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December 29, 2014
Guest article by Michael Cobb:
Part three of the 15 Critical “Must Ask” Questions when Buying Real Estate Overseas deals with “Knowing the Developer” and using the marriage analogy here is appropriate. Not many of us meet a girl in a bar and get married the next day, but it does happen. When it does it might fall under the category of “Margarita Madness,” a malady that sadly affects many travelers to Latin America as well as they are struck by marriage at first site.
So when you decide that you want to own a piece of property outside North America, you should consider it like a marriage. Generally, we get to know several ladies in our lives, find one that is a very good fit, court her for weeks, months, or even years, and then after we know her pretty well we ask her if she’ll marry us. If she says yes, we tie the knot.
Tie the knot is a great way to look at owning real estate overweas. In the previous article we discussed big brother and here is the good news/bad news about big brother again. Good news, he isn’t generally around much south-of-the-border. Bad news, you are responsible for what happens. Just as there are few or no zoning laws as discussed in part two of this series, there are also no bonding agencies, or fair reporting commissions to protect you from outright lies at one end of the spectrum, or just good intentions gone awry at the other.
The questions in the “Know the Developer” section below is all about who the developer is, why they exist, how they plan to get from point A to point B, and do your philosophies and values align with their own. A very simple way to know a lot about the developer is to ask them for a business plan. Do they have one? Developing real estate is a business after all and a wing and prayer is hardly the best way to come about it. Ask to see the business plan. Read it and make sure it is comprehensive and makes logical sense to you. Also, who are the people on their team? What experience do they have? Is there a proven track record or is this their first experiment with you as a guinea pig? What is their commitment? When the going gets tough what is keeping them there to grind it out through the middle of the marathon? Everything takes longer and is far more difficult in Latin America. Why will they stay? Look for answers in this case that make sense in your heart.
Again, owning a piece of property is like a marriage. If it’s a good one you’ll be happy. If not, you’ll be stuck with the developer for the next decade or two. You might want to know who they are a little better than what you can learn over a few drinks under some palm trees in paradise.
A great sales psychologist states that “we buy emotionally and justify logically.” Margarita Madness sets the euphoric mood to buy emotionally. These 15 critical questions, the last 5 of which are below, show us how to justify logically. Both parts of our brain, the emotional and the logical, are critical for happiness and satisfaction with property ownership. It’s a marriage after all. Get it right the first time. Divorce is expensive.
Knowing the Developer
How will you build your home from thousands of miles away? Who can oversee the construction of the home, and what is included? Look for projects that show homes as examples of what you will actually receive. What are the written specifications? What do the Architectural CC&R’s dictate? Are you in agreement with them? Have they planned property for 220v water heaters and air-conditioners, are there hot water lines to all the sinks and showers? Are lights, fans, faucets and other fixtures included in the price? Are appliances and AC units included? Is there a dryer vent or a water line to the fridge? How about the telephone and cable TV wires? Are they included in the price? What are the engineering guidelines? Who is going to validate these specifications as the home is constructed? All of these things and more we assume as North Americans. Verify and assume nothing. Remember, you get what you inspect, not what you expect.
Is the Development Company financially solid and do they have a record of success? Is financing available for Property Ownership? Remember buying a property in a foreign country is like getting married. You should know very well who you are marrying. Hopefully the developer will be around for many years and, if so, you want to be sure you are comfortable with the long term association. Ask to see a copy of a business plan. Ask to see financials. You are the buyer and you have every right to ask to see financials, especially if they’ve promised something like future amenities. You need to know who they are and if they will be around for a long time. Remember, you are going to send them your hard earned money. There are no bonding agencies holding their feet to fire to complete anything they promise. You are counting on the people and company involved to make good now and for upcoming years.
If they’ve promised an ROI on rental return, ask to see cancelled checks to owners. If they’ve returned 8-12 percent returns to owners, they’ll be proud to show you the cancelled checks. In addition because financing is rare in the region, the developer should provide a form of financing as a buyer’s option. This shows financial stability. It also will indicate that they are not using your money to build promised infrastructure and amenities. Build outs based on sales flow can stall in down markets leaving buyers with half built projects to complete and fund as a HOA.
Is there a central sewer system? This may seem like an odd question to put under the heading of “Know the Developer,” but here’s the logic. When a developer doesn’t plan a central sewer system, what they are in fact doing is pushing the cost of the waste disposal off to the property buyer. Depending on soil type, this may or may not be a big issue. But either way, property owners will be responsible for paying for and installing septic systems. If septic is the provided solution, request to see a copy of a perk test. Many soils of Latin America are heavy clay. Lot owners may be forced to install expensive systems to meet environmental codes. Worse, without proper zoning and environmental inspections from big brother, many property buyers may not install what is hygienically required leading to a nasty situation, especially in rainy season.
What about safety and security access? Around the clock security should be provided at any public entrance with cooperating backup from local and national police. Generally, the municipalities will not have the funding or staff to provide the kind of security North Americans are used to. Prevention and deterrence is the key here, and a strong visible presence prevents the kind of petty theft so often happening in the region. Be sure it exists and works. Were you let through the gate no problem? Who else can get through? A tough time getting in through the gate yourself, means others will face it as well.
What kind of title guarantee can be provided? If you can’t get title insurance, you should seriously reconsider the purchase. There are no legitimate reasons you should not be able to get this protection from a major company like First American or Stewart. This is a black and white issue. Either the seller has title and you can get a policy, or you should walk away. There will always be a story. Believe it at your own peril.
About Michael Cobb
At the height of a successful career in the computer industry, Michael Cobb left to pursue pioneering opportunities in the emerging markets of Central America. He formed ECI Development, a multi-country developer with projects in 5 countries: Belize, Nicaragua, Costa Rica, Panama, and Ecuador. The model is based on the Del Webb Sun City active senior communities in the U.S., and it serves North American consumers with familiar product in multiple geographies.