports o Minimal job creation and high levels of unemployment, o Increased oil prices o Constrained household incomes and low consumer confidence 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-45

58 The euro appreciated against the U.S. dollar o European firms had to curb rising labor costs by: Cutting wages Increasing hours with no increase in pay Lowering the salary grid for new employees o These efforts help businesses operate, but do little to increase consumer spending Spending is needed to boost overall economic growth The three largest new European Union member states, Poland, Czech Republic, and Hungary are all expected to sustain relatively strong growth rate 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-46

59 Japan and East Asia Second most technologically powerful economy in the world Third-largest economy in the world after the USA and China o Improved growth from o Fears of deflation in prices and economic activity lessened Japan's government debt totals 176% of GDP Aging population continues as major problem Japan s economy has been growing for the past several years based mostly on high exports to China GDP factors o 4% in 2004 o 2.2% estimated for 2006 o Decline due to: General global economic slowdown High oil prices Japan working to change its economic picture from consumer-price deflation to inflation o Lower government general spending, particularly on road, bridge and other project spending o Phase out tax cuts to boost revenue o Keep borrowing costs low for companies and the government Central bank has a policy of holding overnight loan rates at zero Japan holds the largest amount of public debt, and must increase revenue in order to grow Factors positively or negatively influencing the current forecast include: o Development of overseas economies, including oil prices o Demand for IT-related products o Developments in domestic private demand o Developments in domestic financial and foreign exchange markets o Issues related to the financial system and the disposal of nonperforming loans 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-47

60 East Asia, particularly Southeast Asia, faces serious economic challenges due to widespread poverty o Based on various studies, close to 60% of the 3.3 billion people living in the Asia-Pacific developing countries live on less than USD $2 a day o Because most people are so poor, it is difficult to build the financial institutions needed to underpin a society o Poverty gives rise to relatively high risks, such as domestic violence, crime, sickness, and unemployment o Developing countries face risks on society-wide and national levels Economic Resources are very limited Social and national problems cannot be addressed effectively Globalization and internal liberalization o Trade issues o Competition policies Administrative Social o Initiatives have improved remittance systems for the highly migrant workforce developed in this region For some countries, workers remittances represent a major source of foreign exchange earnings In the Philippines, remittances sent home was estimated to be USD$8 million, or 4.5% of GDP In December 2004, Southeast Asia experienced a horrendous tsunami o Tremendous loss of lives and untold devastation o It will take years to recover from this disaster o Difficult to project the difficulties that will have to be overcome South Korea depends heavily on exports to drive its economy Taiwan has reached a better balance between exports and domestic spending India, which has developed high-tech industries, still depends heavily on agriculture for its economy 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-48

61 Australia Australia s economic growth rates have averaged 3.3% since 1990 Growth has exceeded other Organization for Economic Cooperation and Development (OECD) countries including the United States, Canada, the United Kingdom, Germany, and Japan Financial services industry is Australia s third largest economic sector o Generates 8% of GDP o It is one of the major centers of capital market activity in Asia Australia has a liberal foreign investment policy o Stable and resilient economy o Steady increase in FDI The Australian government encourages and supports foreign investment o Australia s regulatory system is transparent and efficient Gives investors certainty about the security of their operations o Modern and effective intellectual property (IP) regime o No taxes on foreign firms seeking credit or loan facilities o No restrictions on capital flows, profit remittances, capital repatriation, transfer of royalties, or trade-related payments Foreign real estate investments must be approved by the government Most acquisitions are approved provided they are not contrary to national interests 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-49

62 Mexico According to banking and corporate executives who specialize in the Latin American and Caribbean regions, Mexico has been revised upward to 4.8% through 2006 Mexico is the world s fifth largest producer of crude oil o Significant benefit from recent increased oil prices o Oil-related earnings account for 35% of the government s revenues o Oil reserves exceed Billion bbl/day The government is committed to economic and financial reforms o Keep the country on a faster growth track o Develop the domestic securities markets o Reduce the country s dependence on external financing o Mexico has lacked the political consensus needed to advance these programs o The new President, Felipe Calderon faces many of the same challenges that former President Fox tried to tackle Upgrade infrastructure Modernize the tax system and labor laws Allow private investment in the energy sector o The success of President Calderon s economic agenda l depends on his ability to garner support from the opposition In Latin America, economists are projecting good growth at slightly over 4% in the coming years o Latin American countries have fared well by: Keeping interest rates low Low interest rates keep debt costs low o Demand for raw materials such as iron ore and soybeans o China has become an important destination for Latin American commodities and manufactured goods o China is also playing a larger role as an investor in the region Long-term challenges for Latin America include: o Increasing government efficiently o Better education of its people o Modernization of its ports 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-50

63 South America South America is expected to continue its solid pace of growth at 4% The economy is supported by good commodity prices and low interest rates in most countries Prices are stabilizing which translates into single digit inflation Investment and consumption have strengthened allowing for growth o Mainly attributed to exports Crude oil Energy producing countries, such as Venezuela, Colombia, and Argentina are projected to do well Energy-importing countries like Brazil and Chile will be challenged o These countries, along with Argentina and Venezuela, are commodity-producing countries o Generating massive current account surpluses that ease the pressure on their large external debt positions 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-51

64 Africa Sub-Saharan Africa, West Africa, and Central and South Africa have been growing at rates from 3% to 5% Countries in these areas that produce oil have fared better than non-oil producing countries Inflation has been decreasing for most countries MBendi, a prominent online business publishing firm says Africa s opportunities, which range in risk from investing in emerging market funds or one of the listed multinationals active in Africa to trading with African partners, include: o Oil and gas (Angola and Libya) o Mining (West and Central Africa) o Privatizations (South Africa and Nigeria) o International trade (oil producers and SADC) o Infrastructure (pipelines, roads, telecommunications) o Stock exchanges that are mushrooming in many countries o Employment for educated English and French speaking African nationals o Leisure industry (big game, beaches, golf, climate) The biggest challenge to doing business in Africa is the lack of quality information about Africa Other challenges include: o Fluctuating currencies o Bureaucratic red tape o Graft and corruption o Nepotism o Wars and unrest which can affect peace and democracy throughout the region o Lack of local capital o Monopolies such as marketing boards, state trading firms, foreign exchange restrictions, trade taxes and quotas, and concentration on limited commodities All place a disincentive on exports which unlinks Africa from the world economy o Lack of infrastructure 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-52

65 Middle East GDP in the Middle East region rose 4.7 in 2004 Growth is expected to be above 4% through 2006 o Major contributing factor was higher oil prices o Non-exporting oil countries benefited indirectly from the expanded economy If the price of oil remains above the $30 a barrel mark: o The region will continue to accumulate large surplus positions o High oil-related incomes will boost domestic demand Despite the rosy outlook for the region, enhanced reforms are needed in the investment sector o Economic structures o Institutions that promote more balanced growth o Higher employment o Reduction in poverty Current political and social conditions in Iraq will have a strong affect over the region for the next several years o Investors perceive high risks in the region Reduced FDI inflows Without FDI inflows, regional investment projects may suffer o War in Iraq has stimulated demand for logistics and related functions o War has boosted several economies in the region Revenues from the Suez Canal have skyrocketed Tourism in Egypt has increased 34% Middle Eastern and African residents chose to stay in the region for vacations and leisure activities 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-53

66 World growth league table, 2005 (Real GDP, % change) 10 fastest-growing countries 10 slowest-growing countries Azerbaijan 34.5 Lebanon -6.4 Equatorial Guinea 18.6 Zimbabwe -4.4 Maldives 18.0 Seychelles -1.0 Angola 15.0 Montserrat -1.0 Mauritania 14.1 Cook Islands.10 Armenia 13.4 Keribati.30 Kuwait 12.6 Micronesia.30 Latvia 11.7 Brunei.40 Trinidad & Tobago 11.9 Puerto Rico.50 Estonia 11.4 Monaco.90 Source: CIA Factbook 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-54

67 Obtaining Current Information Real estate professionals interested in knowing more about developing or emerging markets can benefit from a variety of services o The World Trade Centers Association offers a directory that lists trade centers operating throughout the world World trade centers provide services such as translation, trade missions, meeting facilities, trade education classes, and electronic messaging There are 285 centers worldwide o The U.S. Chamber of Commerce also offers a professional network and directory 94 international chambers of commerce located in 82 nations International outreach programs for small businesses Private electronic messaging system o CIPS Network provides a number of services to professionals who are researching the global marketplace A membership directory is distributed in over 50 countries A full list of cooperating associations is in the Appendix Opportunities for face-to-face business at the NAR Annual Convention Internet access to real estate market information on nearly 50 countries Quarterly newsletters Customized research from the largest real estate library in the world For more information on the preceding organizations, refer to the resources section of this manual 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-55

68 Traits of Foreign Buyers At the risk of overgeneralization, it is possible to identify certain investment patterns, recurrent themes, and behavioral traits for some regional and national groups of investors Investment patterns include investment objectives, property preferences and anticipated results Professionals who specialize in a particular group of investors should be aware of these traits in far greater detail than are presented here Asian Buyers Preference for prospective markets where minimal cultural differences intersect with economic opportunity Asians often feel most at home with other Asians Real estate professionals may anticipate that they will give priority either to Asian markets or to major markets with a significant Asian presence Market such as Los Angeles and Vancouver have a high Asian presence Japan Japanese investors tend to favor offshore real estate o These serve the user-oriented strategic goals of corporation Natural resources or cheaper labor Increasing global market share Enhancing product acceptance through local production Penetrating a new market The Japanese investor is driven by the need for portfolio diversification o Limited amount of real estate opportunities in Japan o High prices and limited returns in Japan (1%-2%) have caused investors to look elsewhere to diversify o Fears about the Japanese market are underscored by very high land costs, which can equal 90% of a building s market value in Tokyo o Speculation is discouraged in Japan by a 90%-95% gains tax imposed on property held for less than two years Factors stimulating Japanese investment in other nations 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-56

69 o Favorable currency exchange rates o Strong personal savings rates 15% compared to 1%-3% in the United States High local inheritance tax Up to 85% The USA market is a viable investment for Japanese investors due to: o Cheap land o Relative liquidity of the market o Better tax incentives o Existence of tenant side-markets Japanese investors: o Want rates of return to be greater than in the past o Looking more closely at market values of targeted properties o Debt equity is becoming a rival alternative to outright acquisition Targets in the United States continue to include o Los Angeles and Honolulu Close proximity to Japan High levels of Japanese tourism Large local Japanese populations Hong Kong Reversion of Hong Kong to the People s Republic of China in 1997 has influenced investment behavior Individual investors have been a major component of the outbound investment market Much of Hong Kong investment has been immigration-related o Canada has been a major recipient of immigrants o In return there has been investment from Hong Kong Currently, planning and holding horizons are in the five-year range o Targeted property types in the United States include 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-57

70 Residential income Hotels Retail Residential. In the future, offshore residential investment will continue to flourish o Investors seek to satisfy dwelling and capital-conservation needs o Investors will assume more risk to realize higher rate of return o Investment size range is $1 50 $5 million o Investors may be more amenable to absentee ownership than Japanese counterparts European Buyers Events in Eastern Europe and the former Soviet Union have been the drivers of European investment patterns since the early 1990s o Investment opportunities and pitfalls in these areas are more pronounced than those related to German unification o Although a massive human resource has become available for capital enterprise in Eastern Europe, the magnitude of the need for capital and modernization are staggering Diversification remains a significant motive in both commercial and personal spheres Most real estate in Europe is inherited and tends to remain in the family o Many investors look abroad to find desired real estate investments Europeans tend to look for: o High-quality properties in good, dependable locations o Investments that are relatively insulated from the effects of a fluctuating market o Investments that will enjoy a reliable investment return Individual investors tend to be sophisticated and experienced in business o They want strong investments, not trophies o Secondary markets and older properties are acceptable o Residential and residential income properties are major targets o European investors tend to seek income first, then appreciation o Equity positions are high, often all-cash sales 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-58

71 The United Kingdom English organizations are strong cash-position investors o Often pay all cash o Heavy emphasis on the exchange rate and return on capital Other important considerations include: o Tax-reporting requirements o Establishment of local representation o Specific type and language of the leases employed Leases in England do not necessarily contain escalations, free rent, or short terms o Rent levels are reviewed and raised apart from a contract o British investors do not attach much importance to the letter of the lease Look more closely at the commitment and financial strength of a tenant Reliability of an income stream France French investors may now invest in a foreign country without the intermediation of the French banking system o This change paves the way for increased institutional investment Sweden and Norway Swedish foreign investment is increasing due to: o Loosened regulations and heavy domestic tax rates for both individuals and institutions 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-59

72 Germany German investors maintain both open- and close-ended funds o Wealthy individuals o Families who act alone or use banks as syndicates There are fewer opportunities in Germany o Higher savings rate that slows the economy o Germany typically has cap rates of 5%-6% o Domestic investors seek higher returns outside the country o Tax incentive to invest in East Germany has expired causing German investors to look to new markets 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-60

73 Future Trends for Global Investment Globalization is not just a concept it is a reality o Borders are disappearing o Economies and real estate markets become more standardized and interdependent o Technologies become more sophisticated Much of what influences capital flow around the world will depend on the extent to which leadership and proactive measures are exercised by governments o The willingness of countries to ease barriers and open borders will determine the speed of economic growth Europe, particularly the European Union, presents a large market o It is much easier to conduct business using a single currency, uniform standards, more comparable pricing, and easier financing o The democratization of Eastern Europe is producing additional members in the European Union, as well as additional opportunities for investment Despite turmoil and economic struggle to recover, Asia will be a leader in the twenty-first century in terms of size, GDP, and purchasing power o It is estimated that Japanese banks alone have $1 trillion in nonperforming loans o The Asian economies are starving for cash and will be looking for foreign investment to ease conditions Latin and South America are turning their economies around through large industry privatization measures, and have a large demand for foreign investment to help build their infrastructures The United States' reputation for stability, easy access, and favorable tax laws will continue to attract investment 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-61

74 Key Point Review Inbound foreign capital remains a significant source of real estate investment funds in the United States It is important to understand the customs, business cycles, and political events in a particular country before making an investment An international real estate professional should be familiar with the traits and preferences of foreign investors Discussion Question 1. Assume you have a large sum of money to invest in real estate anywhere in the world. Where would you invest and what would you buy? 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-62

75 Chapter 5: U.S. Regulation of Inbound Investments Overview This lesson presents a synopsis of the laws and regulations governing foreign investment in the United States at federal, state, county, and local levels. Tax reporting and ownership laws, and use restrictions are all addressed. Objectives Upon completion of this chapter the participant will be able to: o Identify federal non-tax laws, restrictions, and ownership laws pertaining to U.S. real estate o Explain how the Patriot Act affects real estate professionals o Assist international clients by explaining resident status definitions and identification forms for U.S. tax purposes o Comply with Federal tax reporting and withholding responsibilities Application Restrictions, reporting requirements, and land use regulations significantly affect real estate transactions Some regulations impose legal responsibilities on the real estate professional It is imperative to educate yourself continuously about changing laws 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-63

76 Philosophy of the United States The philosophy of the United States regarding foreign real estate investment is consistent with its open, free-market philosophy o There are very few restrictions on foreign ownership of property in the United States Exceptions to this policy pertain to national interests and/or security o There are restrictions on: foreign acquisition of federal lands United States territories Sensitive business sectors Acquisition by parties who are associated with enemies or hostile countries Federal regulation of foreign real estate investment focuses on: o Reporting, registration, and tax compliance Some state and local governments maintain laws and regulations that significantly impact foreign real estate investment o Such laws generally apply equally to U.S. citizens and foreigners The U.S. open-market approach to real estate is a major attraction for international clients o Laws and practices of other countries too restrictive Federal Non-Tax Laws & Regulations Following is an outline of some of the rules and restrictions that exist in the United States o Laws are always changing and evolving o Consult an attorney to ensure you have the most current information 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-64

77 Restrictions Relating to National Security Federal lands U.S. territories Sensitive business sectors such as defense-related properties Investments by enemies or hostile countries Restrictions Relating to Environment and Use Flood control Environmental impact Wetlands preservation 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-65

78 Ownership Laws Different types of legal structures for holding properties o Selection of an appropriate structure may require the advice of legal and tax counsel Alternative legal structures for holding U.S. real property o Direct o Corporation both foreign and domestic o Partnership both foreign and domestic o Trust, foreign and domestic o Real estate investment trust (REIT) o Foreign pension plan Considerations regarding how to take title include: o Tax laws o Laws of descent o Bankruptcy laws o Mortgagee requirements o Limitation of liability o Overall investment/usage objectives A trend in limited ownership allows for reduced liability of foreign investors o Nonresident foreign nationals may be able to invest through a limited liability company Do not pay income tax at the corporate level Shields the members from direct liability 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-66

79 Non-Tax Reporting Requirements An acquisition must be reported to the Bureau of Economic Analysis within 45 days of closing o An agricultural land acquisition must be reported if the land: Has been used for timber or agriculture within the last five years Is leased for 10 years or more, is in excess of one acre in size, and produces more than $1,000 in output per year o Agricultural land transactions must be reported if the acquisition is made by a: Nonresident foreign national Resident foreign national who is not a permanent resident for immigration purposes Foreign corporation or government U.S. company with more than five percent foreign ownership o Unless it is exclusively for personal use, a non-agricultural land acquisition must be reported if it: Involves a 10% or larger interest in an investment property Valued at more than $1 million Larger than 200 acres o According to the Bank Secrecy Act: Cash transactions involving amounts greater than $10,000 Including payments by travelers checks Must be reported no matter who is involved in the transaction 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-67

80 The Patriot Act Under the U.S. Patriot Act, the Bank Secrecy Act, and the issuance of Executive Order 13224, financial institutions are required to o Have customer identification and anti-money laundering programs o These enable verification and maintenance of records about people opening an account o The purpose is to determine whether the account holders are specially designated nationals or blocked persons These specially designated or blocked people are suspected terrorists, or their financiers on the government s watch list The SDN list is a 150-page publication known as the Specially Designated Nationals list Federal requirements for setting up customer identification and antimoney laundering programs do not specifically apply to real estate brokers o Brokers may be subject to federal sanctions if they provide any service benefiting a person or entity on the list o Property managers are at risk if any of their tenants are on the list Any professional whose practice involves transactions with foreigners or foreign properties should be aware of whom he or she is dealing with, says David Lereah, NAR s chief economist and senior vice president who oversees regulatory and industry relations. (Source: Federal Tax Laws A foreign person in the United States is taxed only on income that originates or is sourced in the United States A foreign person is an alien who does not reside in the United States o May include foreign corporations, corporations organized under the laws of a foreign country All transactions in U.S. real property are considered sourced in the United States The primary consideration in determining how federal tax laws apply to the foreign investor is whether the foreign investor is a United States resident or a nonresident alien Tax treatment is the same for U.S. citizens, U.S. corporations, and alien residents in the United States 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-68

81 The international real estate professional must focus on the tax treatment of the nonresident alien property owner Consult with tax and legal experts for details Resident vs. Nonresident Status Note: These terms may have different definitions for immigration purposes. Refer to the appendix for an overview of U.S. visa and immigration laws. The USA is one of the few countries in the world that taxes citizens and residents on worldwide income For income tax purposes, there are important differences between a U.S. citizen, a resident alien, and a nonresident alien U.S. Citizen Resident Alien Nonresident Alien Taxed on worldwide income; credits allowed for foreign taxes paid Taxed on worldwide income; credits allowed for foreign taxes paid Taxed only on U.S.-sourced income Definition of Resident Status for U.S. Tax Purposes An individual is considered a U.S. resident if: o He or she is lawfully admitted as a resident at any time during a calendar year A green card holder is automatically considered a resident o Physical Presence Test He or she is present in the United States for 183 days or more during a calendar year o Substantial Presence Test He or she is present in the United States for more than 30 but less than 183 days in the current calendar year Must be present in the United States for a weighted average of 183 days over a three-year testing period, comprised of the current year and the two preceding years For a detailed description of the weighted average, refer to the Appendix NATIONAL ASSOCIATION OF REALTORS Section 1-69

82 Tax on Income Received by Nonresident Aliens Income earned by nonresidents falls under two different taxing schemes 1. If a foreign person carries on a trade or business in the United States, tax is imposed on all taxable income connected with that trade or business o Similar to net income earned by U.S. residents 2. Income that is not connected with a U.S. trade or business is exempt from U.S. tax, unless the income originates from sources within the United States and falls within certain classes of income o Passive investment income, such as dividends, interest, rents, and royalties Subject to withholding of 30% of gross income Exceptions: If the nonresident alien s rental income is determined to be, or if alien elects it to be, connected to a U.S. trade or business, it is taxed as if received by a U.S.A. citizen Capital gains on the sale of stock and other income realized on the sale of property, other than U.S. real property, are not usually taxed by the United States Treatment of depreciation and net operating losses differs according to classification If a nonresident alien is not engaged in a U.S. trade or business, he or she may elect to be taxed on a net basis with respect to all U.S. income Tax treaties usually change the tax rate amount and often alter the tax treatment for nonresident aliens Unless the tax withholding rate is changed by a treaty, a 30% tax withholding is required on all investment-type income earned by a nonresident Tax withheld must be reported and transmitted to the Internal Revenue Service (IRS) within 10 days o Capital gain on the sale of U.S. real property is taxable regardless of the length of time a person has been in the United States Application of the taxing rules discussed in this chapter requires professional assistance 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-70

83 Foreign Investment and Real Property Tax Act (FIRPTA) Until 1980, nonresident aliens could sell property in the United States without incurring tax liability on the gains. FIRPTA and IRS Code Sections 897 and 6039C established new requirements for taxing gains on sales of U.S. property by nonresident aliens. Key points include: Under Section 897, gain of a nonresident alien or foreign corporation on a deposition of a U.S. real property interest is deemed to be effectively connected with a trade or business carried on in the United States, even if the property is a wholly passive investment of the taxpayer. o All gains, profits, and income resulting from the sale of U.S. real property are deemed U.S.-source income o FIRPTA provides withholding tax rules requiring buyers of U.S. real property from nonresident aliens withhold and remit 10% of the purchase price, not 10% of the gain, to the IRS A foreign citizen s first contact with the U.S. income tax system may occur when a buyer seeks to enforce the 10% withholding tax o The nonresident alien seller may apply to the IRS for a certificate authorizing a lower withholding tax, which may represent the actual liability that will arise from the sale FIRPTA does not require disclosure of a foreign person s identity during the ownership phase of a U.S. real property investment o Disclosure of a foreign owner s identity on various returns and documents are required at time of sale All sales of real estate by nonresident aliens and U.S. citizens are subject to a set of reporting rules o Designed to enable the IRS to monitor reporting and compliance o Reports are to be filed by the settlement agent responsible for closing the sale New Rules for Sale of Real Estate by Foreign Person The IRS issued new rules for the sale of real estate by foreign persons went into effect on November 4, Under these rules: Any buyer of real estate from a foreign person must file: o Form 8288: The Withholding Tax Return o Form 8288A: The seller s receipt for withholding tax Foreigners selling U.S. real estate must file a tax return reporting a gain or a loss on the sale on Form 1040NR or 1120F 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-71

84 o Form 8288A should be attached to tax return forms as proof of withholding tax paid Forms 8288 and 8288A require an ITIN (Individual Taxpayer Identification Number) for a foreign seller or buye o A tax return can be matched with a withholding tax return If the foreign seller or buyer does have an ITIN at the time of purchase or sale of real estate, the transaction may proceed to closing o withholding tax should be held o Forms 8288 and 8288A should be filed with the IRS A foreign corporation may obtain an EIN (Employer Identification Number) through Tele-Tin or Fax-Tin telephone and fax services provided by local IRS Service Centers o The EIN number is used on Form 8288: U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interest 8288A: Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests [FIRPTA] If a nonresident alien has a social security number, that is their ITIN o That is the number to use on Forms 8288 and 8288A If a nonresident alien individual does not have a social security number o He or she must apply for it on Form W-7 when filing Forms 8288 and 8288A o The IRS will process Form W-7, issue an ITIN, and use the ITIN on Forms 8288 and 8288A The information on Form W-7 must be validated by a valid foreign passport o If a valid passport is not submitted, the foreign national must submit at least two or more documents that are current and verify his or her identity with a name and photograph If Form W-7 is not submitted with Forms 8288 and 8288A, or Form W- 7 is rejected o The IRS will send a letter telling the taxpayer to complete and return the form o A copy of the IRS letter must accompany Form W-7 If Form W-7 is not filed with Form 8288, or Form W-7 is rejected, Form 8288 is incomplete and rejected 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-72

85 Interstate Land Sales Full Disclosure Act Growth of second-home market, both domestic and international, presents significant business opportunity Developers may be local, out of state or out of the country REALTORS must be aware of state and federal laws involving developers in the second-home market State laws Approximately 30 states require qualifying developers to register with the state government Requirements apply to developers agents involved in marketing the properties State laws vary but generally regulate developments composed of subdivided land with at least 10 or more units Laws apply only to a real estate salesperson directly representing a developer or similar entity for multiple units in the development o Rationale is to: Give state jurisdiction over developers marketing properties in their state Enforce laws against developers who commit fraud o Laws do not apply to: Single unit transactions such as a broker listing of a single unit in a development Large tracts of land even if subdivided o Registration requirements are extensive and costly to developer Registration may require annual renewal 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-73

86 o State laws provide right of rescission if sale in violation of law o Right can last for years after transaction is closed o May require bonds to be posted o May include specific contract and escrow requirements Federal Law The Interstate Land Sales Full Disclosure Act requires developers of subdivisions to register with HUD and provide property report before a contract or agreement is signed Applies to developers Does not pose the risks to real estate professionals representing developers that state laws impose Applies to offers of 100 or more lots o Some requirements do impact smaller developments o Arizona, California, Florida and Minnesota are certified by HUD o HUD will accept developer effectively registered with these states in lieu of standard federal registration Agent Liability Understand the laws in your state and how they impact your business activities Knowledge of state requirements allows for conducting business within the legal boundaries of your state Further Information o Contact your state commerce department o NAR has organized state information published at NATIONAL ASSOCIATION OF REALTORS Section 1-74

87 Additional federal information may be found at Deficit Reduction Act (DEFRA) The Deficit Reduction Act of 1984 replaced Section 6039 reporting requirements with a withholding requirement for all transactions after January 1, The main provisions include: A designated agent must: o Withhold, report and transmit 10% of the amount realized on the disposition within 10 days of the transfer o This applies to all forms of interest in real estate, including participation loans The buyer is directly responsible for the withholding tax The withholding agent, often a real estate professional, is subject to civil penalties for failure to comply o If the failure is willful, criminal penalties may also apply Real estate professionals for the buyer or seller can be held liable for up to the amount of their commissions if they fail to disclose to the buyer their knowledge of the seller s false certifications or false claims of exemption from withholding Transactions may be exempt from withholding under DEFRA if: o The buyer acquires the property as a personal residence and the purchase price does not exceed $300,000 o The IRS provides a statement to the buyer that the seller is exempt from withholding or has made satisfactory arrangements o The seller furnishes an affidavit certifying that the seller is not a foreign person 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-75

88 Tax Reporting and Withholding Responsibilities A withholding agent: o Must withhold the tax amount when a property is sold o Is usually the last to control the funds before they are conveyed to the foreign citizen o May be a variety of people according to the IRS rules Attorney Real estate broker Trustee Lessee or mortgagee of the property Important Points: o When selling real estate 10% of the sale price must be withheld for payment of any gains taxes The actual tax amount will be calculated and paid when the seller files an income tax return Any excess taxes paid from the 10% withholding will be returned to the seller Passive income, such as rent, interest, dividends, royalties, is subject to a withholding rate of 30% of gross income, unless the income qualifies for an exemption, or is modified by a tax treaty The withholding agent is responsible for withholding, reporting, and transmitting the tax Property managers must withhold income tax on payments received on rental property, and forwarded to the foreign property owner 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-76

89 Tax Treaties The United States entered into treaties with a number of countries that affect tax and withholding rates, as well as, the applicability of the branch profits tax The primary purpose of most treaties is to prevent double taxation Some treaties also provide for legitimate tax reduction opportunities These treaties are always changing Refer to the appendix for a list of treaties. Information is available from the IRS at: State and Local Regulations Some states have laws restricting or regulating foreign land investment Most state and local laws relate to disclosure, land use and taxation, for aliens and U.S. citizens Many states also have withholding laws similar to FIRPTA o A foreign property owner may not be familiar with these laws o It is important for a real estate professional to refer to experts such as tax specialists o For an outline of such restrictions which vary from state to state, refer to the Appendix 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-77

90 Key Point Review The United States is one of the most unrestricted and open markets in the world for foreign real estate investment Federal ownership regulations relate primarily to reporting requirements Federal tax treatment depends on classification of a foreign investor as a resident or nonresident Income and gain received by nonresident aliens are subject to taxation and withholding Buyers are responsible for paying the withholding tax due; designated agents are responsible for withholding, reporting, and transmitting the tax Discussion Questions 1. How do you know whether a seller is a foreign citizen? 2. What would you do if you were not sure? 3. Do you fully understand the role of the real estate professional in the reporting and withholding process? 4. What other information do you need? 5. Does your state or local area have specific restrictions on foreign investment in real estate? 6. What are they? 2007 NATIONAL ASSOCIATION OF REALTORS Section 1-78

91 Section 2: Professionalism in a Diverse Marketplace Chapter 6: Local Market Demographics Chapter 7: Cultural Issues and Practices Chapter 8: Cross-Cultural Relationships Chapter 9: Transaction Expectations Chapter 10: Ethics and Equal Service 2007 NATIONAL ASSOCIATION OF REALTORS

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93 Chapter 6: Local Market Demographics Overview Participants will analyze local market data so they can evaluate their local market in terms of weaknesses and strengths, opportunities and threats. Objectives Upon completion of this chapter the participants will be able to: Research and interpret data to assess the cultural attributes in their local markets Identify opportunities to expand their practice by finding local and international clients Identify and develop needed services for underserved populations in their local markets Examine local demographic trends Application Real estate professionals, who adapt to increasing cultural diversity in the market, and wisely plan to meet the needs of local multicultural and international clients, gain a competitive edge and increase business opportunities NATIONAL ASSOCIATION OF REALTORS Section 2-1

94 Demographics A quick review of demographics on a national level will help the understanding of real estate trends in local markets According to the 2002 U.S. Census Bureau: The Hispanic community is the fastest growing demographic group in the country During the 1990s, the overall population increase was 12.6%, while the nation s Hispanic population grew 47% Home ownership for Hispanics reached a new high of 46% in 2004 The Asian-American population is expected to triple from 10.7 million in 2003 to 33.4 million by 2050 The 2002 median income of Asian households was $52,018 compared to $42,409 for all households Asian and Pacific Islanders have the highest proportion of college graduates, with 47% of people over age 25 holding a bachelor s degree or higher By the year 2030, one out of four people will be either Hispanic or Asian in ethnic makeup Baby Boomers have record income levels, and are poised to inherit large amounts o Unlike previous generations, they are not downsizing homes o Boomers are buying amenity-filled homes o Boomers are also driving a strong demand for second homes According to the Nation s Housing Report released in 2004 by Harvard University, Immigrant minorities accounted for 27% of households in 2003, and will contribute at least two-thirds of net household growth in the coming decades. NAR research released in 2004 revealed: o First-time home buyers accounted for 3.23 million home sale transactions, including new and existing homes and condominiums o First-time home buyers accounted for four out of ten home purchases o Compared to repeat buyers, first-time home buyers are likely to speak a language other than English, reflecting a higher share of recent immigrants among first-time buyers Section NATIONAL ASSOCIATION OF REALTORS

95 o The average first-time home buyer is 32 years old, has an income of $54,500, and is likely to purchase a town house or row house in an urban area Expanding Immigrant Locations According to the Center for Social and Demographic Analysis of the State University of New York, Albany, immigration to the United States has been averaging one million newcomers per year o Based on data from the 2000 census, the Center found that twentyfive metropolitan areas already match the projected population mix for 2030 as follows: At least 25% of the population will be either Hispanic or Asian Less than 60% will be Caucasian In the 1990s, about 65% of all immigrants to the United States were located in ten metropolitan areas New York, Los Angeles, San Francisco, Chicago, Miami, Washington D.C., Houston, Dallas, San Diego, and Boston New locations for Hispanics and Asians, are metropolitan areas providing job opportunities at the high- and low-ends of the economic scale Growth of immigrant populations is no longer a regional phenomenon o Growth in the biggest cities is likely to be slower o Immigrants will increasingly move to the fringes or suburbs Some of the following cities are not considered major metropolitan areas, and have seen increases in immigrant populations o The Hispanic population increased by more than 100% in Las Vegas from 1994 to 2004 o Cities where the Hispanic population has increased by more than 50% since 1997 include Atlanta, Portland, Orlando, West Palm Beach, Salt Lake City, Seattle, Austin, and Phoenix o Cities where the Hispanic population has increased more than 40% since 1997 include Yakima, Tampa, Colorado Springs, Minneapolis, Oklahoma City, Bakersfield, and Modesto o Prominent destinations for Asian immigrants include Las Vegas and Atlanta o Since 1997, the Asian population has increased 93% in Las Vegas, and 70% in Atlanta 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-3

96 o Other cities with a high percentage of Asian immigrants include Phoenix, Dallas, Houston, Minneapolis, Portland, Boston, Seattle, Detroit, Denver, and Miami Analyzing Demographics Knowing which data is important and how to analyze it allows you to understand what is happening in your local market. Specifically, understanding and interpreting demographic data suggests new opportunities to expand your practice by acquiring new clients and offering needed services. The following are key indicators used to understand trends and identify opportunities Population and Households This data allows you to quantify the current market size and estimate growth o Population is the number of people living in a geographic area o Households consist of one or more people living in the same housing unit, regardless of relationship to one another o Anticipated household or population growth can indicate future housing needs Income Income indicates spending power o Allows focus on different markets o Should not be the sole indicator for selecting markets Age Personal expenditures change with age Different housing needs may result Occupation Occupations provide an overall picture of income and housing affordability Ethnicity Ethnicity of an area should influence your choices for advertising media Section NATIONAL ASSOCIATION OF REALTORS

97 Housing Home ownership, housing turnover, and rental and vacancy rates provide insight about the economic stability and changing patterns of an area Comparisons Demographics are especially useful when presented in comparison with previous and projected data Real estate professionals will find it helpful to compare similar communities and state statistics Comparison of community data allows establishment of a baseline The baseline allows interpretation of trends over time Comparing state statistics provides a broader benchmark for comparing communities This information can be useful for analyzing business opportunities Local Economics Analyzing local economic data allows confirmation or questions regarding current thinking about the local economy o Determine if the market is growing, declining, or stable o Determine the Strengths, Weaknesses, Opportunities and Threats (SWOT Analysis) of an area Good indicators of the local economy include: o Personal Income Trends: a measure of economic activity o Earnings Mix: a indication of the types of employment an area o Labor Force and Unemployment: the size and stability of the local economy o Local Firm Employment: businesses that will draw employees and create housing needs o Local Housing Construction: indicator of economic health of a community Sources of Data The Bureau of Economic Analysis (BEA) prepares regional economic accounts for the United States o Provides estimates of state and local area personal income 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-5

98 o Prepares quarterly and annual estimates of personal income by type of income and place of residence o Provides estimates of labor and proprietor earnings by major industry o Visit State employment departments and the U.S. Bureau of Labor Statistics maintain labor and unemployment data o The U.S. Census Bureau reports: Census data Construction statistics by place and county on new privately owned residential housing units authorized by building permits o Use the American FactFinder option to view, print, and download statistics about population, housing, industry, and business The CCIM Institute offers: o Information on demographics o Owners and investors o Market research o Professional services o Financial information o Property management o Visit Other resources maintaining and publishing data include: o Local chambers of commerce o County planning department or commissions o City clerk offices o Local offices of HUD o Economic development agencies o Commercial real estate firms o Libraries and newspapers Section NATIONAL ASSOCIATION OF REALTORS

99 Using Demographic Data Real estate professionals use demographic data to understand changes and opportunities in their market The goal is to provide better service to all population groups Demographics are useful for understanding trends but should not be used to exclude specific groups o This practice is discrimination and is unlawful o Is considered contrary to the One America Principles, and the principles of the Fair Housing Act 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-7

100 Key Point Review National and local demographic data: o Provide a picture of housing and investing trends o Help identify buyers and sellers in the local market o Should be used to determine changes and opportunities in a market o Should not be used to target specific groups for discriminatory practices Discussion Questions 1. How will residential and commercial trends in your local market impact your practice 2. Incorporate demographic data into a business plan 3. When and how should demographic data be shared with clients 4. How do you decide what data is appropriate to share Section NATIONAL ASSOCIATION OF REALTORS

101 Chapter 7: Cultural Issues and Practices Overview The real estate market is changing due to increased cultural interaction between nations, regions, communities, and neighborhoods. Evolution in technology, communications, open market economics, and social migrations are making the United States increasingly diverse and heterogeneous. More than any other country, America has become a microcosm of the many cultures of the world, and this trend toward increased social diversity is certain to continue. This new growth creates opportunities for real estate professionals who keep pace with cultural trends in local markets and remain open to the challenges and excitement of international real estate transactions. Objectives Upon completion of this chapter, participants will be able to: Access and analyze U.S. demographic information Explain the importance of relationship-building Examine cultural stereotypes, assumptions and biases Recognize how inclusion will increase business and reduce risk Offer appropriate services for immigrant and international clients Develop cultural sensitivity guidelines Recognize the personal and professional benefits of embracing members of diverse cultures Application For many real estate professionals, an international practice often begins with relationships that are cultivated in their local market. These relationships can lead to connections and business on an international scale NATIONAL ASSOCIATION OF REALTORS Section 2-9

102 Application Local demographics and trends confirm that diverse, multicultural populations exist in local markets across the United States Real estate professionals who understand and embrace diverse cultures reap personal and professional benefits National Statistics The following statistics illustrate the changes in the population of the United States. On May 17, 2007 it was reported in USA Today that the nation s minority population topped 100 million o This population makes up 1/3 of the USA population o Hispanics are largest minority group at 44.3 million U.S. Census chart below shows estimated growth by population group Section NATIONAL ASSOCIATION OF REALTORS

103 2007, National Association of REALTORS Percent U.S. Population Growth Projections Black alone Asian Alone All other races Hispanic (of any race) White alone, not Hispanic Year Source: U.S. Census Bureau, Internet Release Date: March 18, 2004 This chart illustrates how the population by race is projected to change over the next fifty years. Percent of Total Population Percent White Black Hispanic Asian All Others Year Source: U.S. Census Bureau, Refer to the Appendix for detailed information from the U.S. Census Bureau about national population statistics and the Census 2000 Demographic Profile Highlights NATIONAL ASSOCIATION OF REALTORS Section 2-11

104 Observations of Cultural Variations Examining general influences in different cultures calls our attention to the fact that variations exist. Real estate professionals must be prepared to be sensitive to these variations and adjust to them. Exercise: Comparing Cultures Refer to the following tables on cultural comparisons and to the cultural summaries in this chapter and in the Appendix. Discuss and answer the following question. Imagine you are working with a buyer who is from a culture very different from your own, or from another country. Would differences in your culture (in the category you were assigned) affect your normal way of doing business? If so, what would you need to be aware of, or be prepared to change? Section NATIONAL ASSOCIATION OF REALTORS

105 Self & space It is common in some cultures to... shake hands; pat shoulders; touch elbows or arms maintain two feet of personal space touch another s hair as a sign of affection highly value physical privacy be uncomfortable with touching during conversation shake hands with persons of the opposite sex consider a slap on the back a sign of friendliness or congratulation consider touching, kissing, and handholding between males and females in public to be acceptable consider touching and handholding between males to be unacceptable People from other cultures may... shun physical contact maintain 14 feet of personal space be offended if another touches his/her hair value physical privacy only moderately touch each other during conversation not shake hands with a person of the opposite sex; some do not shake hands with either sex be insulted by a slap on the back consider touching, kissing, and handholding between males and females in public to be unacceptable consider touching and handholding between males to be acceptable signs of friendship Time & time consciousness It is common in some cultures to... believe in using time effectively, punctuality, time is money, time is a limited resource, and getting down to business is important be in a hurry; value getting to the point quickly and directly be punctual; expect others to be the same be impatient People from other cultures may... believe time and schedules are not always the most important priority; believe quality of life more important than efficiency devote a lot of time to greeting, pleasantries, and chatting before getting down to business; extend leave-taking easily allow social concerns to disrupt schedules spend a long time on preliminaries 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-13

106 Relationships It is common in some cultures to... establish friendly relationships quickly begin using personal names immediately consider it friendly to ask a new acquaintance about jobs, family, etc. prefer to be alone or in pairs consider business relationships distinct from personal ones tend to reflect personal qualities in relationships be interested in short-term benefits live in nuclear and mobile families; not have strong or extensive social ties People from other cultures may... take a long time to establish a relationship maintain formality until a relationship is established consider it rude to ask a new acquaintance personal questions prefer to be in groups emphasize social and personal aspects of relationships, including business relationships tend to reflect social hierarchy in relationships be interested in long-range benefits live in strong, cohesive families that often include distant relatives and even national leaders Mental process & learning It is common in some cultures to... believe information should be available to anyone who needs it believe decisions should be based on information and reason, and are open to examination and review believe decision makers should consult others who have useful information or insights believe one learns best by solving problems creatively value accurate data be persuaded by data and logical analysis revise a decision if new information warrants it People from other cultures may... believe information is power and can be withheld believe decisions are expressions of wisdom by the person in authority and should not be questioned believe those in authority can make decisions without consulting anyone believe one learns best by learning successful patterns and rules not value data be persuaded by emotional, dramatic, and patriotic arguments stand firm on a decision, once it is made Section NATIONAL ASSOCIATION OF REALTORS

107 Work habits & practices It is common in some cultures to... believe that success comes from hard work believe in criticizing or firing a person for doing a bad job believe in doing whatever is necessary to get a job done value whatever works believe in free expression of opinion believe time, money, and technology can accomplish anything give and expect trust based on qualifications and reputation be variable in motivation to work; depends largely on personal goals People from other cultures may... believe wisdom, luck, and time, in addition to work, are required for success believe in withholding criticism and punishment to protect the individual s prestige believe in doing only what is appropriate to one s status value symbol and process above outcome believe in suppressing opinions that do not support those of one s superiors believe that human capabilities are limited give and develop trust through frequent and warm interpersonal contact be highly disciplined and motivated to work 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-15

108 Communication & language It is common in some cultures to... make direct eye contact point with the index finger beckon with index finger or all fingers, palm up nod head to show agreement, shake head to show disagreement smile to show agreement, acceptance, pleasure, goodwill, amusement say yes to mean I agree or I accept ; no to mean refusal be low context: spoken words carry the message use direct eye contact while listening and indirect eye contact while speaking to show attentiveness and respect view heated argument as a precursor to violence consider it acceptable to insert a comment into someone else s conversation resent conversational interruptions; believe in taking turns use direct eye contact to show honesty, attentiveness, and respect consider hissing at someone an insult People from other cultures may... avoid eye contact consider pointing to be rude beckon with all fingers, palm down raise head to show refusal, move head sideways to show acceptance smile to hide embarrassment or avoid giving offense say yes to mean I hear you ; consider no to be rude be high context: nonverbal cues often override spoken message use indirect eye contact while listening and direct eye contact while speaking to show attentiveness and respect (some males do not make eye contact to avoid causing fear or prejudice in others) distinguish between arguing and fighting regard conversations as private; see eavesdropping and interrupting as offensive tolerate conversational interruptions; believe in giving the floor to the most assertive person shun direct eye contact as a challenge to authority use hissing as an acceptable way to get someone s attention Section NATIONAL ASSOCIATION OF REALTORS

109 Beliefs and values It is common in some cultures to... believe in pursuing only realistic goals believe the individual can influence the future believe the individual can change and improve the environment believe a commitment must be honored owe their primary allegiance to an organization or principle believe that jobs and rewards belong to the best qualified persons believe one cannot serve two masters believe competition and ambition are good consider change to be good idealize the self-made person allow stereotypes to prevent them from seeing others as individuals be primarily concerned with family, career, self, principles value consumption consider the individual the most important part of society consider education of dubious value or an investment in personal success not trust a person s word; require contracts value honesty, regardless of who it embarrasses People from other cultures may... believe in pursuing ideals, even if unreasonable believe human action and the course of life are determined by the will of God believe people should adjust to the environment believe a later, conflicting obligation can supersede an agreement or commitment owe their primary allegiance to family and friends believe that jobs and rewards belong to family, friends, and other practical considerations believe one can help two friends, even if they represent conflicting enterprises believe competition and ambition lead to disharmony revere tradition and stability believe that family and class define the person believe individuals should be judged on their own merits, not on what group they belong to be primarily concerned with family, friends, personal interests, and self value saving and conserving of resources consider the group (family, tribe, etc.) the most important part of society consider education an investment in family prestige and well-being believe in keeping their word; dislike contracts place high value on face 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-17

110 It is common in some cultures to... People from other cultures may... Living habits and practices consider as acceptable: personal questions about job, family, origins, general health; not acceptable: questions about income, salary, sexual preferences believe that people are basically good value informality and spontaneity believe in taking risks view public displays of emotion as bad taste and expect public modesty conform their behavior to that of the group they are with form an opinion of another based on that person s conformity with standard language and dress try to dispel their nervousness with other races by discussing race feel that everyone likes to be informal be comfortable with banks and banking practices have no respect for etiquette and protocol assume that conflict is inevitable and productive consider as acceptable: personal questions about general health, personal history; not acceptable: questions about family, financial data, personal habits believe that people are basically selfish consider those who do not observe rules to be ignorant or rude; mistrust spontaneity avoid risk express feelings energetically and openly in public value manifesting who they are as individuals regardless of what others are saying or doing value nonstandard language and dress as an expression of individual or group identity be uncomfortable discussing race with people of another race value being treated in a formal and professional manner mistrust banks and fear entering them consider protocol and social competence as important as technical competence avoid personal conflicts Section NATIONAL ASSOCIATION OF REALTORS

111 Cultural Summaries In this section summarizes of the communication, cultural, and business practices of particular regions will be discussed. These are broad-based summaries and should not play the role of stereotyping. The cultural observations are attempts to capture certain behavioral norms, not to describe individuals nor are they intended to convey the amount of time and research required to work with different cultures. Recent immigrants are influenced more by their traditions and customs than second or third generation immigrants who have assimilated American culture and mores into their lives. When working with international clients in their homeland or as investors in the United States, their practices and customs are a very real part of the transaction. Real estate professionals should do their own research before interacting in a culture. CIPS courses also provide more information about Asian, European, North/Central/South American, Middle Eastern, and African cultures NATIONAL ASSOCIATION OF REALTORS Section 2-19

112 Asia Asia is home to more than 3 billion people more than half of the world population o This is ten times greater than the population of North America, and six times greater than Europe s population. Asia also contains some of the fastest growing economies in the world Countries in the Asian region that have played a significant role in real estate in terms of outgoing or incoming international investment, are: Japan, South Korea, China (Peoples Republic of China), Australia, Hong Kong, India, Indonesia, Malaysia, Singapore, Pakistan, the Philippines, Taiwan (ROC), Thailand, and New Zealand. Some very broad cultural influences may affect business practices in this region including: o Hindu, Buddhist, and Confucian values and traditions o Conflict resolution by role authority versus law o Legal traditions of civil law versus common law o Hierarchical social structure o Group priority over individual interests o Situational logic based on circumstances rather than on reason o Nonlinear notions of time o A tendency to regard foreigners as outsiders The following cultural sketch of Japan has been developed to provide an introduction to the cultural themes that may exist in various regions Refer to the Appendix for more cultural sketches Section NATIONAL ASSOCIATION OF REALTORS

113 Japan Cultural Sketch The Japanese tend to eliminate tension, promote group spirit, and maintain harmony Vertically structured relationships govern life; individual rights are strictly subordinated to the interests of the group Decision making is reached by consensus People are racially and culturally very homogeneous; they may have difficulty accepting outsiders Logic is flexible and subjective, based on adaptation to circumstances and feelings, rather than on fixed principles Business Advisory Use a Japanese go-between to sound out a company s interest in a proposal in advance; otherwise, much time and effort may be spent before hearing the word no Address the Japanese by their last names and the suffix san Never suggest that they call you by your first name Never discuss serious business at first meetings (heists); they are reserved for establishing a recognized official relationship Business cards o Use business cards that include a Japanese translation on one side o The exchange of business cards establishes one s credentials o Handle others cards very carefully o Never write on them or put them in your back pocket Participate in extensive entertainment after business hours o Designed to develop relationships o Business may or may not be discussed Give and/or receive gifts with both hands and a slight bow o Do not open gifts in front of the giver Japanese do not like to sign restrictive contracts Japanese prefer loose arrangements based on trust and goodwill 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-21

114 Europe Among the countries in Europe that continue to play a significant role in international real estate are: the United Kingdom, the Czech Republic, Germany, the Netherlands, France, Italy, Spain, Austria, Belgium, Luxembourg, the Republic of Slovakia, Poland, Denmark, Sweden, Finland, Ireland, Greece, Portugal, Switzerland, Turkey, and Norway. In the region as a whole, some very broad cultural influences may affect your real estate business practice. These include: Judeo-Christian values and traditions Legal traditions of civil law versus common law (Laws that are written by a governmental body versus precedent-setting judicial decisions regarding specific fact-based cases) Mobile social hierarchies that are influenced more by material status and family than by set roles Individualism over group interests Linear notions of time Logic based on reason rather than on situational dictates A tendency toward openness to foreigners Section NATIONAL ASSOCIATION OF REALTORS

115 North America North America consists of Canada, the United States, and Mexico. However, the culture in Mexico is very different from that of the United States and Canada. It is more similar to cultures in Latin American countries. Overall, some very broad cultural influences may still affect business practice in Canada and the United States. These include: Judeo-Christian values and traditions Legal traditions of common law versus civil law A belief in using the law to resolve conflict Mobile social strata that are more influenced by material status or family than by set roles Individuals or families have priority over other group interests Linear notions of time Logic based on reason rather than situational dictates A tendency toward openness to foreigners Great ethnic diversity 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-23

116 Latin America Latin American countries are located in Central or South America and maintain Spanish or Portuguese heritage. In addition to Mexico, the countries most likely to play a role in international real estate are Brazil, Argentina, Venezuela, Panama, Colombia, Chile, Costa Rica, Ecuador, and Bolivia. Generalized cultural influences that may affect business practices include: Judeo-Christian values and traditions Legal traditions of civil law versus common law Minimal respect for the law and slow judicial activity Fixed social strata and limited upward mobility Nonlinear notions of time Logic based on emotions and situational dictates rather than on reason Strong loyalties to the family Section NATIONAL ASSOCIATION OF REALTORS

117 Middle East and North Africa Middle East and North African countries that will play a significant role in international investment real estate are Saudi Arabia, Egypt, Lebanon, Israel, Jordan, Morocco, and Yemen In the absence of an interest-free banking system in the United States, many American Muslims have resigned themselves to paying and amassing interest although the Koran forbids this practice Conservative Muslims want an alternative borrowing structure that abides by Islamic rules To conform to guidelines of the Koran, one option for Muslim home buyers is a lease purchase agreement o Terms call for the borrower and the finance company to pool their money to buy a house o The buyer then makes monthly payments consisting of a fair market rent and repayment of capital to the lender o The rent is divided between the buyer and the financial institution based on how much each has invested in the property o Each payment reduces the capital owed to the lender o Each month, the lender s ownership interest in the house and its portion of the rent declines o Eventually, all the capital is repaid and rent payments are no longer required o Source: New York Times [07/05/01]; Boss, Shira J. American Finance House, Lariba, operates such a lease purchase program o It is the first Islamic institution to receive financing from the Federal Home Loan Mortgage Corporation (Freddie Mac) Another option for Islamic borrowers is to receive financing via self-help organizations that pool funds from Muslim investors to help one another purchase homes For the region overall, some very broad cultural influences may affect your business practices including: o Legal traditions of civil and religious law versus common law o Social structures influenced by family not role expectations or material accomplishments o A tendency toward government based on Islamic law o Nonlinear notions of time 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-25

118 Assumptions, Stereotypes, and Biases Generalizations People generalize to cope with the confusing details of life Generalizations are useful and necessary, as long as they remain guidelines and do not turn into rules We can summarize our experiences with some safety by saying most, many, or some of the individuals in a certain group have certain characteristics This leaves us open to revise our opinions and responses as we see how an individual confirms or contradicts a generalization Assumptions, Stereotypes, and Myths It is not safe to say that all or no individuals in a particular group have certain characteristics o Cannot possibly be correct Have not met all members of the group Individual variability within any culture is vast o The more ignorant we are of the individuals who belong to the group, the more the stereotype turns into a cultural myth that describes no one and resists examination By assuming all individuals of a group are a certain way, it becomes impossible to communicate or form a relationship with the individuals o We are attributing meaning based on our stereotype, instead of paying attention to the individuals and the cultural cues o In return we invite the other to apply a stereotype to us, instead of responding to us as individuals o Both parties make inappropriate assumptions about each other You must recognize a stereotype for what it is, and concentrate on the individuality of another person, noting and enjoying what is different and unique Biases Generalization and assumptions about others incline us to treat them according to our stereotypes of their groups Section NATIONAL ASSOCIATION OF REALTORS

119 We form preferences about the kind of people with whom we want to associate It is understandable for people to be most comfortable with others who are of the same social, cultural or ethnic group Biases become negative and harmful when we allow them to interfere with treating people fairly Categories of Cultural Stereotypes To begin acknowledging how people stereotype each other culturally, it is helpful to recognize some of the aspects of culture that commonly appear in our stereotypes. This list is not exhaustive, but it includes features that should be familiar to everyone, even to those who feel that they do not have any cultural stereotypes. Self-Control - Others have a lower or higher degree of self-control. They are better or worse at following rules, weighing their own needs against those of others, and expressing or containing emotions. Outlook on Life - Others are more organized or less organized, have different societal aims, and place differing amounts of emphasis on the value of life, individual, and group. Racial Attitudes - Others are more open or closed with their attitudes about different races. Honesty/Reliability - Others are shifty and dishonest, or they are as trustworthy as our own group. Character - Others, as representatives of their group, are weaker or stronger in sticking to their principles. Time Orientation - Others think about time differently. They waste it, are too concerned about it, or are ruled by it. Social Classes - Others have a class structure, some are all of a single class, or some all think the same way about class. Religion - Others are adherents of different religions, leading to illogical behavior, or lacking accepted religious values. Orientation to Nature - Others are in tune with nature, believe in letting nature take its course, or believe in overwhelming and controlling nature. Others believe themselves part of nature, or outside of nature. Group Objectives - Others want to take over the world, or take what others have, or impose their values NATIONAL ASSOCIATION OF REALTORS Section 2-27

120 Work Ethic - Others are lazy, spoiled, lacking in purpose, or obsessed with work and unable to enjoy life. Talents and Abilities - Others, by nature of belonging to a group, have or lack certain talents. Exercise: Stereotype Brainstorm Write one stereotype you have heard for racial or ethnic groups listed on a sticky note and place the sticky notes on the appropriate flip chart pages. The stereotype can be positive or negative. Discuss your reactions to what you have heard. 1. How did you feel about using stereotypes? 2. How did you feel about those used to describe members of your group? 3. Do they apply to everyone in a group? Are they fair? If there is little diversity in the area, discuss other groups: religious, disabled, wealthy, older persons, as well as men and women. Discuss how people distinguish themselves from others in their own groups. Section NATIONAL ASSOCIATION OF REALTORS

121 Exploring Buying and Selling Attitudes International and immigrant clients have different home buying and selling experiences. Some of these experiences or preconceptions are based on the traditions and practices of their native countries and cultures. The following are several points that may influence the buying and selling process. Be aware that these points do not apply in every situation or to every client. They are commonly held views or characteristics, but they are not absolute. Typically, but not always, the longer a foreign-born people lives in another country, the more assimilated or universal are their attitudes. Colors Red is associated with good luck to the Chinese, but mourning to Koreans White is associated with death and is used for funerals by Asians Black is worn to weddings by some Asians Purple is not worn to happy events by Asians Yellow is associated with death in Peru, Mexico, and Iran Green is Egypt s national color and associated with Allah o Green should not be used for wrapping paper or printed promotional or marketing items in Egypt o To use green is considered a desecration Numbers 4 sounds like the word for death in Chinese 9 is the Japanese word for suffering 3 and 7 are lucky numbers for Koreans 8 symbolizes wealth and luck for the Chinese 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-29

122 Location and Orientation A Chinese home owner does not want his front door to face north where the devil can see into the home and send bad luck Japanese home owners want eastern or southern exposures for their homes. The headboard of the bed in the master bedroom must not be placed on the north wall Offers and Contracts Write an offer in high or low context terms to match natural cultural instincts High context countries (Mexico, China, Japan, and the Middle East) will find detailed documents a sign of mistrust. Transactions are much more implied than spelled out Low context countries, like the United States, use words to express thoughts, and like lots of text and detail Low- and moderate-income Hispanic consumers and recent immigrants are especially vulnerable to predatory practices because they are frequently not connected to mainstream institutions o They may be unfamiliar or intimidated by these institutions Hispanics consider home ownership a significant financial and emotional commitment and must be ready in order to close a purchase o Advocates and industry experts note that it can take from six months to two years to become ready Negotiating Styles In many countries, the contract is the starting point of negotiations o The contract will change over time to suit the needs of the parties o This is the expected process Many people expect and want to negotiate Threats of legal action by sellers to enforce terms of the contract are often not taken seriously o The legal system in other parts of the world is slower and often less effective than in the United States Section NATIONAL ASSOCIATION OF REALTORS

123 Marketing and Advertising Marketing approaches (high and low context) Materials (colors and pictures, use of flags) Translations should be carefully considered and checked o Nova, the name of an American automobile, means no go in Spanish o The Pepsi jingle, We bring good things to life was translated to, Brings your ancestors back from the dead in Taiwanese The best way to avoid these types of errors and offenses is to talk to your client about the process Provide copies of the contract early in the process Learn how different cultures make serious decisions Home Ownership for Mexican-Heritage Families In 2004, The Tomás Rivera Policy Institute, University of Southern California, published El Sueño de Su Casa: The Homeownership Potential of Mexican-Heritage Families. The report is part of a study about Mexican- Heritage households in three large metropolitan areas Los Angeles, Houston, and Atlanta. The report s findings: Previous research has shown that the Hispanic or Latino population is the youngest ethnic minority in the United States o Half of the Latino heads of households are under 40 years of age o By the end of the decade, this group will enter the prime home buying stage of its life Home ownership rates should rise as the population ages Of the Hispanic population in the United States, those of Mexican heritage make up approximately 67 percent of the total A large portion of immigrants from Mexico are hampered in the home buying process by the following dynamics o Many do not have formal relationships with banks or other financial institutions o They are unbanked and live a kind of cash-only existence o Because of this, it is very difficult to establish a credit history o Many speak little English 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-31

124 They are poorly informed about how to get started, find a house, make offers, negotiate, and qualify for a mortgage o Many profess a high level of trust in real estate professionals as resources for information o Many are confused about the legal requirements for opening a bank account, establishing credit, and obtaining a loan Many believe they must be naturalized citizens, legal permanent residents, or supply a social security number Confusion about residency and documentation requirements exists even though the majority of study participants have lived in the United States for more than ten years o Financial constraint is the most cited reason for postponing the purchase of a home Job insecurity makes many families question their ability to manage the long-term debt that comes with owning a home o Many believe that their stay in the United States is not permanent They hesitate to enter a formal relationship with American financial institutions About 40 percent said they regularly send money to family members, friends, church, or other organizations o Most surveyed participants said that if they were to buy a home, it would likely be in the same neighborhood in which they currently reside This is because many were low-wage earners and needed to live near public transportation, schools, work, hospitals, family, and friends o The group surveyed stated they prefer neighborhoods with low crime rates, good schools, proximity to work, and a neighborhood with rising housing values o By 2010, there will be 3.6 million more Hispanic households than there were in 2000, accounting for 31 percent of all household growth You may access the report at: Section NATIONAL ASSOCIATION OF REALTORS

125 Home Ownership for Asian Americans The Asian Real Estate Association of America (AREAA), in association with University of California, Los Angeles, conducted a survey of real estate professionals across the nation, and released the following information about Asian-American home ownership in 2004: The Asian-American population is diverse, with many ethnic cultural, language, and religious groups, each with its unique history and experience The top five barriers facing Asian-American home buyers are: o Language/cultural barriers (not fluent in English) o Lack of knowledge of the home buying process o Unverifiable income (not reported on 1040) o Lack of credit (not reported to credit bureaus) o Lack of trust (fear of being cheated) Asians tend to have larger median household incomes, but lower median per capita incomes compared to figures for the total U.S. population Many Asian households have undocumented income that is used or could be used to qualify for a loan Many Asians tend to choose a lender based on: o Broker/agent relationships o Language skills/cultural affinity o Referral o Type of product o Reputation In general, the Asian population is a diverse and underserved market. There is a need for cultural and linguistic home ownership services, education, and financial literacy programs You may visit the AREAA at NATIONAL ASSOCIATION OF REALTORS Section 2-33

126 Five Cross-Cultural Listening Skills One of the best ways to serve your clients and avoid offensive or socially unacceptable behavior is to listen to them. There are many ways to listen, but the most effective skill is active listening. Active listening is interactive because it allows you to learn and adjust while building the other person s confidence and comfort level with the communication process. 1. Pay attention to the person as well as the message o For some people and for some cultures, conversation is the message o They need a lot of talk and interaction o Such people are not data-oriented; they are relationship-oriented o Their business aims and decisions only emerge at length o You must listen to the person and to the person s culture in order to hear the message o In some cultures, one may spend days, even weeks, drinking tea with a merchant before even mentioning what it was that brought the customer into the shop 2. Do not assume you know what the other person wants o You do not know o Why make a mistake that can shut off communication from the start o Let the other person inform you For example, you do not know that a customer needs an FHA loan, wants a good school district, or cares about the ethnic makeup of a neighborhood Making assumptions because of the customer s race or national origin can result in not providing the service the customer wants The customer may qualify for a conventional loan or may have cash Schools may be less important than resale value or living near a family business Listen and find out 3. Emphasize and create rapport o Read and emulate cues o Adjust to the other person o Use a tone, level of formality, and style of reasoning that put the other person at ease Section NATIONAL ASSOCIATION OF REALTORS

127 For example, if the customer s reasoning is based on emotion or factors that seem irrational to you, such as needing a house that faces east, you must learn to evaluate properties for this person from this point of view 4. Share meaning o Paraphrase what the other person says, and encourage the other person to paraphrase you o Sometimes this means responding to the hidden message in the other s words Your customer says, How much longer is this interview going to last? And you respond, You re in a hurry Paraphrasing is simply the art of putting what the other person has said into your own words and asking if the other still recognizes the idea Avoid making unwarranted assumptions in your paraphrase You are just checking for understanding You may have to ask a question for clarification before paraphrasing We want to live in a place where our children will be safe, and you reply, I understand that you are concerned about your children s well-being. What specific qualities are you looking for in the community? 5. Request information in a way that does not bias or inhibit the other person s response o Ask open-ended questions Open-ended questions ask for information rather than agreement or disagreement Typically begin with: Question words: who, what, where, when, how, why Invitation to talk, Tell me about o Ask questions that do not assume you already know the answer o Compare these examples Do you know about FHA loans 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-35

128 Closed-ended question assumes the customer needs to know about this type of loan Did you have some ideas or plans about how you will purchase the house An almost open-ended question, but it assumes the customer knows how the process works and is going to finance the purchase Tell me about how you plan to buy the home o Open-ended question that is an invitation for the customer to explain his or her understanding of the process, and whether any financing at all is needed Business Norms and Etiquette Beyond using normal good manners, which you probably already use in the course of business, it is important to project positive attitudes toward diversity, as well as adjust to the other person s need for high or low context communication. Here are some basics for multicultural business norms and etiquette: Learn a few phrases of the other s language Show appreciation for the other s customs, music, and art; do not criticize Be sensitive and nonjudgmental on politics and religion; avoid discussing these if possible Build on the other s cultural heritage to enhance communication, rather than trying to impose your own Show good intentions and consideration Follow up on promises Extend respect to whomever the customer cares about: the elderly, children, family, poor, weak, unempowered, and with whatever the customer identifies, such as religion Use common sense and credit the other for also having it Acknowledge mistakes and apologize when appropriate Minimize talk about the United States Talk less, listen more Do not tell the other what to do; you do not know what is appropriate Do not ask about family unless they are present or the other person mentions them Section NATIONAL ASSOCIATION OF REALTORS

129 Help the other to see the big picture; share information Seek to share the other s ceremonies and celebrations Recognize that you need to be more formal and take more time in doing business than is your normal practice Be punctual, even if it is not customary for the person you are visiting. Many cultures regard lateness as a character flaw, and if they do not, they know that an American would be insulted if another American were late Be sure you obtain the correct names and connections Take the blame for language difficulties Do not tell or make jokes; they have a high probability of being misunderstood Show deference to the elderly; stand when they enter, wait for them to speak or extend their hands in greeting Treat members of the opposite sex with respect. Err on the side of formality Be patient and forgiving if a member of the opposite sex has trouble determining how to treat you o Other cultures differ on the roles of men and women in business relationships and may have difficulty adjusting to expectations in the United States Skip the efforts to create an instant friendship Respect the concept of face o Never do anything to embarrass another person, either in that person s eyes, in the eyes of others, or in your own eyes o Do not sacrifice your own face in front of others 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-37

130 Behaviors to Avoid Just to be on the safe side, and until you learn more from your customer, avoid the following: Standing with hands in pockets Using first names Asking personal questions Asking about family Crossing legs Showing the soles of your feet Fleeing or invading the other s personal space Initiating any physical contact Showing impatience Section NATIONAL ASSOCIATION OF REALTORS

131 Exercise: Different Behaviors The facilitator will demonstrate some nonverbal cues. Facilitator: Ask the participant how he or she felt during the conversation Ask the class if they noticed nonverbal signs of distress Did the participant step back A step backward, in some cultures, would be considered very rude Nonverbal Red Flags Common behaviors that signal discomfort include: Re-adjusting distance Averting eye contact Scowling, frowning Laughing at the wrong time or inappropriate laughing Covering face Remaining silent, not asking questions Displaying impatience 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-39

132 Key Point Review Common aspects of life, such as time, space, work habits, decisions, and relationships often vary among different cultures To successfully manage and close an international transaction, a real estate professional needs a good understanding and appreciation of the cultures of the people involved in the transaction Culture and tradition often strongly influence the buying and selling attitudes of many immigrants and international clients Active listening is a critically essential skill for real estate professionals Research the customs and practices of the cultures with which you conduct business so you are prepared to manage situations and relationships with integrity Discussion Questions 1. Have you found some general or broad-based rules of communication and business etiquette that you rely on when working with immigrant or international clients? 2. What are your biggest challenges when working with immigrant or international clients? 3. How have you tried to meet these challenges? Section NATIONAL ASSOCIATION OF REALTORS

133 Chapter 8: Cross-Cultural Relationships Overview This chapter examines cultural differences affecting business relationships. It will identify specific areas where cultural variations are significant, sketch some features of selected cultures, and suggest guidelines for adapting behavior in the practice of real estate. Objectives Upon completion of this chapter the participant will be able to: Explain the cultural and social elements that help build relationships with foreign clients Discuss high and low context cultures Identify key cultural areas that influence business and personal relationships Examine cultural behaviors Adapt business procedures to accommodate the needs of foreign clients Application International business brings people together from very different cultural backgrounds. Because the practice of real estate depends heavily on the establishment of relationships, it is essential to develop an understanding and appreciation of the cultural factors influencing them NATIONAL ASSOCIATION OF REALTORS Section 2-41

134 Building Relationships Real estate professionals understand the importance of building relationships with clients to promote business opportunities When conducting business with other cultures, relationships are the key to successful transactions In international real estate, where there is no relationship, there is no business Real estate professionals must understand and accept other cultures to be successful in establishing international relationships o Recognize the critical elements that define the culture Language Religion Social structures Values Customs o Historical context in which cultures have interacted o Deeply rooted stereotypes or prejudices Language Language can be both a great barrier and a tremendous facilitator for cross-cultural interaction Many real estate professionals reap the benefits of understanding or speaking a second language Language provides access not only to literal meaning, but also to any cultural undertones o If a Japanese person refers to you as kisama, it is an insult even though it actually means your honorable self o The literal meaning is only part of the message; the underlying cultural meaning may mean something else In many languages, phrases are interpreted when people understand actual words, but are not aware of what they mean in colloquial speech There are multiple ways to communicate with international clients o Partner with someone who is fluent in another language Many real estate firms employ multilingual professionals who Section NATIONAL ASSOCIATION OF REALTORS

135 can assist with translation and interpretation Practice with your interpreter before business meetings Speak in clear, concise sentences with pauses Be sure your translator or interpreter understands the technical terms of real estate o Ask a fluent speaker to edit documents o You may use translation software but be aware of its limitations o Use a mutual language Many people around the world have some level of knowledge of another language, such as English or Spanish If you speak slowly and ask for understanding, you may be able to work on certain aspects of your business Religion Religion is one of the most important cultural differences due to its fundamental role in creating cultural identity and behavioral norms Read about the theology of a certain religion so you may interact with the associated social standards and behaviors o You do not have to read the Confucian texts to work with an Asian investor, but you should know that religious tradition prescribes certain behavior among individuals Social Structure Social structure dictates respect, speech, modes of contact, roles, and relationships In some cultures, social structure is not clearly defined it is fluid and continues to change over time In other cultures, social structure is clear and fixed o Status may be based on entirely different principles, such as family origin, birthright, or religion o Being aware of culture s view on status is important o If you are ignorant or unprepared, you may be assigned a role without even knowing it o By failing to act appropriately, you could lose the possibility of doing business 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-43

136 Historical Predispositions The history of a country and its people is extremely important and broadly influences everyday life Political, social, or religious beliefs often create predispositions for the way in which a culture interacts with other nations and/or people o In Brazil, it is wise to avoid discussing politics or any other topics relating to Argentina, Brazil s traditional rival The way people make decisions, place trust in others, disclose information or make eye contact is often rooted in cultural mores Adapting to Cultural Differences No generalization should be taken as a rule When involved in an international transaction, it is your responsibility to research the culture and current business practices Cultural Interaction Guidelines Preparation In most countries a transaction requires a prior relationship Educate yourself about the country s history, arts, society, economy, language, and geography Know what offends, what creates respect, and what creates comfort Obtain a contact or intermediary in the foreign country It is important to be introduced through the proper channels Identify the decision-making process and participants Obtain information about specific gift-giving practices Plan the first meeting carefully Communication Assess the mutual language capability of your overseas counterpart Use a translator whenever possible keeping in mind that translations and interpretations may be inaccurate Do not assume you are being understood; pause often, repeat frequently, ask questions, provide written backup Be aware that yes does not always mean, I agree Be sensitive to nonverbal behavior that may indicate the other person does not-understand, e.g., nodding, smiling or the absence of questions Section NATIONAL ASSOCIATION OF REALTORS

137 Recognize that colors, symbols, and nonverbal gestures may have other meanings Minimize your use of slang and jargon Consider giving the foreign person a glossary of real estate terms and jargon in his own language o These can be obtained from the Federal National Mortgage Association, Fannie Mae Respect the role of silence during the conversation o Pause to allow time to think Meaning of eye contact varies from culture to culture Do not rely on the telephone o Follow up with letters and face-to-face contact Business Practices Communicate in writing before your visit Always make an appointment Carefully time your approach to discussing business issues Slow down o The pace of decision-making varies from culture to culture Be prepared to do without lawyers and accountants o Rely on personal relationships Many cultures do not value or respect the written contract Respect the use of business cards; in some countries, it is an essential ritual Give and take refreshments; accept hospitality graciously Be prepared, but do not expect to conduct business after hours Role Behavior Maintain proper levels of formality Show proper respect for authority Do not contradict or criticize in front of others Dress conservatively Follow the accepted practices of expressing emotions o Expect difficulties because you do not belong to a class or group in a particular culture 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-45

138 o Use introductions, personal references, and other modes of referring to group membership o Seek out means of establishing common ground Relationships may be enhanced by perceived similarities of both parties o Be prepared to sell yourself as much as, or more than your real estate opportunity Explain your real estate license, your CIPS (or other) designations, the REALTOR S Code of Ethics, and any memberships you may have in professional associations o Use the proper forms of address o Wait to be invited before using first names or any other indications of familiarity o Allow the foreign person to lead the conversation unless you have the highest rank in the group o Cultivate a positive regard for other cultures Sincere goodwill can cause mistakes to be overlooked o Be a good guest Section NATIONAL ASSOCIATION OF REALTORS

139 Key Point Review Cultural differences have a huge impact on relationships and business practices Learning about and adapting to the cultures of others is a prerequisite to finding international real estate opportunities A real estate professional must know how to develop a relationship before any business is possible Discussion Questions 1. How would you cope with a business situation in which the clientele will never fully accept you? 2. What are the most difficult areas of cultural adaptation? 3. Are there ways for you to learn about other cultures in your own community? 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-47

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141 Chapter 9: Transaction Expectations Overview This lesson explores client expectations in an international transaction, and discusses the role of the real estate professional. Objectives Upon completion of this chapter, the participant will be able to: Identify parts of the international transaction process that may differ in international transactions such as real estate practices and laws List important adaptations that must be made to facilitate transactions proceed smoothly Clarify the roles of professionals involved in an international transaction Identify client expectations and needs Application Knowledge, skills, and sensitivity to cultural differences are essential in an international transaction. To successfully complete a transaction, and expand business, a real estate professional must understand the international client s experiences and expectations for the process. It is important to clarify the role of the real estate professional in the transaction NATIONAL ASSOCIATION OF REALTORS Section 2-49

142 Client Expectations of Roles In international real estate, there is a broad spectrum of ways in which transactions are completed The role of various professionals such as lawyers, notaries, and bankers may vary Experienced clients will have some understanding of local practices and laws in markets where they have bought or sold property New clients may approach an international investment in terms of their own cultural experiences and expectations This section examines major contrasts in the way clients view the roles of professionals, the buyer and seller Who Is the Client? The role of the real estate professional in terms of representation, laws of agency, and fiduciary responsibility is an area of potential misunderstanding in international real estate In many countries, it is common for buyers, rather than sellers, to be considered the client The real estate professional must decide how to position themselves For long-term business, it is preferable to operate on the basis that the buyer, not the seller, is the client Always be clear about whom you are representing In many states of the Unites States, if one does not have a signed brokerage contract with the buyer, one is automatically obligated to the seller In addition to the confusion surrounding fiduciary relationships, clients may need help understanding the facets of a local transaction, including financing, cash needed to close, the closing statement, and commissions Learn to tactfully inform or educate an overseas buyer or seller about the business requirements in the country where the transaction will take place Section NATIONAL ASSOCIATION OF REALTORS

143 The Real Estate Professional The three most important expectations that international clients have for brokers and real estate professionals are that they: 1. Fully represent them and be completely loyal 2. Develop a relationship before pressing to make a sale or purchase 3. Have a high degree of competence in all matters relating to local customs, the overall market, and the transaction process Fulfilling these expectations requires considerable patience, sensitivity, and technical expertise o It is not unusual for a client to see a dozen sites, and then deliberate for a year o The professional who can build rapport and remain patient will have a greater chance for success Be aware of the following: o In some cultures, such as the United States, the contract is the end of negotiations In many cultures, it is not It is important to understand the negotiating ethics and strategies used by your clients o International clients expect professionals to adapt to their ways, not vice versa If you want the business, learn the culture and the role you are expected to play o Clients everywhere want real estate professionals to work without a written agreement Have a position on how much you will do without protection o In addition to a reluctance to sign contracts in general, international clients may not want to sign exclusive agreements They worry that signing an exclusive contract limits access to the entire market o International clients are accustomed to working with real estate professionals, often to the exclusion of attorneys They tend to place considerable reliance on agents, particularly in discerning the relative merits of alternative investments 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-51

144 Legal Counsel Attorneys play a larger role in real estate transactions in the United States than perhaps anywhere else in the world If a transaction takes place in the United States, international clients may be surprised at: o The degree of documentation lawyers impose o The degree to which lawyers are involved in the selling and negotiating process International buyers and sellers often do not want attorneys to have a high-profile role in the transaction o Determine a client's particular sentiments o Find a suitable level of involvement for the attorney Section NATIONAL ASSOCIATION OF REALTORS

145 Professional Advisors International clients are accustomed to utilizing the expertise of a number of specialists in completing a transaction Professionals should expect to encounter and establish good working relationships with the various members of a client s staff Support members may include: o Accountants o Tax consultants o Financial planners. o Investment consultants o Attorney. o Mortgage bankers o Trade consultants o Area specialists o Researchers o Translators/interpreters o Notaries o Feng-shui experts o Numerologists o Notaries o Settlement real estate professionals o Title companies o International bankers o Surveyors o Appraisers o Insurance brokers 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-53

146 Translators It is imperative for all parties to fully understand what is going on throughout a transaction Having a reliable translator is well advised, particularly during negotiations in which terms are established Some international clients are wary about translators o Concerned about correct interpretation, honesty, and loyalty o Do not assume who the translator should be, or what role the translator is expected to play o It is best to establish the ground rules with the client in advance, and use translators all parties find acceptable Title and Escrow Agents In the United States, title and escrow officers are necessary parties to the transaction and closing May be unfamiliar roles to an international client In many countries, such things as chain of title, escrow accounts, and title insurance do not exist The real estate professional must explain the role of escrow personnel and title companies, if they are involved Section NATIONAL ASSOCIATION OF REALTORS

147 The Transaction Process Understanding different practices in the international transaction process goes hand-in-hand with understanding different role expectations. In particular, certain legal aspects of a real estate practice in the United States may be common points of misunderstanding. Clearing Title Encumbrances The United States has one of the world s most sophisticated and comprehensive systems of recording and assuring descent of title to grantees o Recorded encumbrances, however, impede title transfer and must be removed o Fees and/or expenses are incurred during this process o Many international clients, unaccustomed to title abstracting, will not understand the meaning of many encumbrances, or why they obstruct transfer Title and escrow procedures often need to be explained so that the client understands the ultimate benefit of a clear, insured, and marketable title Real Property Interests Careful explanation of the rights and interests obtained when purchasing real property in the United States is essential The bundle of rights will probably be different from what an international buyer s country of origin normally includes In a worst-case scenario, the buyer may not be getting rights and interests he or she expects Use Restrictions and Loss of Ownership It is often confusing to international clients who own property in the United States that they can own property fully and lawfully, yet lose ownership in ways over which they have no control Explain the ownership terms, such as fee simple interest, eminent domain, adverse possession, Environmental Protection Agency judgments, and tax sales 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-55

148 Does It Have To Be In Writing? Many international clients dislike and try to avoid a written agreement U.S. real estate professionals, in accordance with the Statute of Frauds, must have an exclusive listing agreement in writing for it to be enforceable Weigh the risks and rewards concerning listing agreements, and carefully explain why other documents and covenants must be in writing And Even If It Is In Writing... Some clients will sign a contract because somebody wants them to, or because they do not want to offend anybody o They do not necessarily intend to abide by the contract o When a conflict arises or circumstances change, the international client will default and/or ask to renegotiate In England, an accepted sale contract does not necessarily mean the seller is committed to a buyer Before closing, the property may be purchased by another buyer who offers a higher price o In some cultures, it is assumed that any agreement may be changed due to conflicting demand, particularly if it comes from a superior or a relative To minimize problems, parties should aim for full communication before signing contracts Be sure there is trust, agreement, and mutual respect between the parties Relationships are more important than fine-print contracts in some cultures The Client Knows Best Master the art of knowing when to talk and when to keep quiet Communicate informatively rather than persuasively Clients want to make up their own minds Do not appear too aggressive o North Americans, who are used to closing quickly, may appear too aggressive and commission-hungry, which may harm the relationship and risk the sale or purchase Section NATIONAL ASSOCIATION OF REALTORS

149 Decision-Making Styles International real estate decision-making tends to take place either by consensus, by committee, or through levels of hierarchy o For example, in Japanese business, very strict consensus development practices prevail o Even for a transaction taking place in another country, the decisions are likely to be made in Japan at the home office o In many cultures, decisions for residential purchases are subject to the hierarchy in the home Whatever the process, international clients are going to follow their own practices Be prepared to accept and adapt to the client s practices To be sure that all decisions are understood by the parties involved, follow up every verbal exchange with a written confirmation or summary o may be acceptable, but a card or letter is better Negotiating Styles Negotiation practices among international buyers and sellers vary as much as decision-making styles Some groups seek favorable results for everyone involved, while others focus only on their personal objectives It will take experience, insight, and good listening skills to manage the negotiation process successfully When negotiating abroad do not state your departure date o Some groups may use your departure date to pressure you into lastminute concessions, knowing you would prefer to complete the transaction, and avoid returning home empty-handed Funds Experienced international real estate professionals know where the client has the money for the transaction. Closings involving international clients have been known to fail because the money does not arrive in time Both banks and clients can be at fault for delays Identify money channels to ensure a closing Work to get the funds inside domestic borders before the closing date 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-57

150 Tax Laws Develop a relationship with a knowledgeable international tax attorney who knows the latest requirements and laws Section NATIONAL ASSOCIATION OF REALTORS

151 Key Point Review International business practices and customs vary Clients have widely different expectations about the roles professionals should assume in a real estate transaction People from different countries have different methods of selling, negotiating, and decision-making The real estate professional must understand different methods of selling, negotiating and decision-making To avoid potential misunderstandings and problems, educate and inform clients on the aspects of domestic law and practice Discussion Questions 1. What methods have you used to resolve a misunderstanding or remove an impediment during a negotiation? 2. What methods have you found most useful in trying to close a transaction? 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-59

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153 Chapter 10: Ethics and Equal Service Overview As real estate professionals, you already know and practice fair housing laws. In this chapter, you will combine your knowledge and experience regarding fair housing and diversity because: Success in today s markets requires awareness, communication, and planning a diversity-oriented practice Changing demographics in local markets indicate potential clients and an opportunity to grow your business Learning and applying acceptable fair housing practices help real estate professionals serve a diverse clientele while complying with the law Real estate professionals serving international clients will be able to explain and protect clients rights and investments Objectives Upon completion of this chapter the participant will be able to: Identify discriminatory acts under federal fair housing laws Apply the One America Principles and the philosophy of inclusion to their real estate practices Assist clients by recognizing illegal practices such as steering, discriminatory advertising, and predatory lending practices Apply the Equal Professional Service Model to your practices to enhance professional services to all clients Application Building a real estate practice on a foundation of understanding and commitment to fair housing laws, ethical treatment of clients, and equal service to all, will enhance your opportunities for a successful international practice NATIONAL ASSOCIATION OF REALTORS Section 2-61

154 Building on the Foundation of Fair Housing From a professional perspective, initiating a diversity-oriented practice makes good business sense From a legal standpoint, local, state, and federal fair housing laws have established minimal standards of behavior all professionals must meet This course builds on the promise of those laws that provide for equal housing opportunities An understanding of fair housing law and a commitment to equal housing opportunities is expected of all real estate licensees, and is embodied in the Code of Ethics of the NATIONAL ASSOCIATION OF REALTORS Fair housing laws are designed to help you and your customers have a full range of housing options available The Equal Professional Service Model, developed by the NAR, gives you a solid basis on which to offer the promise of these laws Those who need more information should read the Fair Housing Handbook published by NAR. Fair Housing Background Congress, in passing the Federal Fair Housing Act, established a national policy to provide for fair housing throughout the United States This Act prohibits discrimination on the basis of race, color, religion, sex, familial status, handicap, and national origin For a detailed history of fair housing legislation as well as information about the protections fair housing laws provide, refer to the Appendix. Additional information can be found on the U.S. Department of Housing and Urban Renewal website, Section NATIONAL ASSOCIATION OF REALTORS

155 Discriminatory Acts Fair Housing laws protect the public from discrimination by emphasizing that there should be no variance in the real estate services offered to clients. The Fair Housing Act specifically prohibits certain practices if based on race, color, religion, sex, familial status, handicap, or national origin. The following acts are considered illegal: Refusing to sell or rent housing Refusing to negotiate for housing Making housing unavailable Refusing to sell or rent housing after a bona fide offer is made, or refusing to negotiate to sell or rent, or otherwise make unavailable or deny, a dwelling to any person Discriminating against any person with respect to terms, conditions, or privileges of sale or rental of a dwelling, or with respect to the provision of services or facilities in connection with the sale or rental of property Setting different terms, conditions, or privileges for sale or rental of a dwelling, or with respect to the provision of services or facilities in connection with the sale or rental Falsely denying that housing is available for inspection, sale, or rental Persuading owners to sell or rent for profit, because of changes in neighborhood composition (blockbusting or panic selling) Denying anyone access to or membership in a facility or service related to the sale or rental of housing Refusing to make a mortgage loan Failing to provide information regarding loans Imposing different terms or conditions on a loan, such as different interest rates, points, or fees Discriminating in the appraisal of property Refusing to purchase a loan Setting different terms or conditions for purchasing a loan Advertising or making a statement that indicates a limitation or preference connected with the sale or rental of housing. Other Discriminatory Practices Other practices in the real industry used to discriminate against people include: 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-63

156 o Screening applicants for rental properties o Steering clients o Discriminatory advertising o Predatory lending practices Legal Screening Criteria To uphold fair housing laws, and avoid discrimination, landlords may screen applicants appropriately by using objective criteria including: o Ability to pay rent o Credit history o Rental history Limits on the number of persons living in one unit are legal Students who are not self-supporting may be asked to have parents cosign their rental agreement Consistency in applying the same policies to all applicants is a key factor in complying with fair housing laws Steering Steering is a term used to describe an agent s thoughts and actions when making choices or assumptions for a buyer The agent attempts to guide or steer the buyer in a certain direction o For example, the agent may make the decision to show homes in certain neighborhoods where the race or ethnicity matches the race or ethnicity of the buyer o Buyers might also be steered to cities or school districts with differing racial or socioeconomic composition Agents use different approaches to engage in unlawful steering such as: o Recommend homes to clients for consideration o Editorialize about areas the client should or should not consider The agent makes these types of decisions based on personal prejudices or biases about the buyer The Federal Fair Housing Act, as amended in 1974, 1988, and 1995, identifies steering as an illegal activity o The Act makes illegal any discrimination in the selling, leasing advertising, or financing of housing; or making housing otherwise Section NATIONAL ASSOCIATION OF REALTORS

157 unavailable because of the race, color, national origin, religion, familial status, sex, or handicap Advertising Advertising is another area that has the potential for discriminatory acts Avertising is subject to the Fair Housing Act, and may also be subject to state laws that prohibit discrimination in advertising for real estate Typical violations of the law involve the selective use of publications, human models, geographic advertisements as in the location of billboards or distribution of brochures, and equal opportunity slogans and logos Use the Fair Housing logo in all advertisements o Although using the logo is no longer required, it creates a presumption that you are trying to follow fair housing laws Risk Management Activities o Consistently using the logo in all advertising o Placing the logo on business cards o Incorporate the above uses as part of Office Policies The Fair Housing Logo Predatory Lending Federal banking regulations define predatory lending as practices or loan terms that: o Deliberately deceive borrowers o Strip home ownership equity o Induce a borrower to refinance repeatedly with higher points and fees NAR identifies abusive and predatory lending practices as those loan terms and deceptive claims that can result in: o Home equity stripping o Diminished personal credit standing o Violations of federal consumer protection statutes and regulations 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-65

158 A real estate professional can assist their clients by being aware of predatory lending practices o Do not advise clients to apply to sub-prime lenders o Let clients make the decision about their financing options Agencies for Reporting Discrimination U.S. Department of Housing and Urban Development (TDD) State and local government human rights or civil rights agencies Private fair housing groups Protect Your Fair Housing Rights An agent may have a cause of action against the discriminating party A complaint may be filed on their own behalf Report any incident of discrimination to an appropriate agency without filing a complaint Refer to the Appendix for advice about reporting acts of discrimination Section NATIONAL ASSOCIATION OF REALTORS

159 The One America Principles The Department of Housing and Urban Development (HUD) created the principles to help real estate professionals with awareness, communication, and planning for a diversity-oriented practice. The One America Principles were the basis for NAR s development of a diversity course. The One America Principles o A diverse demographic community o Opportunity for all o Responsibility for all o Respect and celebration for diversity while embracing shared values The following set of principles of professional conduct for practicing real estate professionals were created to support the One America Principles 1. I welcome you and want to do business with you. 2. I will base my decision and opinions of you on who you are, not on any preconceived stereotypes or ingrained value judgments. 3. I subscribe to the federal Fair Housing Act and its principles. 4. I embrace and celebrate the strength that diversity brings to our communities and our nation. 5. I will help you find opportunities to buy the home you choose. 6. I will market home ownership to the public and reach out to people who may not know that home ownership is a realistic option. 7. I will make sure you know there is a full range of housing choices available to you, and encourage you to consider all communities and neighborhoods. 8. I will make every effort to maintain open two-way communication. If we do not share a common language, I will work with you to find someone who can interpret. 9. I have incorporated these principles in my daily operations and my overall business plan. I would be proud to share the plan with you. 10. I am here to help you meet your real estate needs because you are the reason I am in business. 11. Please let me know about any cultural or special needs that you have so that our business relationship will be comfortable and successful NATIONAL ASSOCIATION OF REALTORS Section 2-67

160 The Philosophy of Inclusion The philosophy of inclusion forms part of the foundation of the One America Principles To thrive in the growing cultural heterogeneity that characterizes our country, we need to commit to a positive acceptance of individuals who come from diverse cultures and backgrounds This positive acceptance is more than a tolerance of other people, it is a commitment to a social philosophy that says, I respect other individuals unconditionally, regardless of cultural, personal, social, or professional differences It says to an individual, Not only do I accept you; I accept your culture The step beyond unconditional respect for all individuals to a sincere positive regard for all individuals Positive regard means you respect other people enough to grant them the right to be different from yourself, and to appreciate their differences This leads to relationships where individuals from all backgrounds are included in the cultural fabric without losing their uniqueness Positive regard extends to all individuals regardless of cultural and racial background, marital status, gender, sexual orientation, religion, age, geographic origin, educational background, and physical and mental capacity People who embrace diversity see positive value in seeking out crosscultural relationships, both socially and professionally Embracing diversity does not imply assimilation, conformance, or any other ethic advocating that American individuals should become more alike Diversity awareness celebrates individual differences without any imperative to change The key to building inclusive cross-cultural relationships is to learn one s own attitudes and biases, make allowances for them, and bring them under control Section NATIONAL ASSOCIATION OF REALTORS

161 NAR s Code of Ethics REALTORS have a long history of supporting the letter and spirit of our nation s fair housing laws All REALTORS pledge to conduct their business in accordance with the tenets and spirit of the Code of Ethics Article 10 of the Code of Ethics outlines an unequivocal commitment to equal opportunity in housing Article 10 of the Code of Ethics and Standards of Practice of the NATIONAL ASSOCIATION OF REALTORS Effective January 1, 2007 REALTORS shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, or national origin. REALTORS shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, or national origin. (Amended 1/90) REALTORS, in their real estate employment practices, shall not discriminate against any person or persons on the basis of race, color, religion, sex, handicap, familial status, or national origin. (Amended 1/00) Standard of Practice 10-1 When involved in the sale or lease of a residence, REALTORS shall not volunteer information regarding the racial, religious or ethnic composition of any neighborhood nor shall they engage in any activity which may result in panic selling, however, REALTORS may provide other demographic information. (Adopted 1/94, Amended 1/06) Standard of Practice 10-2 When not involved in the sale or lease of a residence, REALTORS may provide demographic information related to a property, transaction or professional assignment to a party if such demographic information is (a) deemed by the REALTOR to be needed to assist with or complete, in a manner consistent with Article 10, a real estate transaction or professional assignment and (b) is obtained or derived from a recognized, reliable, independent, 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-69

162 and impartial source. The source of such information and any additions, deletions, modifications, interpretations, or other changes shall be disclosed in reasonable detail. (Adopted 1/05, Renumbered 1/06) Standard of Practice 10-3 REALTORS shall not print, display or circulate any statement or advertisement with respect to selling or renting of a property that indicates any preference, limitations or discrimination based on race, color, religion, sex, handicap, familial status, or national origin. (Adopted 1/94, Renumbered 1/05 and 1/06) Standard of Practice 10-4 As used in Article 10, "real estate employment practices" relates to employees and independent contractors providing real estate related services, and the administrative and clerical staff directly supporting those individuals. (Adopted 1/00, Renumbered 1/05) Section NATIONAL ASSOCIATION OF REALTORS

163 The REALTOR Fair Housing Declaration For the past quarter century, the NATIONAL ASSOCIATION OF REALTORS has worked closely with the U.S. Department of Housing and Urban Development to promote equal opportunity in housing. In 1966, HUD and NAR created a voluntary Fair Housing Declaration for use by REALTORS. REALTOR FAIR HOUSING DECLARATION I agree to: Provide equal professional service without regard to the race, color, religion, sex, handicap, familial status, or national origin of any prospective client, customer, or of the residents of any community. Keep informed about fair housing laws and practices, improving my clients' and customers' opportunities and my business. Develop advertising that indicates that everyone is welcome and no one is excluded; expanding my client's and customer's opportunities to see, buy, or lease property. Inform my clients and customers about their rights and responsibilities under the fair housing laws by providing brochures and other information. Document my efforts to provide professional service, which will assist me in becoming a more responsive and successful REALTOR. Refuse to tolerate non-compliance. Learn about those who are different from me, and celebrate those differences. Take a positive approach to fair housing practices and aspire to follow the spirit as well as the letter of the law. Develop and implement fair housing practices for my firm to carry out the spirit of this declaration NATIONAL ASSOCIATION OF REALTORS Section 2-71

164 The Equal Professional Service Model The Equal Professional Service Model offers a simple method for any REALTOR to set up systematic procedures to offer services without discrimination. This model is the basis for the fair housing practices recommended by NAR in the Fair Housing Handbook. By applying the model to procedures and practices, you automatically evaluate your practices to determine that you are consistently offering equal service. Section NATIONAL ASSOCIATION OF REALTORS

165 Equal Professional Service Model 1. Do I use systematic procedures? 2. Do I have 3. Has my Yes objective Yes customer set Yes information? the limits? 4. Have I offered a variety of choices? No No No No As the model illustrates, anytime a question is answered No, the process returns to the first step. By following the steps of the model, real estate professionals are forced to apply each step in succession to build and incorporate practices and procedures that provide equal professional service to everyone NATIONAL ASSOCIATION OF REALTORS Section 2-73

166 Systematic Procedures Equal professional service means consistently providing the same level of service to all your customers Develop a consistent approach to greeting people, showing homes, qualifying buyers, getting listings, conducting open houses, keeping records, and following up with clients and customers Systematic procedures and equal professional service help meet the needs of a diverse customer base Obtaining and Using Objective Information Objectivity applies both to the information provided to customers, and the information obtained from them Provide information that is free of assumptions and biases, and ask for information in a way that does not impose assumptions and biases Giving and asking for objective information increases effective marketing of a customers home or finding the home customers want Customers appreciate professional problem-solving skills, objective, factual responses to their questions, and recognition that it is the customers, not you, who will be making the decisions Information provided and implied in your advertising and marketing should be objective Objective information in advertisements make it possible for customers to take the next step of setting the limits Letting the Customer Set the Limits Certain questions make sure the customer is setting the limits of a home search o Did the customer identify the necessary and desired features of the home o Did the customer indicate the spending limit o Did the customer know the financial qualifications to purchase o Did the customer express a preference for one or more communities Did the customer express a lack of preference for one or more communities 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-74

167 Did the customer express a preference for any particular type of financing Did the agent ask the customer for all information necessary to search for a home Customers are satisfied when they find what most closely meets their needs and desires, not what aligns with agent assumptions. Offering a Variety of Choices Providing a variety of choices based on customers objective information is good business Customers who have had a wide choice are the most satisfied with their selections and with their real estate professionals Fair housing laws protect everyone from discrimination They ensure that buyers, sellers, property owners, renters, and the real estate professionals who serve them, have full access to the housing markets with no discriminatory barriers o Customers can expect that all housing in their price range is made available: At the most favorable terms and conditions available for that housing In all communities and locations where that housing exists With complete access to all forms of financing and insurance for the housing With consistent professional service Promote services and the availability of housing to all people through marketing and advertising Indicate that everyone is welcome in all communities Diversity in today s society does not change the effectiveness of the Equal Professional Service Model o By learning how to work with people who are different, you will find that this model continues to be a useful tool o The Model promotes the high level of service that will earn the respect and loyalty of consumers 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-75

168 Exercise: Fair Housing Case Study Manuel and Olivia Romero, recent immigrants from Sonora, Mexico, are looking for a home. They have looked at housing ads in several area newspapers, including a Spanish language publication. The Spanish newspaper seems to advertise ads almost exclusively for lower-priced properties in selected areas, unlike the statewide or regional publications, which feature properties in all areas of the metropolitan markets. The Romeros found several properties that interested them in both the statewide newspaper and the Spanish newspaper. They first called Ron and Rita Smith, a husband and wife team at ABC Realty who had several ads in the statewide paper, and one ad in the Spanish paper. Ron answered the ad call from Manuel. Ron had a difficult time understanding Manuel and asked him if he would like an interpreter. Manuel gave the phone to Olivia, who was more fluent in English. Olivia arranged to meet with Ron and Rita that afternoon. At their meeting, Ron and Rita asked some questions about the Romeros housing needs, size, number of bedrooms, and focused on financing arrangements, whether they had good credit, etc. Ron pressed whether they had been pre-qualified, and Manuel advised they would be paying in cash. After further questioning about price range, Manuel finally said he thought they could afford $125,000. Olivia told them they wanted a house with three bedrooms, two baths, a garage, and a large backyard. She also indicated that the house had to be close to a park, and near good schools for their children. Olivia asked if there were neighborhoods where there were many Mexicans. Rita hesitated and said, I think so. I can get you some demographic information that will confirm that. Rita and Ron ultimately showed the Romeros five houses, four located in predominantly Hispanic neighborhoods and one in a mixed neighborhood. Manuel asked whether there were other neighborhoods with homes that met their needs. Ron replied, I don t think so, especially since you are looking for a large yard NATIONAL ASSOCIATION OF REALTORS Section 2-76

169 The Romeros ultimately bought a home for $115,000 in one of the Hispanic neighborhoods. A few months later, Olivia was discussing their new home with a coworker who just recently bought a similar home in a neighborhood with a reputation for having excellent schools based on their scholastic records. It was two blocks from a neighborhood park. They had paid $120,000 for their house and said the neighborhood was full of houses just like theirs. It was a very popular neighborhood because of its large lots. Olivia immediately wondered why they had not heard about that neighborhood, which was just a few miles away from theirs, across the railroad tracks. Discussion Questions 1. What possible fair housing violations or fair housing red flags can you identify in this example? What did the Smiths do that may have led to these possible violations? 2. What might the Smiths have done to avoid some of these problems? 3. Name at least two laws that govern your fair housing practice NATIONAL ASSOCIATION OF REALTORS Section 2-77

170 Exercise: You Be the Judge Tony Hall listed his house for sale with Robert Mitchell of Neal Jackson Realty & Mortgage, Inc. Carol Hayes, an agent with the Neal Jackson Company took Kwesi and Latrisa DeGraft-Hanson and their children to see the house. When Tony Hall answered the door, he asked to speak with Carol Hayes inside the house while the DeGraft-Hansons waited outside. Hayes alleged that Hall became angry and said, We don t need their kind here. Hayes was shocked by Hall s statements and thought he was discriminating against the DeGraft-Hansons because they were African Americans. Hayes left the house upset and told the DeGraft-Hansons that Hall would not let them look at the house due to their race. According to the DeGraft-Hansons, Hayes told them that Hall told her that he had previously told the listing agent that his house was not to be shown to blacks. Hayes did not recall either Hall s statement about the listing agent, or herself mentioning the listing agent to the DeGraft-Hansons. She claimed that it was the DeGraft-Hansons who later raised the question of whether the listing agent would have taken the listing with understanding that the house would not be shown to black people. In fact, another agent of the Neal Jackson agency had previously shown the Hall house to an African- American client. After Hayes and the DeGraft-Hansons left Hall s house, Hall called the agency and allegedly told another agent that his house was not supposed to be shown to blacks. The agent told Hall that he could not restrict the sales of his property in that way. Hall then asked the agent to extend an invitation to the DeGraft-Hansons to return to the house. The following day, the managing broker for the Neal Jackson agency learned of the incident and was prepared to immediately void the Hall listing, but did not do so because the DeGraft-Hansons had indicated that they might still be interested in viewing the property. The DeGraft-Hansons never did revisit the property. Instead, they sent the agency a letter demanding an apology. A signed apology from Hall was mailed to the DeGraft-Hansons. The agency did not show the Hall house to any other potential buyers and eventually voided the listing contract with Tony Hall. The DeGraft- Hansons continued to work with Carol Hayes to look for houses, but did not buy any of the properties shown by Hayes NATIONAL ASSOCIATION OF REALTORS Section 2-78

171 Approximately one and half years later, the DeGraft-Hansons filed a lawsuit against Tony Hall, Robert Mitchell, Neal Jackson Realty and its franchisor, and Colwell Banker Real Estate Corporation. The complaint alleged that the defendants violated the Georgia Fair Housing Act and committed the tort of intentional inflictions of emotional distress by agreeing to discriminate based on race. Discussion Questions 1. What possible fair housing violations or fair housing red flags can you identify in this example? 2. What is your opinion of the actions taken by agent Hayes? 3. What court action would you expect and why? Court Response The court found that Coldwell Banker could not be held vicariously liable because they had no control of time and manner of the agent s work. Without such control, franchisors are not liable for the torts of franchisees. The court found no evidence of racially discriminating housing practices by Robert Mitchell and Neal Jackson Realty and Mortgage, Inc., only evidence of discrimination by home owner Hall. The DeGraft-Hansons based their intentional infliction of emotional distress claim on their allegation that Robert Mitchell and Neal Jackson Realty and Mortgage, Inc. agreed with Tony Hall to discriminate based on race. The court found no evidence to support the claim NATIONAL ASSOCIATION OF REALTORS Section 2-79

172 Personal Application Before asking questions to obtain information consider how a person with a different cultural perspective will feel, and modify the questions if necessary. Sample universal questions that may be used with any client: Property: What can you tell me about the kind of home you are looking for? Location: What types of neighborhoods are you interested in? Price: Our homes are listed by price. Do you have a price range in mind? Payment: I would be happy to discuss financing with you if you wish. Would this be helpful now? Timing: If you can find a house you like, how soon do you want to move? Understanding: Perhaps you could tell me how you think the home buying transaction takes place. OR Would you like for me to walk you through the home-buying process? Expectations: There could be a number of people involved in the purchase. Do you need any help understanding what each person should do and what your rights are? Special needs: Is there anything I can do or anything I need to know to make this process easier for you? Next steps: Please tell me how you would like to proceed from here NATIONAL ASSOCIATION OF REALTORS Section 2-80

173 Key Point Review The REALTOR Fair Housing Declaration, the One America Principles, and NAR s Code of Ethics form the foundation upon which real estate professionals can build an ethical practice that serves everyone equally Standard policies and practices that include sensitivity to diversity make it easier to provide professional service to everyone Discussion Question 1. As a member of the NATIONAL ASSOCIATION OF REALTORS, how have NAR s Code of Ethics and the REALTOR Fair Housing Declaration changed you or your outlook, your business, or your relationships in your community? 2. What guidelines should be followed to ensure equal service to all, and to prevent discriminatory practices? 3. Balancing information, fair housing laws, and the Equal Professional Service Model in your practice NATIONAL ASSOCIATION OF REALTORS Section 2-81

174 2007 NATIONAL ASSOCIATION OF REALTORS Section 2-82

175 Section 3: The World of International Real Estate Chapter 11: Professional Goals Chapter 12: Creating and Launching a Business Plan Chapter 13: Marketing and Selling Practices 2007 NATIONAL ASSOCIATION OF REALTORS

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177 Chapter 11: Professional Goals Overview In Chapter 11, participants have an opportunity to review and create professional goals. These goals will serve as the foundation for their business plan. Objectives Upon completion of this chapter the participant will be able to: Determine personal attitudes and practices they want to improve, change or adopt Create professional goals for an international practice Examine immigration data and its impact on buying power Translate professional goals into specific action statements Application Opportunities and resources for global investment are better than ever before. International real estate is a specialized practice that requires initiative, skill, and appreciation for working with people from different cultures and countries. Setting professional goals for an international real estate practice will help achieve success and provide the freedom to enjoy the rewards of this special professional segment NATIONAL ASSOCIATION OF REALTORS Section 3-1

178 The Opportunities The free market philosophy is spreading The volume of foreign direct investment is increasing These trends promise expanded international real estate opportunities, both now and in the long term The opening of China, Eastern Europe, and the former Soviet economies to western free market enterprise represents a huge potential market for future investment Recent changes in USA immigration laws have created an investor s visa which o Offers foreign investors U.S. citizenship o May provide an incentive for foreign investment Global Resources Wherever you live, you have local access to global resources and contacts Global resources and contacts provide access to local government and economic or cultural organizations who sponsor trade missions to other countries A real estate professional has valuable skills to contribute to a mission Earning a place in such an organization expands a professional network The Internet contains thousands of real estate and international resources o Social and economic conditions and opportunities in foreign countries o Real estate firms and listings o Government programs and policies o Currency exchanges o Communication with professionals and clients around the world Loyal Clients Mean Repeat Business It takes time to develop relationships with foreign clients Once established, foreign clients will choose you to service their ongoing real estate needs The initial transaction may be a small If you perform to their expectations, there will be additional, and larger, transactions over the years Section NATIONAL ASSOCIATION OF REALTORS

179 Income Opportunities International business relies on referrals Successful transactions build reputations which will attract new clients o Developed relationships o Provided knowledgeable and trustworthy service Clients value these attributes and will refer future business Bigger Audience for Your Properties Creating an international network means global exposure for all properties in your market area International focus can give a significant competitive advantage and result in more listings and sales Excitement and Personal Growth International real estate can be an exciting, adventuresome experience It can create opportunities for meeting people from different cultures Opportunities for travel to other countries Many real estate professionals find the international specialty personally rewarding as they make friendships and grow in new areas 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-3

180 The Commitment Initiating an international practice requires more time, money, and effort to succeed than a domestic practice Time to develop relationships Travel further distances may be necessary Transactions may take longer to close International business is a long-term commitment Rewards are often slower in coming There is no guarantee there will be any business at the end of the development period Patience is the special ingredient in developing a lucrative international business Realize the opportunities, make a commitment and enjoy working in a business that has unique challenges Time Expect to spend time establishing relationships before any real business can occur Transactions take longer to complete in the international arena due to distances, time differences, money transfers, and legal issues Money Costs of networking, marketing, promoting, and general overhead are much greater than in a domestic business o Faxes, telephone calls, travel, legal fees, document preparation, accounting, and tax reporting will all be more expensive when working with international clients Education Development of cultural understanding and international expertise requires ongoing education and training Change is constant because governments change, economies rise and fall, and opportunities enter and exit the market In addition to the CIPS programs offered by NAR, many seminars are available on international business Universities, world trade centers, firms and nonprofit associations, such as the International Real Estate Federation (FIABCI), also offer courses on international business Section NATIONAL ASSOCIATION OF REALTORS

181 Networking Formation, organization, maintenance, and cultivation of an international network can be difficult due to different practices and levels of development in other countries Local resources, such as title companies, maps, online information, directories and address systems, may work differently abroad or may not exist at all Participation in international real estate events at the NAR Annual Convention presents a great opportunity to learn about other countries and to meet key players Over 20,000 professionals from the United States and approximately 1,500 professionals from more than 50 countries attend this event annually Adaptation Differences in business practices, banking and legal procedures, customs, or time zones require changes in the way you conduct business Redefine your philosophy and attitudes concerning business associates and clients Personal Self-Assessment To learn the goals that will help create an international business plan refer to the assessment on the following pages. The purpose of this assessment is to help determine how agents interact with people from different cultures and backgrounds The assessment will identify attitudes and practices that may need change or improvement This assessment is for your personal use only. It will not be shared or discussed in class. You are encouraged to answer honestly. There are no correct or incorrect answers NATIONAL ASSOCIATION OF REALTORS Section 3-5

182 Personal Assessment 1. What makes you different from everyone else? Write the first things that come to mind. 2. Imagine that you are in a social setting and meeting someone from another country. How do you feel about this encounter? Mark as many reactions as apply. a. It is not a big deal. b. I feel on edge. c. The differences between us intrigue me. d. I suppress how I am different. e. I wonder why he or she is so different. f. I gravitate away from the person. g. I enjoy engaging the person in conversation. h. I look for someone who has more in common with me. 3. Assume you are a religious person, and you meet an atheist. Which of the following, if any, describe you? a. I accept the atheist in spite of his belief. b. I refuse to have anything to do with the person. c. I try to convince him of the folly of his theology. d. I listen to his beliefs; they might even influence my own thinking. Section NATIONAL ASSOCIATION OF REALTORS

183 4. A recent immigrant informs you that a property you believe to be gorgeous is unacceptable because the street address has the wrong numbers in it. Your most likely response would be to: a. Ask why an address would prevent someone from making an offer. b. Ask why the address is a problem, then move on to other properties. c. Thank the person politely and move on to the next buyer or listing. 5. When you meet a stranger from another country, your first emotional response is likely to be: a. Fearful and apprehensive. b. Interested. c. Accepting. d. Suspicious. e. Respectful. f. Reluctant. g. Awkward. h. Confusing. 6. If you were to create a utopia, the inhabitants would be: a. All exactly like you. b. All different from you. c. Mostly like you. d. Mostly different from you. 7. Your experience and contacts with other cultures and subcultures, compared with those of the average American, have been: a. Extensive. b. Average. c. More than average. d. Less than average NATIONAL ASSOCIATION OF REALTORS Section 3-7

184 8. When you meet a person from another country or culture, you usually find that: a. Your stereotype of the nationality or culture is confirmed. b. Your stereotype had nothing to do with the person. c. You do not let stereotypes get in the way of communication. d. You do not apply stereotypes to individuals, just to nationalities or cultures as a whole. e. You are sensitive to how that person has stereotyped you. 9. If you were to recognize that you had a significant number of biases about other people, which of the following would you most likely do? a. Accept your biases and move on. b. Develop ways to camouflage your biases. c. Work to reduce biases that are excessive. d. Try to get rid of the biases that were not justified. 10. When you are in a group of culturally diverse people, your comfort level: a. Is fairly easy to establish. b. Depends on the types of group present. c. Depends on the individuals to whom you are talking. d. Is fairly difficult to establish. Section NATIONAL ASSOCIATION OF REALTORS

185 Market Assessment Checklist Evaluate your local market s potential for international business Is the environment positive or negative according to the following characteristics If the local market has many positive attributes, it should be possible to find and transact international business If the local market has many negative attributes, it may be necessary to look outside the local market for opportunities Assess your means and desire to meet these challenges Market Features + Property type, size, variety, and availability Existing foreign investment Local economic trends Local demographic trends Market appreciation Accessibility and transportation Market size Market name recognition Real estate market conditions Proximity to universities and other resource centers 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-9

186 Goals and Strategies During this course you have learned how valuing diversity and using inclusive business approaches increases opportunities for expanding your market The next step is to develop strategies that will help realize the professional goals you have set The following examples illustrate how to translate goals into specific actions Local Demographic Trends The analysis of local demographic data is an important first step in developing marketing strategies and business plans that address the specific needs of a diverse market area Among the critical factors are: o Total population o Population by nationality or race o Income o Employment o Key housing indices No target marketing on the basis of race or national origin U.S. Government Census Bureau Population data can be found on the Internet at Quick search options are displayed on the right side of the screen You may select from the following options: State and County Quickfacts Sample page shown below The list of categories with available data are listed on the left Additional links are provided at the bottom of the page Latest Economic Indicators New Home Sales Federal Statistics A good source for regional, state, and county data is Local Statistics Other sources of information include: Section NATIONAL ASSOCIATION OF REALTORS

187 o Libraries o City or county planning departments or commissions o Chambers of commerce o State and local human relations commissions o Local HUD offices Residential Property News and Research from Around the World Can be found at CCIM Institute The CCIM Institute, an affiliate of NAR, maintains a comprehensive website that provides information and data to its members and NAR Associate Members for a fee o One helpful feature is the Site To Do Business (STDB) o Offers information on demographics, owners and investors, market research, professional services, financial information, property management, and more o Visit the website at The following questions help determine the status of a local market 1. Is the population in your local market growing or declining? 2. How has the ethnic mix of the market changed? 3. Is the per capita and/or household income rising or declining? What does that imply for housing needs? 4. How has the change in percentages of renters and home owners changed? What does this mean? 5. What general, qualitative conclusions can you make about the demographic or cultural trends in your market? 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-11

188 Sample Local Market Data This chart is offered as an example of the type of data that should be gathered about a local market. The following sample report is based on data from a search of various categories, including population by race, household income, type of employment, tenure, median value, and median gross rent. When using demographic data be aware of the following considerations: o Traditional fair housing training has emphasized there should be no difference of treatment on the basis of race and other factors o Becoming culturally aware does not change that basic principle of fair housing o The analysis of demographic data helps to understand, reach out, and expand marketing efforts o Such data should never be used to limit choices or steer prospects to or away from communities o Demographic data should not be provided to customers and clients Keep demographic data and information you gather for diversity business planning separate from customer and property files Check state and local laws concerning the collection and use of demographic data Section NATIONAL ASSOCIATION OF REALTORS

189 1990 % of total 2000 % of total +/- % change Total population White population African American population Hispanic population Asian population Other population: Household income Per capita income Unemployment % % White collar % Blue collar % Renter occupancy % Owner occupancy % Vacancy Average home value Average rent rate Trends should compare data from two or more years The Census Bureau s Internet site delivers data for one year Complete information for a comparison year can be found in the Census Bureau s publications available at a public library, or from an area agency maintaining local demographic data Start at the local planning commission or committee for your town or county Calculate the percent of total and the percent change items yourself, depending on where you obtain the data 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-13

190 Goals for Services and Customers 1. Promoting listings: Promote listings in local and international markets 2. Marketing listings and obtaining buyers: Allocate promotional efforts, time, and budget resources according to the size of markets Select advertising channels to effectively include local multicultural and international prospects in local markets. 3. Obtaining listings: Emphasize inclusive marketing plans when obtaining listings 4. Facilitating closings: Broaden facilitation services to ensure that all buyers get to the closing table successfully Goals for Reaching the Local Community 1. Get to know the community: Embrace and celebrate the strength that diversity brings to our communities and our nation. Become actively involved with social and cultural organizations and educational opportunities that will enhance knowledge of market. Section NATIONAL ASSOCIATION OF REALTORS

191 2. Gaining recognition in marketplace Include ways to increase personal and professional profile in this country and abroad, so people in local markets recognize me as their real estate resource of choice. Goals for Reaching International Markets 1. Learning about and participating in international marketing or sales events: Network with agencies, associations, and cultural organizations to identify international events in which participation is an option. Goals for Professional Development 1. Improving language and communication: Improve communication skills with immigrant and ethnic groups. Learn to speak a foreign language. 2. Increasing cross-cultural awareness: Familiarize yourself with the social and cultural backgrounds of ethnic groups in your market to achieve a greater comfort level on both sides when involved in a business transaction. Increase focus and efforts to build one-on-one relationships with prospects and customers. Company Goals 1. Improving and expanding company image: Develop communication to clients and prospects that shows the company is proactive and inclusive. Develop ways to promote the international capabilities of the company in home country and abroad NATIONAL ASSOCIATION OF REALTORS Section 3-15

192 Guidelines for Specializing Professional goals may include developing a niche market or expanding a practice to include international transactions The following considerations may influence how you define a specialty area in your local or international business Consider all aspects of your practice, and develop a plan that will provide the greatest likelihood of success and professional fulfillment Personal Background Capitalize on relevant personal experiences or insights, such as: o Foreign language fluency o Ties with friends or relatives abroad o Hobbies, interests, or social and professional affiliations that may have local or offshore ties o Knowledge of a particular culture through your heritage o Knowledge of a foreign market from previous travel or other overseas experience Professional Background Links to other countries or cultures include: o All formal education including any degrees and professional designations Many cultures place a high value on education and credentials o Identify possible networks through: Current firm Educational institution Organizational memberships Current Real Estate Expertise Successful international real estate professionals recommend continuing what you do best rather than starting all over in a new area. If your strength is leasing new developments, consider business in that particular area of expertise. Most real estate careers can have an international element. Overseas clients need these services as well. Section NATIONAL ASSOCIATION OF REALTORS

193 Market Opportunities in Your Area Analyze your market area Study investments that have already occurred These provide a good perspective of current opportunities Do not limit yourself to what has already been done Consider your community in terms of its current international connections o Many cities, states, universities, and other organizations have international festivals and events, host overseas visitors, and set up exchanges or sister city connections o Such programs provide insight to the level of international activity in your area, and can provide an avenue for building a network Competitors Be aware of the business happening in your local market If specialists have identified a need, and the demand is significant, you may want to follow the trend If demand is already being met, you may want to specialize away from existing competition 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-17

194 Succeeding in International Real Estate Based on the experience of a number of international specialists associated with NAR, certain attitudes, traits, and business practices are important for a success in multicultural, and/or international real estate Traits and Attitudes Patience Genuine affinity for people with whom you work High degree of interest in the culture Resourcefulness Initiative Perseverance Tolerance Sensitivity Strong listening and communication skills Fondness for travel Good interpretation skills Commitment Ability to cope with ambiguous and unforeseen events Honesty Adaptability Modesty Courteousness Section NATIONAL ASSOCIATION OF REALTORS

195 Business Practices Commitment to success Ability to provide clear and frequent explanations of details Precision in written and verbal communication Respect for clients wishes Specialization in a particular area Ability to overcome clients prejudices Consistency in business patterns Ability to network Collaboration with foreign colleagues Collaboration with organizations Dedication to full disclosure Loyalty to foreign clients Determination to keep promises and commitments Respect for foreign business practices Ability to plan and organize Establishment of clear objectives 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-19

196 Key Point Review Opportunities and resources for an international real estate practice are better than ever before Success in an international practice requires a sincere commitment of time, energy, and money It is important to assess personal biases, and strengths and weaknesses to prepare for and succeed at transacting international business A key to success is the ability to translate professional goals into specific actions that advance your career Discussion Question 1. In what ways can diversity and inclusion contribute to the success of an international real estate practice? Section NATIONAL ASSOCIATION OF REALTORS

197 Chapter 12: Create and Launch a Business Plan Overview In this chapter participants will share ideas and practice creating strategies for a business plan. Strategies are plans or approaches used to support the professional goals. The final step will be to create actions to implement the business plan. Objectives Upon completion of this chapter the participant will be able to: Identify the variables that influence a business plan Develop strategies for initiating or expanding an international real estate practice Create specific actions to launch the business plan Application A good strategic plan is an indispensable road map for identifying: Where you want to go How and when you will get there What to do along the way How to measure success Action plans should be developed to facilitate implementation of the business plan. Action plans are a way to assign accountability, track details, and maintain momentum NATIONAL ASSOCIATION OF REALTORS Section 3-21

198 Formulate a Business Plan A basic business plan consists of the following components: o Your mission and goals o Strategies to attain goals o Action plans to implement strategies Begin by identifying all the variables needing to be organized o People involved o Resources at your disposal o Real estate services An inclusive practice incorporates: o A multicultural service philosophy in daily operations o Diversity in strategic plans, practices, and staffing o A culturally friendly presence in the community People Identify all the people involved in your practice o You as the real estate professional o The company o Buyers, sellers, renters and investors o Local community o Areas or countries where you want to conduct international business The business goal is to supply customer service that exceeds customer expectations o Learn the desires and needs of each group o Identify how you can provide the services to meet these needs Section NATIONAL ASSOCIATION OF REALTORS

199 Resources What resources will help provide customer service to all clients Consider the following items and add any additional resources you may have in the space provided below o Time o Money o Real estate skills o Cultural skills and awareness Services Consider the range of services to provide to clients Add other services to the list o Listing properties for sale or rent o Communication o Marketing o Servicing o Community and professional networking activities 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-23

200 Business Plan Strategies Basic goals for an individual practitioner or agency that practices international real estate o Increase resources to accommodate international transactions o Add or expand services to international clients o Network or establish international contacts in the local market o Network or establish international contacts abroad Exercise: Developing Strategies Forming a strategy begins with identifying the groups you want to work with and ways to reach and serve them. In this exercise, the class will be divided into several groups. Each group may select a goal from the list above, or create a different goal. Your assignment is to develop at least two strategies that you think will support the goal. At the end of the exercise, a spokesperson for each group will present the group s strategies to the class. Strategy 1: Strategy 2: Section NATIONAL ASSOCIATION OF REALTORS

201 Strategy 1: Strategy 2: Goal: Network or establish international contacts in the local market Strategy 1: Strategy 2: Goal: Network or establish international contacts abroad Strategy 1: Strategy 2: 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-25

202 Section NATIONAL ASSOCIATION OF REALTORS

203 Launching Your Business Plan A business plan has no value if it is not implemented The implementation process consists of planned actions that allow attainment of goals An action plan is a schedule of specific actions that addresses one objective or goal that is part of the entire business plan o Include the name of the person or group responsible for completing a specific action o Identify the anticipated start and stop dates for specific actions Following is a sample action plan for advertising an agency s capabilities in international real estate Sample Action Plan: Advertising in the Local Market Goals 1. To actively promote the agency and its services to specific cultural groups in the local market. 2. To establish contacts with local businesses, banks, and financial services that have business relationships with local immigrant and ethnic groups in the local market. Strategy 1. Advertisements will be placed in local newspapers and magazines to raise awareness of the agency s services to local immigrant and ethnic populations. Action/Task Completion Date Meet with advertising design company 5/1 John Person Responsible Select newspapers and magazines 5/1 to 5/10 John and staff Obtain advertising rates and schedules 5/12 Maria Finalize ad copy 5/15 John Place advertisements 5/20 Mary Track responses to ad 6/1 to 9/30 Jamal 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-27

204 Working With an Action Plan Each strategy of a business plan should have an action plan Each step of the action plan should be a step to attaining the goal o Action plans monitor progress toward a goal o Aids in identifying obstacles o Acknowledge achievement of an objective or goal o Keeps program on track and focused Include start and stop dates for specific actions List other needed resources For complex and or detailed action plans, you may want to use Microsoft Excel or Microsoft Project software to create and revise action plans Exercise: Writing Action Plans In the previous exercise, you developed at least one strategy for each of the business goals. For this exercise, you will choose one strategy, and write the action steps needed to support the strategy. Section NATIONAL ASSOCIATION OF REALTORS

205 Goal: Increase resources to accommodate international transactions Strategy: Action Steps: 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-29

206 Goal: Add or expand services to international clients Strategy: Action Steps: Section NATIONAL ASSOCIATION OF REALTORS

207 Goal: Network or establish international contacts in the local market Strategy: Action Steps: 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-31

208 Goal: Network or establish international contacts abroad Strategy: Action Steps: Section NATIONAL ASSOCIATION OF REALTORS

209 Evaluate The Strategies Determine how well the objectives were reached The evaluation phase will help answer the following questions: o How well did I (we) do o What did I (we) learn Additional Project Evaluation Questions Did the project satisfy the project goals How close to schedule was the project completed How close to budget was the final cost How well were the clients, sponsors, etc., satisfied with the project outcome Were the objectives satisfied What was learned about writing specifications that will help with the next project What recommendations do you have for future development If you had the project to do over, what would you do differently (If applicable) Did you work well as a team What changes, if any, should be made 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-33

210 Key Point Review A business plan helps organize all the variables (people, resources, and services) that constitute a real estate practice so that all efforts are aimed at achieving specific goals Multiple strategies may be used to achieve specific professional goals Action plans provide direction, focus, and accountability for completing those tasks that help achieve professional goals Discussion Question 1. Some of the most successful strategies contain a certain amount of creativity. Where might you find sources of inspiration and creativity? Do you think your search for creativity should be limited to the real estate industry? Section NATIONAL ASSOCIATION OF REALTORS

211 Chapter 13: Marketing and Selling Practices Overview Marketing and selling properties involves preparing data, developing a marketing plan, prospecting, qualifying, presenting, offering, negotiating, and closing. Marketing and selling practices may need to be revised or created so that your practice incorporates diversity, and is able to serve local multicultural and international clients. Objectives Upon completion of this section, you will be able to: Apply awareness and sensitivity of cultural differences to marketing and selling practices. Use practices that make clients feel comfortable, informed, and valued. Identify the professional skills needed for a successful international practice. Application People from different cultures and backgrounds are influenced by experiences and traditions of their heritage. They will be encouraged to buy or sell by approaches and practices that are familiar and comfortable to them. Practitioners, who understand and are sensitive to cultural values, use marketing and selling practices that create long-term relationships. These relationships frequently yield multiple transactions NATIONAL ASSOCIATION OF REALTORS Section 3-35

212 Market Profiles Market profiles are usually associated with commercial or investment properties. They serve to inform and educate prospective buyers and clients. A market profile summarizes economic, demographic, and financial aspects of the national and international market, primarily in order to substantiate performance forecasts, valuations, and general benefits of the prospective investment. As homework, list the contents of a market profile in the space provided below. Section NATIONAL ASSOCIATION OF REALTORS

213 Market Profile for International Properties A market profile should be comprehensive and detailed o County and local market data o State and regional and national economic summaries The subject property listing may be competing with alternative opportunities in other markets, so a detailed profile allows the client to compare properties A market profile also indicates that the real estate professional understands how the property fits into the big picture o If a property is in a secondary market, the market profile should pay particular attention to the differences and advantages over primary markets o The ability for international clients to buy and sell in a market should be completely detailed, because access is a major consideration o Do not recreate the wheel for this profile State, region, city, chamber of commerce, or convention and visitors bureau has already assembled most of this information 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-37

214 Property Profiles Property profiles provide a clear, comprehensive portrait of a specific property May include tangible physical features and amenities, financial and economic aspects, tenant and management data, facts about the surrounding area and competing properties, and intangible items such as reputation and prestige Prepare a copy of the property profile to give to your clients o It demonstrates knowledge of the market o Provides an opportunity to review information, and formulate any questions they may have As homework, list the contents of a property profile in the space provided below. Section NATIONAL ASSOCIATION OF REALTORS

215 International Property Profile A market profile for an international property should contain detailed information, particularly because it is difficult to foresee the buying criteria of an offshore buyer. If possible, assess beforehand how much experience potential clients have had in your market. This type of information will help you immensely in preparing for your first meeting: Do they speak the language Have they visited many times before Is this their first trip to your country/market Is this their first investment in your country/market The international property profile may need to include the property s competitive standing with properties located outside the immediate market, region, state, or even outside the country. Present physical dimensions in measurements familiar to the client. You may need to convert square feet to square meters. Target Buyer Profile The profile of the target buyer includes: o o Size Location o Investment expectations o Historical buying patterns o Preferred property type o Motivation to buy The target buyer profile has information about the property o It does not target a prospective client or buyer by any preference, limitation, or discrimination o Such targeting is illegal under the Federal Fair Housing Act Target buyer profiles guide the real estate professional to appropriate networks, help to determine promotional channels, and direct approach strategies Effective targeting requires knowledge of the market 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-39

216 For example, if an undeveloped parcel is a prime site for development, but market conditions have discouraged merchant developers, you may target equity developers who hold properties for their own accounts. Specific targeting can be very helpful in identifying clients or users. Marketing Plans In the United States, companies in the real estate industry must comply with the Fair Housing Act when they market their firm and property listings. By law, any marketing plan, including the selection of media and publications for advertisements, that indicates a preference, limitation, or discrimination based on race, color, religion, sex, handicap, family status, or national origin is prohibited. Marketing plans for an inclusive real estate practice is intended to reach all potential clients. The plan should address two critical issues: 1. Identification of the buyer best suited for the particular benefits of a property 2. Selection of promotional and selling activities within budgetary constraints in order to reach the target buyer A comprehensive marketing plan would include the following topics: o Target buyer profiles (primary, secondary): Region/country/market of the property for sale or purchase Entity type (user, corporation, bank, individual, joint venture, etc.) Financial category of the client Specific target clients according to their preferences or desires for specific types of property o Budgeting and resource allocation: Financial resources Time constraints, marketing plan duration Selling and promotional budget o Identification of key selling and advertising themes: Market area and property themes Target audiences Section NATIONAL ASSOCIATION OF REALTORS

217 o Selling plan: Contact plan for prospects Sales support and presentation materials Activity level, time period o Promotion plan and budget: Advertising Direct mail Publicity, press releases Special promotions o Listing on the Internet and other available networks The time period for marketing plans is often left undetermined o Know how much time can be devoted to marketing without putting budget at risk Multicultural Marketing Multicultural marketing o Recognizes a diverse market base Ethnic minorities People of color People in same sex relationships Urban or suburban populations Multicultural marketing approach o Learn as much as possible about the traditions and beliefs of your targeted potential clients Do not assume all minorities are alike There is considerable diversity within each ethnic segment o Country of origin o Language o Social and cultural adaptation to the United States Within the Hispanic market, there are Mexicans, Cubans, Puerto Ricans, South and Central Americans, and Spaniards Asian community includes more than twenty-four ethnic groups, each with its own language, religion, culture, and value system o The Asian community includes Chinese, Filipinos, Japanese, Asian Indians, Koreans, and Vietnamese 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-41

218 o Within the African-American group, there are French-speaking Haitians who may have little in common with American-born blacks Be careful when translating English into foreign languages o Some idiomatic expressions cannot be translated word for word and retain the same meaning Use the appropriate native language media, such as foreign-language newspapers and television broadcasts Media experts know that ethnic Americans often access different media from mainstream America from the Internet to magazines to radio and print o Media is digested for information, a sense of community and values Hire staff members who speak the language of the ethnic group or groups you are trying to serve Be sensitive about cultural slurs, stereotypes, clichés, and taboos Strive to understand the cultural nuances in communication, dress, and family values Be prepared to educate your audience Get involved with ethnic communities Consider hiring a specialty advertising agency or marketing consultant Financial Budgeting for a Marketing Plan A marketing plan includes a financial budget for expected revenues and expenses. The real estate professional allocates a portion of anticipated commissions or fees for marketing, and may draw on working capital to cover interim cash flow needs Marketing costs should run from 15% to 30% of income For larger plans, budgeting should be split between selling, promotion, and advertising expenses Section NATIONAL ASSOCIATION OF REALTORS

219 The Selling Plan A selling plan details: o Direct contacts that will be made via letter, phone, and personal meeting o Indirect contacts that will be made through the business network o Include the number of calls to be made, the support materials to be produced, and a general activity schedule Divide target markets into primary and secondary categories Primary targets have the most interest in a particular property and are slated for a face to face contact Secondary targets may not have a direct interest in a particular property but who are interested in good real estate investments and are contacted by phone or correspondence The Promotion Plan The property, the target audience, and budget all determine how a property will be promoted Critical tasks in advertising include media selection, art, copy, placement schedules, and frequency of ads Selling and advertising themes are the foundation of all promotional copy and selling activities o The best themes: Emphasize benefits rather than features Present overriding strengths of the property Meaningful to the target audience Promoting a Property Internationally There are a few differences promoting in an international marketplace o Conducting business on an international level takes more time so be be prepared to allow more time for results to materialize o Advertising should promote your company not just a property International buyers are sometimes surprised at the degree to which some real estate professionals, particularly those from the United States, promote themselves rather than their firms o Advertising in the financial papers of targeted cities can be effective if it is done consistently and frequently, otherwise, it is a waste of money 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-43

220 o International marketing efforts should be directed at developing long-term relationships rather than obtaining expected commissions o International selling requires greater travel and entertainment expenses Foreign clients prefer meeting the real estate professional personally They often expect you to visit them, not vice versa Showing properties to offshore clients may also entail bearing travel expenses for the prospective buyer o Promotional expenses are much higher in the international arena o Smaller real estate companies should focus on institutional advertising that promotes the company and the market This will help compete with larger companies that may be more familiar to foreign clients o Someone familiar with the culture you are targeting should review brochures or print materials Color, theme, text, and graphics often have different meanings in other cultures and countries Advertising and Fair Housing Laws Fair Housing Act restrictions on advertising apply to all forms of print and electronic media used to sell or rent housing o Newspapers, radio, television, websites, business cards, billboards, flyers, signs, posters, banners, and applications are all subject to fair housing laws The laws affect what you can and cannot say about a property o You may say anything to draw attention to features and benefits of a property provided it is true o You may not say or imply anything about the people, or the type of people, that may want to rent or buy a property For example, you may say a property has four bedrooms, is in a quiet neighborhood, or is handicap accessible. But, you cannot use expressions such as, four bedroom family home, quiet Hispanic neighborhood, or mature applicants preferred. Reread your advertisement for words with hidden or double meanings; keep descriptions accurate and focused on the features and benefits of the property Section NATIONAL ASSOCIATION OF REALTORS

221 Use the following questions to evaluate your advertisements and promotional material: 1. What is your message really saying? 2. Do the ads exclude any potential prospects or groups? 3. Do the ads describe the services of the firm and not the target market? Placement of advertisements o Be inclusive and make the same information available to everyone o If advertising on a Spanish radio station, also advertise on an English radio station o If posting a flyer in a Asian supermarket because the property is nearby, also post flyers in supermarkets in other parts of town Personal or business marketing o There is no restriction under the Fair Housing Act for a real estate professional to include a picture of themselves on their website or business card o It is illegal for the licensee to describe the race of prospective buyers they want to serve There may be state and local laws and regulations that apply to advertising and showing properties o Contact your local enforcement agency to learn about specifics o Most agencies provide printed materials about the legal details o Read all materials, whether they apply to owners, landlords, or tenants Refer to the Appendix for an advertising checklist which details what is allowed and prohibited according to the fair housing laws NATIONAL ASSOCIATION OF REALTORS Section 3-45

222 Optional Exercise: Case Study Jancik vs. HUD, 44 F.3d 553 (7 th Cir. 1995) In Jancik vs. HUD, Jancik owned a building in a large housing complex in suburban Chicago. Jancik placed an advertisement that included the phrase, mature person preferred. Suspecting a fair housing violation, the Leadership Council for Metropolitan Open Communities, a group that promotes fair housing, decided to test the property for fair housing law violations. Gunderson, a white female, spoke with Jancik by phone. After Jancik learned that Gunderson was 36, he stated, That s good. I don t want any teenagers in there. Jancik asked her to disclose her national origin, to which she replied Norwegian. Jancik asked if she was black Norwegian or white Norwegian. Gunderson asked if Jancik was inquiring about her race, and he replied affirmatively. They arranged to meet the next day. Allen, an African-American female, phoned Jancik two hours later. Jancik asked Allen about her occupation, income, age, marital status, race, children, and pets. Allen did not reveal her race, but did ask Jancik why he needed that information. He said that he had to screen applicants because the building s tenants were middle-aged. He did not want anyone who made a lot of noise, or had children or pets. Allen told him she had no children or pets, and they arranged to meet the next day. Upon arrival at the building the next day, both testers were told the unit was already rented. Based on reports filed by the testers, the Council filed a complaint with HUD, alleging violations of advertising rules regarding familial status, and violations of interviewing rules regarding race and familial status. The Administrative Law Judge held that Jancik violated the Fair Housing Act, awarded damages, and assessed a civil penalty. Jancik appealed both federal and local civil court decisions. The Seventh Circuit found that Section 3604 prohibits making or publishing any statement or advertisement that indicates any preference for a buyer or renter based on race or familial status. The court found that the use of the words mature person in the advertisement discriminated against the family status protected class as defined in the Fair Housing Act. The court also noted Jancik s statement that he did not want families with children in the building. The court affirmed the Administrative Law Judge s finding of discriminatory advertisements and statements. Section NATIONAL ASSOCIATION OF REALTORS

223 Court Decision Regarding the racial claim, the Seventh Circuit found that Jancik did not expressly indicate a racial preference, but that the context of Jancik s racial questions indicated intent to discriminate. Because Jancik s questions about race came directly after questions regarding other unlawful preferences, and because he had never rented to a black tenant, the court affirmed the Administrative Law Judge s decision that Jancik discriminated on the basis of race NATIONAL ASSOCIATION OF REALTORS Section 3-47

224 Prospecting and Making Contact Prospecting must be carefully planned and include target audiences and objectives for making contact Prospecting may be defined as either: o Direct: making personal contact with buyers, sellers or clients For international clients, this happens through intermediaries, introductions, or at trade shows and conventions o Indirect: using a business network for information that leads to buyers, sellers, or clients In either case a pre-planned course of action is needed When creating a plan, consider the following questions: o How can the target audience be most efficiently located? o What is the specific objective of a call to a targeted prospect? o How should the target be approached: telephone, letter, or face-toface? Prospecting for International Clients Indirect prospecting o Research network materials for leads o Contact spheres of influence for leads Direct prospecting o Primary o Secondary Method of approach o According to custom o According to priority Section NATIONAL ASSOCIATION OF REALTORS

225 Method of contact: o Face-to-face o Letter o Phone Contact objectives: o Establish a relationship o Market a property o Convey a message o Sell yourself and your company o Sell the market area o Sell the property Cultivation of a business network produces leads and referrals Decide which prospects are of primary importance in achieving business goals Contact by phone or letter may initially handle lower priority leads Face-to-face meetings are necessary for top priority leads, even if such meetings are expensive 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-49

226 Methods of Approach and Contact Methods of approach and contact will vary between a domestic practice and an international practice. Compare the following possible sequence of events: Domestic International 1. Make contact. 1. Establish indirect contact through an intermediary. 2. Present property and disseminate data. 2. Establish direct contact. 3. Analyze data. 3. Establish a relationship and make repeated personal visits. 4. Offer and negotiate. 4. Present property and disseminate data. 5. Close. 5. Analyze data. 6. Negotiate. 7. Close. Tokens and Gifts In many countries, it is customary to present a token or gift in conjunction with a meeting Giving gifts varies widely from country to country Research in advance whether giving gifts is appropriate and what type of gift would be appreciated Refer to the Appendix for further resources Section NATIONAL ASSOCIATION OF REALTORS

227 Qualifying Overseas Clients Qualifying an overseas client o Uncover a prospect s objectives o Determine whether the opportunity is worth pursuing o Ongoing learning process o Shapes the business agenda and the relationship itself o Define the relationship before qualifying a potential client o The success of qualifying depends on how relationship has been established Key points o What role/responsibilities does the client envision for the real estate professional o How long will the relationship last o How are relationships established in the client s culture o What personal traits and attributes does the client value Identifying investment requirements o General nature of investment and the client s intentions o Investment magnitude and/or structuring o Financial performance criteria o Property type and characteristics o Market, location, and site criteria o Alternatives under consideration Investment timeline o Starting point for search o Analysis period o Closing deadline o Build-out/improvement/construction dates o Project completion/move-in date o Marketing period Identify the client s decision-making structure 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-51

228 o How are real estate decisions made o What are the channels of communication and reporting o Who has the authority to make investment decisions Determine whether a client s investment capability corresponds to their stated intentions o What is the client s financial capability o What is the organization s experience level Refer to your business network to see if anyone has worked with this client o How have the clients structured previous investments o Where is the money o How will the money be transmitted to a seller o How does the client remunerate brokers Qualifying Unsolicited Parties There are many window shoppers in the international market o Looking for free information o No intention of maintaining your services Immediately begin the qualifying process o Client background and reputation o Client s previous purchases o Amount of money involved o Location of money to be used for transaction o When decisions will be made o Who will make the decisions o Is potential client talking to other real estate professionals Presenting Emphasize yourself and your company rather than the market and property aspects o Personal business practices Section NATIONAL ASSOCIATION OF REALTORS

229 o Professional ethics o Other international clients and closings o Knowledge of the local culture, language, and customs o Range of services o The team of professionals who assist you o Overseas offices and affiliations Present in person Provide written materials Videos and other material should be formatted for overseas use Property presentations o Provide detailed market information on local, state and regional levels o Substantiate what you say in printed form o Include every characteristic the client has indicated to be important o Provide maps of the market, county and state o Photographs of the city, neighborhood and property Include aerial photos if practicable Take extra time to clarify terms and procedures Ask the same questions in several different ways Repeat the answers Team up with other business professionals Use translators when necessary Have client visit the site to avoid any surprises later 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-53

230 Offering and Negotiating In offering and negotiating a property, pay particular attention to the cultural values and differences. Guidelines for negotiating transactions in the international arena include: Know and conform to local customs as much as possible Maintain the client s confidence in the value and fairness of the transaction Emphasize any ideas and values you share, despite disparate background. Exercise discretion and respect for all parties Work around any prejudices and stereotypes that may arise Follow the client s timetable Do not exceed the role you are expected to play Closing a Transaction Special considerations o Clients and funding institutions can be very slow in processing funds and financial instruments to close an international transaction o Pay attention to the timely transmittal of funds o Make sure all steps have been taken to comply with federal tax withholding, reporting, and transmittal laws Section NATIONAL ASSOCIATION OF REALTORS

231 Transnational Referral System The International Consortium of Real Estate Associations (ICREA) is a group of 24 national real estate associations that have agreed to support an international referral system. ICREA devised this referral system so their members can easily make and receive referrals across national borders. If someone is a member of one of the participating national real estate organizations, he or she is a defacto member of ICREA. A list of participating associations can be found at This international referral system is a legal agreement between consenting agents who are members of national associations affiliated with ICREA. Members of ICREA conduct real estate business using standardized referral procedures and are bound by a binding dispute resolution process. ICREA provides and assembles information so REALTORS have the opportunity to do business on a global scale. Primary benefits ICREA offers it members: Increased income Additional client relationships Participation in the new global marketplace ICREA also offers a 6-hour online Transnational Referral Certification course that teaches REALTORS how to integrate international referrals into their business plans and market themselves worldwide as "TRC" (Transnational Referral Certified). For registration details, visit ICREA s website, contains the transnational referral contract, arbitration forms, international real estate professional contact database, and detailed information on how to use the referral system NATIONAL ASSOCIATION OF REALTORS Section 3-55

232 Networking for International Business An international business network is a unique combination of people, data resources, and communication channels that enables you to: o Gain access to targeted markets o Maintain current market awareness o Reach prospective clients o Transmit information about local investment opportunities to foreign centers of influence and prospective clients o Make your own services and capabilities known NAR has a network of 66 cooperating agreements with 53 countries. Visit for a complete list. Refer to the Appendix for organizations specializing in local, national and international real estate. Organizing a Network A network is built by prospecting, researching, and investing your time with people and organizations To be effective, others must sense you are sincere, you respect them and are willing to share your talent, knowledge, and experience Keeping your network current requires organization and updating. A system similar to that used for maintaining domestic contacts and sales records is appropriate. A typical file-based system might include: Market files: surveys, market summary sheets, notes on contacts made, maps for each market in your specialty area A useful tool for condensing information about a market is a Hot Sheet. See a sample Hot Sheet on the next page. Permanent prospect and client files: records of contact with phone numbers, addresses, copies of correspondence and documents and conversation summaries Tickler file: dates for follow-up, call-back times, future convention and meeting information Map file: local, regional, and national maps; atlases; aerials; plats; surveys Spheres of influence files: information on organizations or connections such as societies, fraternities, clubs, embassies, companies and banks General file: magazines, trade journals, books, newspapers and clippings, filed by title, subject, or market Section NATIONAL ASSOCIATION OF REALTORS

233 Name of Country: Date revised: HOT SHEET Personal contacts: Institutional contacts: Real estate associations: Private sector organizations: Accounting and legal firms: Government agencies/contacts: Sources of market information: Business newspapers: Real estate journals: Local trade organizations: 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-57

234 Currency trends: Ranges of return rates: Hot Spots: Area: Property type: Brokerage laws/environment: Government disposition toward overseas clients: Remarks: Section NATIONAL ASSOCIATION OF REALTORS

235 Real Estate Market Profile of: Market inventory estimate: By property type: HOT SHEET By total footage: Year-to-year change: Pipeline product: Product economic profiles: Valuation/pricing by property type: Income and expense profiles by property type: Capitalization rates: Vacancy/occupancy rates by property type: 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-59

236 Absorption and construction trends: Lease profiles by property type: Types of leases in use: Typical lease terms term, rates per foot, escalators, concessions, abatements, etc: Real property taxation: Periodic tax, tax rate: Transaction rate: Financing: Customary practices LTVs, DCRs, security: Owners of financed property: Synopsis of transactions: Process: Conveyance: Professional team and roles: Real estate legal structure: Brokerage community operation: Section NATIONAL ASSOCIATION OF REALTORS

237 Maintaining a Network Suggestions for local and national networking resources Local Networking Resources Resources Multiple Listing Service (MLS) Tax records State and local REALTOR boards Commercial brokers Finance, insurance, and real estate firms Title companies, mortgage, law, accounting, property management, and appraisal firms Libraries Telephone directories Newspapers Information Available Market inventory, market demand, activity, and values Ownership data, taxes, square footage, and size MLS and other meetings, actual, pending, and upcoming activity Foreign activity in the marke; volume; who is buying, selling, and leasing properties; properties in demand; and leads Business and market studies and activities Reports, social functions, market activity, referrals, transaction data, ownership, and underwriting Articles and books on investment, foreign cultures, real estate laws, directories of foreign societies, fraternities, clubs, and organizations Local listings of foreign societies, organizations, clubs, and local offices of international firms Market activity, local conditions, and offerings 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-61

238 Resources National Networking Resources Information Available Chambers of commerce Data, reports, surveys, publications on foreign markets, market conditions, trends, channels, spheres of influence, foreign contacts, and leads Government agencies and commerce departments Foreign embassies in your country Foreign corporations in your country Banks (international departments) NAR International Section at Real estate societies, institutes, and councils National trade journals and newspapers Lists of foreign organizations, laws, and market conditions Customs, laws, data, reports, surveys, publications on foreign markets, market conditions, trends, channels, spheres of influence, foreign contacts, and leads Real estate managers, contacts, referrals, requirements, channels, and foreign practices Finance, currency markets, economic reports, laws, channels, and spheres of influence Meetings, customs, laws, data, reports, surveys, channels, spheres of influence, and foreign contacts Meetings, customs, laws, data, reports, surveys, publications on foreign markets, market conditions, trends, channels, spheres of influence, foreign contacts, and leads Relevant articles, current newspapers events, market conditions, and leads Section NATIONAL ASSOCIATION OF REALTORS

239 International Networking Resources Resources Information Available 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-63

240 Cultivating Your Network Some are more appropriate for an international practice than for a domestic practice. Earn your CIPS designation Always mention any business contacts you may share with clients or prospects Explore different business methods; share and explain yours with other real estate professionals A primary goal is to get a trustworthy and legitimate introduction Check credentials and references for potential international clients Explore methods of collaboration, e.g., referrals, fees, taxes, and shared commissions Be aware of a contact s cultural and social environment Always assume you do not know another real estate professional s international market and procedures Ask questions and be prepared to explain transaction details Recheck understandings and agreements Avoid the courtesy yes Market yourself; capitalize on a sale or purchase you have already completed by networking with the people involved in the transaction Promote yourself as a specialist in working with foreign clients Use your own ethnic background or language skills Join your local offshore trade missions Use your affiliated overseas business offices Contact local economic development commissions and present your properties and markets Volunteer for international organizations in your area Talk with leasing agents These suggestions for cultivating a network are offered by current NAR Certified International Property Specialists (CIPS) designees. Section NATIONAL ASSOCIATION OF REALTORS

241 Key Point Review A successful international marketing effort begins with matching property and market profiles to target buyer profile Well-prepared property and market profiles aid in the development of appropriate selling and promotional themes, and can be used to educate prospective clients Knowing how to approach foreign prospects in their cultural context to initiate and build relationships is essential in international prospecting Qualifying can uncover a client s desires, motivations, and plans without offending the client Presentations to foreign clients should emphasize reputation and international experience Know whether a client has the financial capability to fund an investment, and whether the funds will actually arrive at closing Discussion Question 1. Prospecting, marketing, selling, and closing international transactions can be complex and time-consuming endeavors. As you assess your current skills, practice, and network, what do you see as the most challenging part of the process? 2. What plans, activities, or contacts would be most beneficial to you for initiating or growing your international practice? 2007 NATIONAL ASSOCIATION OF REALTORS Section 3-65

242 Section NATIONAL ASSOCIATION OF REALTORS

243 Appendix Chapter 10 The History of Fair Housing 13th and 14th Amendments After the Civil War, there was a flurry of legislative activity about granting full citizenship to blacks and former slaves. The 13th Amendment abolished slavery and the 14th Amendment guaranteed all persons due process and equal protection under the law. Civil Rights Act of 1866 Among civil rights laws enacted by the Reconstruction Congress is the Civil Rights Act of 1866, which specifically guarantees, all citizens of the United States shall have the same right to inherit, purchase, lease, sell, hold and convey real and personal property as is enjoyed by white persons. Civil Rights Act of 1968 Following the assassination of Dr. Martin Luther King, Jr., Congress passed the Civil Rights Act of 1968, which included Title VIII, now commonly known as the Fair Housing Act. It specifically prohibited discrimination in housing because of race, color, religion, or national origin. This, along with the Supreme Court s decision in the Jones v. Mayer case, which held that the Civil Rights Act of 1866 applied to acts of individual discrimination, was the beginning of a comprehensive body of fair housing laws in the United States. Fair Housing Act Amendments Amendments to the Fair Housing Act in 1974 prohibited discrimination based on gender. Further prohibitions against discrimination because of handicap and familial status were added in The 1988 amendments also added procedures for administrative enforcement of the Fair Housing Act by the U.S. Department of Housing and Urban Development, and provided increased penalties for housing discrimination. 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-1

244 The Law The Civil Rights Act of 1866 The Civil Rights Act of 1866 prohibits racial discrimination in the sale or rental of property. Fair Housing Act The Fair Housing Act, as amended in 1974, 1988, and 1995, declares a national policy of fair housing throughout the United States. The law makes illegal any discrimination in the sale, lease advertising, financing of housing, or making housing otherwise unavailable because of: Race Religion Color Sex Handicap Familial status National origin Modifications and Accommodations for People with Handicaps In 1988, Title VII was added to the Fair Housing Act. Title VII prohibits discrimination against people with handicaps. It requires two types of changes to make existing housing more accessible to people with handicaps: Handicapped persons must be allowed, at their own expense, to make reasonable accommodations for the enjoyment of the premises. Reasonable accommodations must be made in rules, policies, practices, or services necessary to afford handicapped persons equal opportunity to use and enjoy a dwelling. Under this law, housing providers must allow renters with handicaps to make reasonable modifications to the premises. The term, premises, applies to the interior of the handicapped person s unit and lobbies, main entrances, and other public and common use areas of a building. The handicapped person is responsible for the cost of modifications and must obtain approval for the modifications from the landlord. Housing Appendix , NATIONAL ASSOCIATION OF REALTORS

245 providers do not have an absolute right to reject proposed modifications, nor select or approve who will do the work. However, a landlord may require a description of the work, reasonable assurances about the quality of the work, and that appropriate or required building permits will be obtained. In rental situations, the landlord may require, with some limitations, the renter to restore the premises to its prior condition. Restoration work can only be required where it is reasonable to do so. For example, making a door narrow again after it has been widened is not considered reasonable. Prohibitions of the Fair Housing Act Following are the prohibitions as contained in Sections 804,805, 806 and 818 of the Act. Refusing to rent a dwelling, whether outright or subtly by using techniques to confuse or harass the applicant, and rescinding an offer upon learning of a person s protected status. Using of discriminatory terms, conditions, or privileges in the sale or rental of a dwelling. Using of discriminatory advertising with respect to the sale or rental of a dwelling. Misrepresenting that a dwelling is not available for inspection, sale or rental, when it is in fact available, to any person of a protected class. Attempting to influence, for profit, someone to sell or rent a dwelling based on fears about entry into the neighborhood by a member or members of a protected class. This practice is commonly known as blockbusting. Denying the opportunity for sale or rental of a dwelling to people with handicaps. Refusing mortgage loans and/or financial assistance based on membership in a protected class. Discriminating in providing brokerage services. Coercing, threatening, intimidating, or interfering with any person s exercise of his or her rights provided under sections 803, 804, 805 and 806 of Title VII. 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-3

246 Exemptions under the Fair Housing Act Single-family houses, if the owner: o Owns, sells, or rents the house. o Owns three or less homes at any one time. o Does not use the services of someone in the real estate business. o Does not advertise in violation of Section 804(c). House or living quarters that are occupied or intended to be occupied by no more than four families living independently, and the owner maintains or occupies one of the living quarters. Owner duplexes are eligible. Religious organizations, association, or societies can give preference to such persons if it is not discriminatory. Non-profit organizations or private clubs can give preference to such persons if it is not discriminatory. Housing for older persons is exempt from familial prohibitions. The law also allows housing providers to adhere to reasonable occupancy standards for the number of people who may live in a dwelling. People who have been convicted of manufacturing or distributing illegal drugs are not protected by the Fair Housing Act. Americans with Disabilities Act Title III of the Americans with Disabilities Act prohibits discrimination against persons with disabilities in places of public accommodations and commercial facilities. Equal Credit Opportunity Act The Equal Credit Opportunity Act makes discrimination unlawful with respect to any aspect of a credit application on the basis of race, color, religion, national origin, sex, marital status, age, or because all or part of the applicant s income derives from any public assistance program. State and Local Laws State and local laws often provide broader coverage, and prohibit discrimination based on additional classes not covered by federal law, such as age, source of income, marital status, occupation, sexual orientation, and unfavorable discharge from the military. All real estate professionals need to keep informed about these laws. Appendix , NATIONAL ASSOCIATION OF REALTORS

247 Census 2000 Demographic Profile Highlights General Characteristics Number Percent Total population 281,421, Male 138,053, Female 143,368, Median age (years) 35.3 (X) Under 5 years 19,175, years and over 209,128, years and over 34,991, One race 274,595, White 211,460, Black or African American 34,658, American Indian and Alaska Native 2,475, Asian 10,242, Native Hawaiian and Other Pacific Islander 398, Some other race 15,359, Two or more races 6,826, Hispanic or Latino (of any race) 35,305, , NATIONAL ASSOCIATION OF REALTORS Appendix-5

248 Average household size 2.59 (X) Average family size 3.14 (X) Total housing units 115,904, Occupied housing units 105,480, Owner occupied housing units 69,815, Renter occupied housing units 35,664, Vacant housing units 10,424, Social Characteristics Number Percent Population 25 years and over 182,211, High school graduate or higher 146,496, Bachelor's degree or higher 44,462, Civilian veterans (civilian population 18 years and over) Disability status (population 21 to 64 years) 26,403, ,553, Foreign-born 31,107, Now married (population 15 years and over) Speak a language other than English at home (5 years and over) 120,231, ,951, Economic Characteristics Number Percent In labor force (population 16 years and over) Mean travel time to work in minutes (population 16 years and over) 138,820, (X) Median household income (dollars) 41,994 (X) Median family income (dollars) 50,046 (X) Per capita income (dollars) 21,587 (X) Appendix , NATIONAL ASSOCIATION OF REALTORS

249 Families below poverty level 6,620, Individuals below poverty level 33,899, Housing Characteristics Number Percent Single family owner occupied homes 55,212, Median value (dollars) 119,600 (X) Median of selected monthly owner costs (X) (X) With a mortgage 1,088 (X) Not mortgaged 295 (X) (X) Not applicable. Source: U.S. Census Bureau, Summary File 1 (SF 1) and Summary File 3 (SF 3) 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-7

250 Advice on Reporting Acts of Discrimination When working in the housing market, you may encounter situations that appear to be discriminatory in violation of fair housing laws. To protect the prospective home buyer s rights to equal opportunity in housing, and to keep yourself from participating in discriminatory acts, you need to take the following steps: If the party discriminating is your client, or is not a client of any other REALTOR : Talk to the party who appears to be violating the law and explain fair housing laws. Ask the party to act in a nondiscriminatory manner. This request is often enough to resolve the situation, and results in the home seeker having access to housing as guaranteed by fair housing laws. Always follow up with a letter summarizing your discussion. If the party discriminating is a client of another REALTOR : Talk to the other REALTOR and explain your concerns. Ask the other REALTOR to speak with the client and end the discriminatory behavior. Follow up with a letter summarizing your discussion. If the discrimination is not ended or corrected, and the party discriminating is your client: End your relationship with that client, i.e., terminate the listing. Inform the home seeker about what occurred, and state your belief that discrimination was involved. Provide the home seeker with information about filing a complaint. Follow up with a letter to the client, and to the home seeker summarizing your discussions and actions taken. If the discrimination is not ended and the party is not your client: Inform the home seeker about what occurred, and your belief that discrimination was involved. Provide the home seeker with information about filing a complaint. Follow up with a letter to the home seeker summarizing your discussion. If the discrimination is not ended and the party is another REALTOR : In addition to the above, you may file an ethics complaint with the NAR s Board of Directors alleging violation of Article 10 of the Code of Ethics. Appendix , NATIONAL ASSOCIATION OF REALTORS

251 Chapter 7 Cultural Sketches Japan Cultural Sketch The Japanese way is to eliminate tension, promote group spirit, and maintain harmony. Vertically structured relationships govern life; individual rights are strictly subordinated to the interests of the group. Decision-making is reached by consensus. People are racially and culturally very homogeneous; they may have difficulty accepting outsiders. Logic is flexible and subjective, based on adaptation to circumstances and feelings, rather than on fixed principles. Business Advisory Use a Japanese go-between to sound out a company s interest in a proposal in advance; otherwise, much time and effort may be spent before hearing the word no. Address the Japanese by their last names and the suffix san. Never suggest that they call you by your first name. Never discuss serious business at first meetings (heists); they are reserved for establishing a recognized official relationship. Use business cards that include a Japanese translation on one side. The exchange of business cards establishes one s credentials. Handle others cards very carefully; never write on them or put them in your back pocket. Expect to participate in extensive entertainment after business hours. This is generally to develop relationships, but business may be discussed as well. Give and/or receive gifts with both hands and a slight bow. Do not open gifts in front of the giver. Keep in mind that the Japanese do not like to sign restrictive contracts; they prefer loose arrangements based on trust and goodwill. 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-9

252 South Korea Cultural Sketch South Korea is one of the most homogenous nations in the world, both racially and linguistically. Confucianism is the basis of conduct and character for most Koreans. It calls for total loyalty to a descending hierarchy of authority, moving from parents to family, to clan, to community, to nation. The South Korean culture is collective; individuals may speak for the group, but decisions are made by consensus. A sense of harmony (kibun) must be maintained at all times. Class, breeding, and character are defined by the ability to control emotions. Men tend to dominate in public situations. Business Advisory Be punctual, even if your Korean counterparts aren t. Be sincere and honest; relationships are more important to Koreans than the actual business at hand. Keep in mind that Koreans will often tell you what they think you want to hear; maybe usually means no. Recognize that Koreans are distinct from other Asians in food, language, and culture. Understand that giving gifts to acquire favors is common in the workplace. Do not open gifts in the presence of the giver. Be aware that reading faces (nunch'i) is a well-developed art in which others are assumed to be well versed; words may be misleading. Appendix , NATIONAL ASSOCIATION OF REALTORS

253 China Cultural Sketch The Chinese are masters of the oblique. What is not said is often more important than what is said. The Chinese will tell you what they think you want to hear. Social status and connections are very important. Chinese culture is collective. Decisions are made by a group leader and individuals are expected to follow them. The Chinese tend to make subjective decisions based on prior experience; feelings can be accepted over facts. Business Advisory Use titles with a person s surname. Be aware, however, that Chinese names are in the following order: surname, generational name, and birth name. Bring business cards with the translation printed in Mandarin on the other side. Understand that gift-giving is technically against the law, but is becoming a more acceptable practice. A gift from your organization to the Chinese one is acceptable. Keep in mind that the Chinese normally decline three times before accepting. Remember that eye contact is important; eyes should be slightly lowered during introductions to show deference and respect. Allow for consensus decision making. Be aware of feng-shui practices that are believed to harmonize life. Feng-shui involves manipulating the environment, including the placement of buildings and objects, to produce good fortune. Expect business discussions to be conducted by the senior officials of each party. 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-11

254 Australia Cultural Sketch Australians are generally open-minded and trusting of others until given reason not to be. Rules and laws take precedence over emotions. Individualism is important in decision making, but decisions are always subject to company policy. The nuclear family is the strongest socializing force. There is a great deal of emphasis on ability rather than on rank or wealth. Australians are highly ethnocentric and take great pride in their country. Business Advisory Be punctual. Australians believe that tardiness conveys a careless attitude. Be direct. Australians value a forthright and honest manner. Do not use high pressure negotiating tactics. Approach presentations with modesty, brevity, and a degree of casualness. Keep in mind that academic qualifications are downplayed in public. Do not give gifts in a business context. However, if you are invited to someone s home, it is appropriate to bring a gift. Do not discuss business in social settings unless your Australian counterpart does so first. Appendix , NATIONAL ASSOCIATION OF REALTORS

255 United Kingdom The United Kingdom actually consists of four countries united under one government: England, Scotland, Wales, and Northern Ireland. (Great Britain includes only England, Scotland, and Wales.) It is difficult to make any regional generalizations about the United Kingdom, but the following sketch should give you some idea of what to expect when doing business there. Cultural Sketch People maintain a strong sense of identity, particularly in distinguishing themselves from other nations. People take great pride in both national and individual accomplishments. Practical and reserved behavior is the norm; people do not tend to warm quickly to strangers or indulge in extravagant behavior. Class and school networks are important in all contacts. The multiracial population is not thoroughly assimilated. Business Advisory Know the difference between the English, the Welsh, the Scots and the Irish; not everyone from the United Kingdom is an Englishman. Also, the English do not consider themselves European. Be aware that relationships among management levels are becoming more informal. Expect decision making to be in the hands of an executive committee or of an owner. The process may move slowly. Understand that U.K. citizens tend to disdain written contracts; a handshake or an oral agreement will do. If you must have a contract, present it tactfully. Feel free to discuss business at meals, but do not expect to discuss it very seriously. Do not regard being invited to an executive s home as a special favor. It is not unusual, but it may mark an important stage in the business relationship. 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-13

256 The Czech Republic Until recently, Europe was deeply divided by Soviet rule and the Warsaw Pact. Today, however, Eastern Europe is no longer under communist rule, and both the business and cultural environments are evolving. As a result, Eastern European countries, such as the Czech Republic, are becoming more like their democratic counterparts in Western Europe. Cultural Sketch The population is well educated and maintains a 99% literacy rate. The Czechs value relationships more than obedience to rules. The Czechs tend to be open to most information. Decision making is the responsibility of the individual. Individual achievement is more important than family in determining status. Women are treated as equal to men in all areas of society. Business Advisory Anticipate that the decision-making process will be slow. Consider hiring a Czech business lawyer to help you understand changes in Czech law. Always engage in polite conversation before getting down to business. Bring plenty of business cards, but do not worry about having them translated. Consider it a great honor to be invited to a Czech business associate s home; bring flowers. Discuss business before and after but not during a meal. Appendix , NATIONAL ASSOCIATION OF REALTORS

257 Canada Cultural Sketch English and French are the official languages; French is predominant only in Quebec. Canadians are generally analytical and favor the objective over the subjective. There is a strong sense of ethnocentrism within each province, particularly in Quebec, where citizens are considered French Canadians. Emphasis is placed on ability, and individual recognition is highly valued. Emotion is not shown in public. Business Advisory Use eye contact, a firm handshake, and a friendly manner when working with Canadians. Use titles with a surname to show respect. Do not use first names unless your counterpart suggests you do so. Do not be overbearing. Allow your Canadian counterpart to be the first to bring up business at dinner. Be aware that invitations to dine at a Canadian home are unlikely. If you do visit a home, however, take a gift. Remember that business gifts are usually exchanged at the close of business. It is common to host a dinner or entertainment for your counterparts. 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-15

258 Mexico Cultural Sketch A strong allegiance exists to the Catholic Church. An individual is responsible for his/her own decision, but the good of the family/group is most important. Subjective feelings are often used as the basis for truth. Women are well respected. Age and rank are held in high esteem. People are informal and open in sharing feelings. Business Advisory Be sure that the first contact is between the highest-ranking people in both firms. Shake hands upon greeting and departing. Learn the abrazo greeting: a handshake, two pats on the back, and a handshake again. Do not refer to the United States as America. Mexico is also the United States (of Mexico) and it is in North America. Be aware that questions are typically answered with the intention to please, even when the information is known to be incomplete or the requested action impossible. Remember that people are more important than schedules; meetings are often interrupted by personal visits. Be aware that short-term profits are commonly preferred over long-term results. Choose the best possible hotels and restaurants; Mexicans are very status conscious, and they will pay close attention to your choices. Appendix , NATIONAL ASSOCIATION OF REALTORS

259 Brazil Cultural Sketch Portuguese is the official language; Brazilians resent being spoken to in Spanish. Brazilians tend to be more analytical than their Latin American counterparts. They examine a situation rather than prescribe to universal laws or rules. (Nevertheless, subjective feelings can always take precedence over facts.) Family loyalty is the most important obligation. Church and family provide structure and stability. The concepts of class and status are still strong. Color, gender, and economic/social biases continue to exist. Business Advisory Be prepared to wait. Punctuality is not a revered trait in Brazil, and negotiations may move slowly. Be sure to shake hands with everyone in a group upon both arrival and departure. Handshakes may progress to embraces as the relationship develops. Be prepared to discuss all aspects of a contract simultaneously rather than in sequence. Use a local accountant or lawyer for contract issues. Brazilians may resent an outside legal presence. Gift-giving is not required; buy lunch or dinner instead. Present a gift later in a relaxed social setting. 2007, NATIONAL ASSOCIATION OF REALTORS Appendix-17

260 Saudi Arabia Cultural Sketch Religion and language are deeply embedded in Saudi culture. The Arabic language receives almost mystical devotion, and the Islamic prescriptions on proper behavior penetrate every aspect of life. Apart from the royal family, unstratified families and clans rather than classes dominate the social structure. In spite of much contact with the West, Saudis remain highly traditional and resistant to foreign influences. Male leaders are the decision makers, but they come to conclusions through group consensus. Tensions, allegiances, and alliances with other nations in the region are significant and control much thinking and policy. Public life is reserved for men only. Business Advisory Obtain introductions and/or personal references from a Saudi sponsor whenever possible. Establish personal trust. This is paramount; many Saudis feel that foreigners cheat and take advantage of them. Schedule meetings around prayer times and the Islamic calendar. Fridays are holy days. Be patient. Business meetings tend to start slowly with small talk and personal inquiries; decisions occur slowly. Expect Saudis to take care of entertaining in their country. Use only your right hand in passing something to another. Never show the soles of your feet; this is considered offensive. Appendix , NATIONAL ASSOCIATION OF REALTORS