The United States is a country with a population of 264 million and a territory of over 3.5 million square miles. The gross domestic product in 1993 exceeded $ 6 trillion with a per capita GDP of $24,700. The U.S. is a federal republic based on a division of powers between the 50 states and the federal government. Each state has its own set of laws governing the conduct of business within its jurisdiction. Its strong democratic tradition and economic stability make the United States a magnet for foreign investors, individuals and corporations alike. Another reason for foreign investors' interest in the U.S. is its relative homogeneity. There is only one currency and no internal trade or customs barriers. In addition, the U.S. has a very efficient advertising and distribution system. Communications within the country are also very advanced. Last but not least, economic policy as well as laws and regulations create a very open and reliable environment for investors.
The U.S. stock market is composed of various stock exchanges and over-the- counter market. The American Stock Exchange (ASE) and the New York Stock Exchange (NYSE) are the most important stock exchanges but there are also other smaller, regional exchanges in various areas of the country.
The 1933 Securities Act requires the filing of a registration statement and a related prospectus with the Securities and Exchange Commission (SEC), to provide disclosure of relevant facts in connection with the sale of securities to the public. Some securities need not be registered if they do not constitute a public offering or because they are sold exclusively within the boundaries of one state. The Securities and Exchange Act of 1934 regulates the trading of already issued securities. The Act also regulates securities exchanges, brokers, transfer agencies and securities associations. Intrastate sales of securities are regulated by individual states through their state securities commissions. Many states require the licensing of dealers in securities and require securities registration. It is therefore important to analyze a state's laws in order to determine whether they apply to a sale within the state.
Real Estate, both commercial and residential, is one of the most popular investments in the United States. Real estate transactions are entirely governed by state law. Unlike certain foreign countries, the U.S. and the states of the Union do not pose significant restrictions on ownership of real estate by foreigners. One main difference is in the manner in which capital gains tax (the tax on profits made through the sale of real property) is collected. U.S. citizens and residents ordinarily report capital gains on their tax return. Non- resident aliens, on the other hand, must pay a percentage of the sale price to the U.S. Treasury and later claim the difference (if any) between the tax due and the amount paid. The percentage of the sale price is withheld by the seller or his/her attorney and turned over to the Internal Revenue Service at the time of the closing of title.
There are three types of residential properties in the U.S. One is the individual house or townhouse which is sold with the land. A buyer buys this type of property in "fee simple absolute", which means he and his heirs will own the property forever. The second type is the condominium. An apartment in a condominium building is sold as an individual unit with the use of certain amenities in common with the other condominium owners. Although the condominium owner does not own the land or the common areas, he does have title to the individual unit. The third type of property is the cooperative. A cooperative is a corporation which owns a building. The buyer of an apartment in that building does not get title to an individual unit. He gets shares in the corporation together with a lease, or right to occupy a specific apartment.
Several entities are involved in a real estate transaction. In addition to the seller and buyer, there usually are one or more brokers or real estate agents. Real estate commissions are ordinarily paid by the seller. The real estate agent who lists the property will get the entire commission only if he actually finds the buyer. If not, he must share the commission with the broker who actually finds a buyer. When a lender is involved, it is a crucial party to the transaction in that it sets many requirements which must be met before the transaction can go through. Those requirements usually involve a thorough investigation of the borrower's financial status, an inspection of the property, the securing of insurance on the property and a title search to determine whether any liens have been placed on the property or the tile has any defects. The title company is the entity which insures title to the property. Insuring title means that if defects are later discovered with the title, the title company will be liable for it. For that reason, the title company ends up doing most of the paperwork required in order to close title. The paperwork involves dozens of affidavits and other documents. As new regulations are enacted, every year the volume of documents needed to close title seems to increase. In some states like New York, both the buyer and the seller have an attorney representing them. In other states, the legal work is done by the title company, the lender and the real estate broker. Attorneys get involved only if there are complications or claims.
Commercial real estates transactions run the entire gamut of possibilities. They can involve the purchase of a three story apartment building or the development of a shopping mall. The problems involved can be quite complicated. Attention should be paid to real estate regulations, construction codes, zoning laws and, rent regulations. The list of things to check is too long to be include in this article. A competent real estate attorney should be consulted before making any investment decisions in this area.
Residential investments are a little more difficult to define in the sense that, in addition to a return on the investment, they also usually involve matters of personal taste and preference. A company or individual who purchases an expensive townhouse or glamorous apartment is usually looking for intangible benefits such as prestige, character and other elements distinct from purely financial considerations. A whole set of problems also surrounds residential real estate transactions which do not come into play in commercial deals. In the purchase of a house, for example, it is important to carefully study the local zoning laws or applications for variances to determine whether the neighborhood is going to maintain its quality and residential character. Getting an idea of tax assessments in a certain area or town is also important to determine whether real estate taxes are excessive with respect to the services available. The quality of the school system is important not only for families with children but also with regard to the general quality of a neighborhood. Proximity to a metrorail system or other mass transit is also an important issue.
In the purchase of a condominium, an investor needs to be aware of several potential problems. Condominiums have boards designed to screen potential buyers and approve a lease by a condominium owner. They also have the function to screen potential tenants of owners. While such boards have the function of protecting the property and avoiding problems for the condominium, their power is often unchecked and can easily turn into a nightmare for an owner. By failing to approve a potential tenant, a condominium board can in effect block the rental of a unit, thereby causing financial loss to the owner.
Cooperative apartments are the closest thing to a fraud, short of breaking the law. Here is how it usually works. An individual or company buys an old building and "converts" it to a coop by forming a corporation. If the price of the building is, say, one million dollars the speculator, or rather the corporation who now owns the building (cooperative), borrows $ 2 million. $200,000 are then spent in renovations and $50,000 put aside as a special fund. The corporation then sells its shares to the existing tenants of the building or to outsiders. As was explained above, apartment buyers are not really buying an apartment but shares of the corporation which owns the building along with an agreement that gives them the right to occupy a specific unit. When all the shares are sold, the corporation will have only a small fund left and $750,000 in debt and the speculator walks away with a handsome profit. Since the corporation is now owned by the apartment buyers (they have bought the shares of the corporation), they are the ones who have to pay the debt and the interest. They normally do so through exorbitant monthly "common charges" or "maintenance fees". How is all that legal? The answer is in the "prospectus". The prospectus is a large book which discloses all the financial transactions relating to the co-op conversion. As long as you disclose it, you can do almost anything. It could not be stresses enough how important it is to fully examine the prospectus before purchasing a co-op apartment. Better yet, a prudent investor should avoid co-ops altogether if possible. Many things can go wrong with that type of investment. The typical problem is the refinancing of the loan of the corporation. If the loan was originally a balloon (no interest for a certain period of time), the monthly payments would be artificially low until the debt is refinanced. When that happens it is not unusual to see maintenance fees double within a year.
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