15 Critical “Must Ask” Questions When Buying Real Estate Overseas – Part 3

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.

Don’t Forget the Title Insurance

December 10, 2014

Guest article by Greg Fencik:

In real property law, title is the means whereby a person’s right to property is established. Title should not be confused with a deed. A deed is merely a piece of paper that serves as evidence of title. The possessor of a deed may not, in fact, have legal title to the property described in a deed. For example, a deed may be forged. A deed may be one of multiple deeds issued by a prior property owner. A deed may stem from a deed that was one of multiple deeds issued by a prior property owner. There may be a mistake in the description of the property in a deed. In these instances, the person who has the deed may not have legal title.

Title isn’t just a piece of paper, be it a deed or otherwise. Title is the right to do with the property whatever the title holder sees fit (provided, of course, that it’s legal). Title insurance is a means by which buyers of real property and mortgage lenders protect their respective interests in the property against losses due to flawed titles.

Most people are familiar with health insurance, auto insurance and homeowner’s insurance. Each of these types of insurance provides coverage against future losses – things that may occur in the future. For this future coverage, healthcare insurers, auto insurers, and homeowner’s insurers charge periodic premiums from the date of purchase of the respective policy until the policy is cancelled or non-renewed.

Title insurance provides insurance against defects in the title to real property. Title insurance ensures that the purchaser/owner of real property to which the policy applies has legal title – the right to do with the property whatever the title holder sees fit (e.g. develop the property, sell the property). Unlike providers of healthcare insurance, auto insurance and homeowner’s insurance, title insurers charge a one-time premium for the provision of what is essentially a lifetime insurance policy. There are a number of title insurance providers in Florida – First American Title, Stewart Title Guaranty Company, Old Republic National Title Insurance Company, and Fidelity National Title of Florida, to name just a few.

In Florida, title insurance is regulated by statute and by administrative rules. See, generally, Fla. Stat. §§ 627.7711 – 627.798.

Florida statutes define a title insurer as:

Any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance. Fla. Stat. §627.7711(3).

By statute, title insurers are obligated to perform title searches and to examine information upon which a determination can be made that there is valid legal title:

A title insurer may not issue a title insurance commitment, endorsement, or title insurance policy until the title insurer has caused to be made a determination of insurability based upon the evaluation of a reasonable title search… has examined such other information as may be necessary, and has caused to be made a determination of insurability of title… in accordance with sound underwriting practices. Fla. Stat. §627.7845(1).

A title search is “the compiling of title information from official or public records.” Fla. Stat. §627.7711(4). What constitutes such other information as may be necessary is not defined by statute. It stands to reason that a title insurer will engage in a thorough investigation of title before providing insurance for the title so as to minimize the likelihood that it will have to pay a claim. [1]

Title insurance is issued to owners and/or to lenders (e.g. North American Savings Bank or NASB). Title insurance policies are, thus, referred to as owner’s policies and lender’s or loan policies, respectively. First American Title explains the difference here.

The premium charged for title insurance in Florida is dictated by statute and by administrative rule. SeeFla. Stat. §627.727, Fla. Admin. C. 69O-186.003. The premium charged for an original owner’s policy is a function of the value of the property to which the title applies:

Per Thousand
$0 to $100,000 of liability written $5.75
Over $100,000, up to $1 million, add $5.00
Over $1 million, up to $5 million, add $2.50
Over $5 million, up to $10 million, add $2.25
Over $10 million, add $2.00

Fla. Admin. C. 69O-186.003(1)(a)1.a. [2]

The premium for a loan policy, which the Florida Code refers to as original mortgage title insurance, is the same. For a one-time premium, title insurance policy holders obtain insurance against a number of covered risks. Covered risks typically include:

1. Someone else owns an interest in the title.
2. Someone else has rights affecting the title because of leases, contracts, or options.
3. Someone else claims to have rights affecting the title because of forgery or impersonation.
4. Someone else has an easement on the land.
5. Someone else has a right to limit the use of the land.
6. The title is defective due to:

6.1 Someone else’s failure to have authorized a transfer or conveyance of the title.
6.2 Someone else’s failure to create a valid document by electronic means.
6.3 A document upon which the title is based is invalid because it was not properly signed, sealed, acknowledged, delivered or recorded.
6.4 A document upon which the title is based was signed using a falsified, expired, or otherwise invalid power of attorney.
6.5 A document upon which the title is based was not properly filed, recorded, or indexed in the public records.
6.6 A defective judicial or administrative proceeding.

In the event a policy holder suffers a loss as result of a covered risk, the title insurance company will generally do one or more of several things:

1. Pay the claim.
2. Negotiate a settlement.
3. Bring or defend a legal action related to the claim.
4. Pay the policy holder the amount required by the policy.
5. End the coverage of the policy for the claim by paying the policy holder the actual loss resulting from the covered risk, and those costs, attorneys’ fees and expenses incurred.
6. End coverage for certain risks by paying the policy holder the amount of the insurance then in force for the particular covered risk, and those costs, attorneys’ fees and expenses incurred up to that time.
7. End all coverage of the policy by paying the policy holder the policy amount then in force, and those costs, attorneys’ fees and expenses incurred up to that time.
8. Take other appropriate action.

Given all of this, it should be obvious why lenders such as NASB require title insurance. To understand why purchasers of real property, such as IRAs should insist upon title insurance for themselves, consider the following hypothetical scenario:

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. All that is obtained is mortgage loan insurance or a loan policy; there is no owner’s policy obtained.
5. The loan policy is obtained from a company such as First American Title.
6. The IRA pays for the title insurance. [3]

In this scenario, the cost of the insurance policy would be $402.50 (the premium is a function of the amount of the loan, $70,000, not of the value of the property). That cost would be paid by the purchaser (the IRA) as part of the cost associated with obtaining the financing – it was required by NASB.

In this scenario, because the policy is a loan policy, the policy would only protect NASB. The limits of coverage would initially be $70,000 (the amount of the loan), not $100,000 (the value of the property at the time of the purchase). The amount of coverage would decrease as the loan to NASB is paid off until, eventually, when the loan to NASB is paid in full, there would be no coverage at all.

Now, in this scenario, First American Title likely did a good job investigating the title of the property. It was obligated to do so by statute, and good business practices would dictate as much, as well. As such, one might think: though the IRA did not obtain a title insurance policy in its name (an owner’s policy), it did, nevertheless, have the benefit of the title search and assessment of title resultant from the title examination First American Title conducted prior to issuing the loan policy. But bear in mind: title companies are not infallible; they sometimes make mistakes. And if First American Title made a mistake, the IRA would be left to suffer the loss of a title defect on its own, without insurance.

Consider this, alternative hypothetical:

1. The IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. The IRA pays for the property in cash; there is no financing.

In this scenario, there is no financing. That means there is no lender to insist and require that the IRA obtain any kind of title insurance. In the absence of a requirement that the IRA obtain title insurance, the IRA might not obtain title insurance. If the IRA does not obtain title insurance, it assumes the risk that it may have acquired defective title; and the IRA would be left to suffer the loss of a title defect on its own.

Now in either of the two scenarios discussed herein above, the IRA could hire a company to perform a title search. In such a case, in the event the title search company performed a bad search, and the IRA suffered a loss due to a defective title, the IRA might have recourse against the search company.

If the IRA pursued a case against the search company, the IRA’s recourse would be limited by the terms of the contract between the IRA and the search company. It’s likely that the contract would limit warranties of the work performed by the search company. As such, the recourse would be not nearly what the IRA could hope to obtain in the form of benefits from a title insurance policy.

So, consider this hypothetical scenario (a variation of the first hypothetical):

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. A loan policy is obtained.
5. An owner’s policy is obtained as well.
6. Both the owner’s policy and the loan policy are obtained from a company such as First American Title.
7. The IRA pays for the title insurance.

In this scenario, the total cost for the two policies would be $600. That’s based on a $575 premium for the owner’s policy and a $25 premium for the loan policy.

Understand that the premium for a loan policy, alone, in the amount of $70,000 would be $402.50. And an owner’s policy, alone, in the amount of $100,000 would be $575. In this scenario, because both a loan policy and an owner’s policy are issued, the premium for the loan policy is reduced or discounted to $25. This is commonly referred to as a simultaneous issuance discount. In this scenario, the IRA obtains the title insurance required by its lender, NASB; NASB is satisfied. And, for just $25 more, the IRA obtains title insurance for itself as well; the IRA has piece of mind.

The loan policy will eventually cease to exist. The owner’s policy (the IRA’s policy), on the other hand, will last for so long as the IRA owns the property. If the policy issued by First American Title tracks the language of the policy promulgated by American Land Title Association or ALTA (and it likely would), coverage afforded under the policy (the Coverage Amount) would actually increase by 10% of the Policy Amount each year for the first five years following the policy date, up to 150% of the Policy Amount. Thus, the IRA has a title search and analysis and title insurance (essentially, a warranty by the title insurance company, First American Title, of its search and analysis). After considering the various scenarios presented herein above, it should be obvious that an IRA engaged in the purchase of real property should not forget the title insurance.

About the Author

Greg Fencik is an attorney licensed to practice law in Florida since 1992. He is admitted to practice before Florida state courts, the U.S. Supreme Court, the 11th US Circuit Court of Appeals, and the Federal District Courts for the Middle and Southern Districts of Florida. He is a certified circuit court mediator. He received his bachelor’s degree from the University of Pennsylvania. He received a juris doctorate degree from Tulane University. He engages in business law, business consultations, and real estate law, as well as handles financing placements and credit facilities. In addition, Greg teaches real estate law at the University of Central Florida. He may be reached by email here.

Disclaimer: Anything read in this article is not to be taken as legal advice. It is up to the reader to consult with their own local attorney for any and all legal questions. This article is for educational purposes only. NuView IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.

Author Notes

[1]  To get a better idea of what exactly title insurers do when it comes to the investigation of and assessment of title prior to providing a policy of title insurance (underwriting), consider Chicago Title Insurance Company’s 333 page Basic Underwriting Manual.

[2] Many title insurance companies offer online title insurance premium calculators. First American Title, which utilizes policies promulgated by the American Land Title Association (see ALTA.org), provides an online calculator here.

[3] Either the purchaser or the seller of real property may pay for title insurance; in general, it may be negotiated in the purchase agreement.

Year-End Tax Planning & Retirement Accounts

December 4, 2014

Guest article by James K. Duerr:

So you thought you could defer taxes on your IRA forever?    

Sorry, the IRS will not wait forever. Although pretax money going into a Traditional IRA is tax deferred, there is a requirement at age 70 ½, to take RMD’s (required minimum distributions). The minimum distribution is based on tables of life expectancy and the balance in your account. There are worksheets on the IRS website, and many brokerage companies have calculators available to find out your RMD’s. If you do not take the RMD distributions, you may be subject to penalty. Per the IRS, “You cannot keep retirement funds in your account indefinitely”. The penalty could be up to a 50% excise tax on the amount not distributed as required.

 Roth IRAs & Roth Conversions

Roth IRA’s, do not require minimum distributions until after the death of the owner. Be careful with Roth 401K’s, as those plans do require RMD’s. That being said, it may be wise to roll the Roth 401K into a Roth IRA, if possible.Many clients consider converting Traditional IRA’s into Roth IRA’s. The amount converted is subject to tax, but is not subject to penalty. If you are in a low income year, you can have your CPA project the tax that you would owe on conversion.  You do not have to convert all of the funds at once. In fact, you can minimize the tax implications by converting the funds a little at a time.

Solo (or Individual) 401K Plans

For people who are in their own business, and do not have outside employees, the individual 401K plan can offer you flexibility and the opportunity to make large pension contributions to the plan.  If made pre-tax, the contributions may lower your tax liability. For example, if you took a $50,000 payroll, you have the ability for your company to contribute up to $12,500 to your pension plan, and you could, if under age 50, contribute another $17,500, for a total of $30,000 being contributed to the plan, and becoming a tax deduction. Assuming a conservative tax rate of 20%, you would save $6,000 in taxes. The plan has (2) components, an employer portion (up to 25% of earned income) and an employee deferral portion (up to $17,500, or if  age 50 and over, $23,000 with a catch up provision). The employee piece can be either pre-tax, or  Roth, if the plan allows.  Be sure that the original paperwork is completed correctly, and these plans can also allow borrowing rights. Most retirement plans are available as self-directed plans. These self directed plans allow you to have more control over your investments, by purchasing real estate or other assets, such as gold, notes, joint ventures, tax liens, etc.

Maximizing Profits and Minimizing Taxes

Whether you are in your own business, or not, it is smart tax planning to have a professional review your taxes, prior to year end. By doing this, you may be able to make some decisions that could significantly lower your taxes, and provide for your future financial freedom. As I always advise my clients, “It’s not what you make, it’s what your keep.”


 

James K. Duerr, CPA

CFRI Business Member

Small Business Resources USA, Inc.

Technology Levels the Playing Field for Self-Directed Investors

Guest article by Matt Lutz:

Anyone with a self-directed retirement account will tell you adding alternative investments to the portfolio can supercharge investment returns and enables investors to participate in asset classes where they are most skilled and knowledgeable. After one learns about self-directed investing, he or she will typically make the same types of investments utilizing the self directed account that he or she would make outside of the account. A real estate investor who owns single family rental properties will use self-directed IRA (SDIRA) funds to buy single family rental properties or a tax lien investor will participate in tax lien auctions using his or her SDIRA. Assets like single family housing and tax liens are great allocations of SD funds. Individual investors with knowledge of the local real estate market have the same advantage as institutional investors. The barriers to entry are very low. Anyone with money can buy a mobile home, a single family home or attend a tax lien auction. The only restriction is the amount of money the investor has. With knowledge and capital the individual investor can continue to participate in the asset classes.

Self-directed investors it seems by nature are an inquisitive bunch and want to learn about other asset classes. Most have looked at businesses and thought “I wish I could get returns like that” or “how do I invest in something like that?” Many of those businesses or investments are often controlled by institutional investors or specialty finance companies who don’t want anyone entering their markets. One thing we know about competition is that it reduces profits. The institutions want to protect the superior yields they are able to achieve. Prior to a few years ago, if an individual investor could break into those markets, it required a tremendous amount of the investor’s time and energy to find deals and then additional time and effort to conduct due diligence. Technology has changed that.

The most recent credit crisis is a great example of how technology has affected different asset classes. Everyone knows the banks were overrun with non-performing subprime single-family mortgages. A very similar thing happened in the late 1980’s to the Savings and Loans Industry with commercial real estate mortgages. The S & L crisis had the highest number of bank failures since the Great Depression with 797 thrifts shuttered and total assets of $394 billion. The problem was so large the United States government created the Resolution Trust Corporation (RTC) to liquidate the non-performing loans and collateralized assets. The RTC became a massive government institution that existed until 1995 when its duties were transferred to the FDIC. The most recent crisis although much larger (and scarier at the time) was much different. Technology enabled non-performing loans and properties to be sold via online auctions. Not only did technology help liquidate the non-performing loans much faster than the previous crisis but investors, large and small, could participate. Mortgages and REO’s (Real Estate Owned) were sold individually or in pools. An investor with a self-directed IRA could participate in the same auction as a Greenwich hedge fund. The Greenwich hedge fund might have a capital advantage but the individual investor knows his or her local real estate market much better.

So what other asset classes are are now available to individuals because of technology?

Consumer and small business lending are experiencing tremendous changes. Peer to peer lending companies like Prosper and Lending Club allow individuals to apply for unsecured personal loans up to $35,000. Individual investors can participate by investing as little as $25. The peer to peer lenders underwrite and service the loans. The investor’s decision is whether to invest and if so, how much? An individual investor has the same opportunity and the same information as a bank or specialty finance company.

Small business funding 

A very profitable business controlled by specialty finance companies is buying trade receivables or factoring. Factoring is a $3 trillion dollar industry run by companies like CIT. What is it? Factoring is the sale of accounts receivable (invoices) to finance companies (factors). The finance company discounts what it pays the seller of the invoice. Example. Let’s say Joe’s Hammer Company sells hammers to Home Depot. Home Depot is Joe’s biggest customer but it’s slow to pay which is normal practice for large companies. Home Depot might not pay Joe for 120 days. That doesn’t help Joe pay his employees or electric bill so Joe will sell Home Depot’s invoice (the legal obligation to pay him) to a factor. Joe receives a discounted amount of the the invoice immediately and the finance company will receive the entire amount in 120 days. The factor determines the discount amount and Joe has to decide to “take it or leave it.” Sometimes the discount can be as much as 30%. It is a very profitable business for the factor because businesses will continually sell receivables to meet their cash flow needs. It’s also a great business because a company like Home Depot (the obligor) has very good credit and is legally responsible to pay the invoice. The odds of not receiving payment from Home Depot are very slim.

Technology has disrupted the factoring business as well. Recently an online marketplace has launched that allows companies to sell their trade receivables to self-directed investors. Allegheny Exchange operates an auction format exchange that allows companies like Joe’s Hammer Company to sell its invoices at a discount to individual investors. The exchange provides credit ratings of the invoice sellers and invoice obligors, validates the invoices being sold and facilitates the payment process between the invoice sellers, buyers and obligors. The sales of the invoices are full recourse to the sellers which means the sellers and obligors are legally responsible for paying the invoice buyers. The exchange is a turn-key solution for investors to participate in a market previously controlled by specialty finance companies. Technology not only allows individuals to participate in the asset class but greatly reduces the time and effort normally required to make investments. The investors only responsibilities are deciding which invoices to buy and how much they will pay for them. The appeal of trade receivable investing is apparent; short-term, high yielding assets with an invoice obligor legally responsible for payment and full recourse to the invoice seller. Because most trade receivables are paid within 60-120 days, they are a superior alternative to money markets and commercial paper to park cash between longer duration investments.

Matt Lutz, a Pittsburgh entrepreneur, has been utilizing a self-directed IRA for the past ten years. He was featured in the June 6, 2012 Forbes Magazine article, ‘Go Rogue With Your IRA.’ He has used his IRA to buy real estate, trade receivables, tax liens, performing and non-performing mortgages, and floor plan loans for car dealerships. He is currently the Managing Partner of Allegheny Exchange. Matt can be reached at mlutz@tarponbaycapital.com or by phone at 412-841-5009.

15 Critical “Must Ask” Questions When Buying Real Estate Overseas – Part 2

December 1, 2014

Guest article by Michael Cobb:

Part two of the 15 Critical “Must Ask” Questions when Buying Real Estate Overseas will focus on “Owning Community.” While this seems like a no-brainer to most folks from North America, it really goes to the heart of what big brother does for us in North America and just how much we unconsciously depend on him. Would you think to ask to see a copy of the local zoning laws? You would likely be surprised to find there are none, and that in fact, your neighbor can legally build anything they want next door as far as the government is concerned. This is real freedom isn’t it?

But freedom and responsibility are a double edged sword. You the buyer must take the responsibility to ask the right questions to learn what you need to know so you can make the right decision for you and your interests. But how do you know what questions to ask? How can we know what we don’t know? Obviously we can’t, but a strong dose of humility goes a long way, as does turning off our filters and confirmation bias. These issues were covered in part one of this series in the last issue of To the Point.

Owning community is important, not just in zoning, but also in who will be around, or more importantly, will anyone be around. A build requirement on the part of the developer is a key piece of the community puzzle. Without something to mandate home construction, most projects of Latin America are long to be ghost towns and a collection of sold, empty lots waiting for their investor buyers to come build a home.  Most wont. They bought the lot as an investment to flip in a few years. Maybe they can, maybe they can’t. But a community is something else entirely.

Community is a tough word to define, but the subjective experience is real and we know it when we sense it don’t we? In fact, this soft fuzzy feeling can be and is quantifiable by the free market. Developments that achieve this sense of friendliness and warmth sell at higher prices initially and retain much higher resale values over time. The velocity of sales, even in down periods, outpace projects close by that lack this so important sense of community. Case studies abound and several are contained in ECI’s Business Plan.

Other factors too contribute to community and the financial and personal benefits that accompany it. Walkability is a huge factor. So are spaces where people can meet casually and get to know one another. Sure, there are a few Jeremiah Johnsons out there, but the vast majority of people want to have other people around to golf with, fish with, play tennis, swim, hike, play cards, share a drink or a meal and a multitude of other activities that we enjoy socially. But if there are no other homes around, no restaurant or fun places to congregate, no amenities in place to play a round with friends, how will this happen? Buy what you see is extremely relevant here too.

Owning Community

What kind of construction and design standards are in place and enforceable?  Is there building requirement of any kind? Zoning is almost non-existent in Latin America. Unless the developer has written and implemented CC&R’s, your neighbor can do whatever they want. Read the CC&R’s and make sure you agree with what is allowed and what is not. Know what deed restrictions are in place or you may be unpleasantly surprised by a neighbor whose tastes are radically different than yours. Empty lots on the beach are great for a picnic, but don’t create much of a living environment. Community means homes around you. If you want to have neighbors around, be sure that there is a requirement that property owners build a home in order to avoid living in a ghost town.

Are there amenities for use by owners and visitorsBuy what you see should be the basis for 90% of your due diligence evaluation. Is there a golf course, restaurant, bar, tennis court, fitness center, dock, dive shop, in place and serving clients. Or are they just promised. Promises can be alright, but your due diligence should include the verification of hard funds needed to complete the promised infrastructure, amenities, and services. Without the money, you are buying a dream.

Are there state-of-the-art telecommunications or fiber optics for fast and reliable worldwide communications? This question could fit in either “Buy what you see,” or “Own community.” But in a time where we take internet and phone service for granted, and community is being more and more defined on the web, this vital component must be in place, and in place well. Understand the reality of telecommunications infrastructure. How is the phone service provided? Can you get the bandwidth of internet you need? Is the service flexible and expandable to grow with the future needs?   

What about the Home Owner’s Association?  Are the fees high enough to cover maintenance of existing and planned infrastructure? Yes, high enough. You should worry about low fees because they are usually a sales tool to show how cheap the cost of ownership is. Let’s be honest, nobody likes to pay monthly fees. However, please realize that fees set too low equate to unexpected surprise assessments in the future and/or a drastic rise in HOA fees when the developer is gone and the true costs of maintenance are carried by property owners.

What about green belts, common areas, and the future of the development? True community requires spaces and places for people to meet and enjoy each other’s company. Club houses, parks, sidewalks, and maintained open space are critical to foster a spirit of enjoyment for residents. If public spaces are important to you, be sure they exist and are protected in the master plan. Remember too that there needs to sufficient resources for the care and maintenance of these areas. Knowing and agreeing with the vision of a project is important too. Be sure that the developer’s long term plans align with your goals and desires as a homeowner in that project. Ask to see a copy of the developer’s business plan if they have one and make sure it makes sense over the long run for you.

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.

15 Critical “Must Ask” Questions When Buying Real Estate Overseas

November 4, 2014

Guest article by Michael Cobb:

Everyone buying property outside of North America needs to remember the famous words of Dorothy to Toto after being dropped into Oz, “I don’t think we are in Kansas anymore.” When going offshore, especially to places that feel familiar, we must be very, very careful. In fact, the more familiar it seems, the more caution we should apply. But how do we do that?

Take a look at a favorite saying of mine, “I don’t know what I don’t know.”

Please stop and reread that…

Really! But how can we know what we don’t know? We can’t obviously, but we can be open to new possibilities and realities that vary greatly from our assumptions. The analogy that makes sense here is one of a radar screen. A small radar screen is easy to manage. In the world of “North American normal” we can get away with that. But overseas, a larger radar screen serves us well. It makes sense to expand it greatly so that anomalies are picked up way out, not close in.  Give yourself time and space to examine this data, process it, and then understand it.

Humility is the one attribute that really helps us to be open to the fact that we don’t know what we don’t know. It gives us a willingness to listen, hear what doesn’t make sense, acknowledge it and try to fit it into our analysis. It also allows us to let others with more experience guide us in unknown territory. The choice is really humility or tuition.

The other piece of this puzzle is our assumptions mentioned above. Have you seen the word “assume” defined as making an ass out of you and me? When we come to Latin America we bring our assumptions with us. We have to because they are part and parcel of who we are.

Assumptions are like filters. In the back of the brain, right at the top of the spinal cord, resides a special part called the Thalamus. This is one of the oldest parts of the brain and it is the brains chief filtering mechanism. It hears and senses everything. Billions of sensations per second, yet our conscious mind gets only about 1% of that information because that is all the conscious “I” can handle and process.

A good example is when you have a small baby in the house. It is possible to sleep through a raging thunderstorm, but a tiny squeak from a newborn will rouse the mother instantly (and dad sometimes). This is the Thalamus hard at work, sorting out the needed info from the not needed.  This filtering mechanism lets us live our lives. If we had to pay attention to every noise, movement, sensation around us, we’d be overwhelmed. So we filter.

But this filtering mechanism can be an Achilles Heel unless we understand that we are indeed filtering and are prepared to try and turn it off as best we can. But it’s not easy to turn the filters off, live “on your toes,” and be ready to see something that doesn’t make sense. In fact, it can be hard work. But it is necessary to if we want to make wise property ownership decisions overseas.

When you see it, turn off your confirmation bias, acknowledge it, and respect what your logic says. Push your radar screen out further. Give yourself time and space from the awesome emotional experience of palm trees, margaritas, and friendly sales guys. Process the hard data and do your homework. Look for evidence that contradicts what you want to believe.

The bottom line is that there are numerous wonderful properties out there and some of them are right for you. But you are in a different country, with different rules. There is no big brother looking out for you, so be sure you are smartly looking out for yourself.

An educated buyer is a happy owner. The answers to the questions below should be an important part of your property selection process. There is no right or wrong answers, but we’ve found that the things people take for granted or assume are standards in North America, may not be in Latin America. Be sure you know the answers to the following questions and make conscious decisions about what levels of creature comforts are mandatory and which may be optional.

The 15 Critical “Must Ask” Questions when Buying Real Estate Overseas needed for excellent and comprehensive due diligence are broken into three main areas:

  1. Buy what you see
  2. Own community
  3. Know the developer.

The first set below deal with “Buy what you see.” The president of ECI Development has a saying, “You get what you inspect, not what you expect.” Promises are easy to make and difficult to deliver. Be sure you are dealing with existing reality. These first critical due diligence questions are below.

The other two areas, “Own Community, and “Know the Developer” will be presented in subsequent posts.

Buy what you see

Is there year around access to the property? What is the drive time from shopping, dining, and the airport? Not all roads are accessible year around in the region. Steams that barely flow or don’t at all, can be raging torrents half the year. Know the road condition in rainy season. Proximity to services is very important. The key factor is the time to reach the destination not the miles. 10 miles on a rough dirt road in rainy season can easily take an hour or more.

What road and public infrastructure exists? Does the current infrastructure include underground utilities, paved streets and sidewalks? Do not take for granted paved roads, street lights or state of the art telecommunications. If these are not in place when you buy your property, they might never be. Rarely, if ever does, the government or utility company provides these services to a developer. If the sales agent says, “it’s coming,” verify y that the developer has the funds to meet his promises. Ask to see a copy of his most recent bank statement showing the millions of dollars it will take to build the infrastructure. Bottom line: Buy what you see! Be sure that the price you pay is indicative of existing reality.

Is there enough fresh water and water pressure? Sometimes it’s the smallest of things that adds greatly to the quality of life. Water pressure is one of them and it must be planned for and paid for. Either the developer has planned and paid for this part of the infrastructure or the lot owner will bear this cost with the addition of storage tanks and pressurizing systems. If you are considering an existing home or condominium, turn on all the faucets, inside and out, the showers, and then flush the toilets. Is there sufficient pressure?

Is the house or condominium plumbed with hot water? Not a silly question. Look under the sinks to see if there is hot and cold service. In many cases, a splitter is used from the cold service to provide water to both faucets. The cost to retrofit a concrete home for hot water to the bathrooms can be high. If you are having a home built, be sure to triple check the plans for a hot and cold service to all bathrooms and fixtures. Architects and builders may design “local” and unless you catch this upfront, change orders become prohibitively expensive.

How far is it to major medical care? How long in dry season, how long in rainy season? Major medical care is critical. Most major Latin American cities have state-of-the-art hospitals. In fact, in many cases these facilities can eclipse regional US hospitals with newer more modern equipment approved for use by the Europeans but not yet passed by the FDA. Be sure to visit the medical facilities as part of your due diligence process. Remember too, it is not how many miles to a major medical facility, but how many minutes by car in both the wet and dry seasons that really counts.

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.

Profits Without Ownership: Sandwich Lease Options

November 3, 2014

Guest article by Augie Byllott:

You may be asking yourself, “What’s a sandwich lease option?” It’s an incredible financial instrument for creating profits without ownership. Let me explain.

It gets its name for the way everything is structured between the seller, you (the investor), and the tenant-buyer. You step in and negotiate a long-term option agreement with the seller, which gives you the right (but not the obligation) to close on the property within 1-5 years. Often, you also negotiate in the ability to assign the contract, and to let someone else other than you live in the property.

You then go find a potential tenant-buyer, perhaps someone who is a good person that has had a few financial knocks. Individuals who don’t qualify for traditional financing are prime clients for this sort of transaction. Often they will make ideal homeowners, but simply need a few years of documented on-time payments to help repair a spotty credit record. You then place them in the property with your own option agreement. If you structure it correctly, you can earn a spread on both the sales price and monthly payment amounts that you make to the original seller.

This is, of course, is a highly simplified explanation of sandwich lease options. But my intent is to show you how it is very possible for you to start earning money through sandwich options.

By targeting areas with “pretty” houses in good neighborhoods, you will vastly increase the potential number of buyers you can attract. Since you don’t actually own the home, finding properties that are already in good condition is paramount. To make the most of your investment dollar, you will want to spend most of your money on marketing rather than repairs and cleanup. Additionally, properties in nicer neighborhoods minimize your risk exposure, as you won’t have to worry as much about vandalism or depreciating home values.

Sandwich lease options are an ideal strategy for the new investor because they carry limited
risk and great upside potential. Further, they are an ideal match to the current market
conditions. Motivated sellers and potential buyers with damaged credit are much easier to find. This technique of options has the potential to earn you a nice sum of money, but it does require work.

As with any investing technique, you need to find the right strategy that works best for you, learn it inside and out, and most importantly, TAKE ACTION!

 

Augie Byllott helps people buy and sell homes and investment properties in all price ranges without using lots of cash or credit. He is a full time real estate investor, speaker and coach with Personal Action Coaching & Training. He is also a founding member of Common Wealth Trust Services, LLC a land trust service provider.

Self-Directing How To: Leveraging IRAs

September 30, 2014

Article by NuView President, Glen Mather:

We’re often asked during our seminars and continuing education classes on self-directed IRAs whether investors can use their IRA to make a down-payment on investment property, and the short answer is yes. But there are two rules to be aware of when leveraging IRAs:

First, the IRA must purchase the entire property, not just provide the down-payment. The property is titled in the name of the IRA (NuViewIRA, FBO (client’s name) IRA). The mortgage then would also be issued in the name of the IRA.

Second, the loan must be non-recourse, which means that in the case of non-payment the lender is limited to only taking the asset secured in the loan that is owned by the IRA. The IRS actually prohibits a disqualified party of your IRA, which includes yourself, to provide credit to your IRA (IRS Section 4975).

There are considerable benefits to leveraging IRAs. It certainly could provide a way for the IRA holder to purchase higher-valued property than the balance their IRA account may allow. While partnering can provide additional funds, leveraging IRAs allows you to retain all of the net gains rather than just a partnered portion. It may also permit several properties to be purchased instead of just one, increasing diversification inside the IRA.

So, is it even possible to get a non-recourse loan? The best source may actually be the seller of the property, although that would normally require that the property has sufficient equity in order for the seller to offer such terms to your IRA. There also are several banks that have created a special loan program for IRAs that clients often find attractive.

Lenders to IRAs normally require not only an appraisal, but also an assessment as to the likely cash flow of the property, including rental history and projections. After all, the lender to an IRA cannot assume that the IRA holder can or will make future contributions to his account. At NuView IRA, we can set up automated payments to the lender, ensuring that available funds are transferred according to the agreed-to terms of the loan.

Before you get started with leveraging IRAs, be sure to seek guidance about potential taxes your IRA could incur, Unrelated Debt Financed Income, which takes effect when an IRA makes a profit of more than $1000 per year from the leveraged portion of the rental property. Also, state laws may differ on the exact protection for the borrower of the loan.

Our transaction experts at NuView to answer any questions on the process of leveraging IRAs, and, as always, tax professionals and advisors can help with specific investment details you wish to make within your IRA.

A Walk in the Woods – Investing in Timberland

September 25, 2014

Guest article by Tom Brickman:

With the stock market at all-time highs, many have forgotten that six years ago everyone’s stock portfolio lost a gut-wrenching 40 percent in eight months, and with money market rates around 0.4 percent, cash is not keeping pace with inflation. High volatility with a low yield is an unpleasant combination for anyone, and while alternatives seem scarce, investing in timberland tends to satisfy many security needs.

People are beginning to turn to timberland investments, in fact in America there are 23 million private timberland owners. Prices for stocks and bonds can go up and down dramatically over short periods of time, sometimes as short as a single day, but timberland values tend not to fluctuate. Over 50 percent of the return from timberland comes from biological growth – trees get bigger at a steady rate independent of market factors. Diversifying a portfolio by investing in timberland can reduce value swings.

What are the different types of timberland?

In the south there are a few different types of timberland: land that will grow pine trees (dryer ground), land that will only grow hardwood trees (wetter ground), and farm land.

The kind of land you buy depends on the mix of motivations you have for buying it. Those motivated purely by financial benefit will seek investment-grade pine properties. In the south, this is land that has been planted with genetically improved loblolly pine. Those more interested in hunting, which means less return, will seek properties that have more hardwood land, perhaps with a lake or river frontage too. Investors motivated by conservation may seek longleaf pine or hardwood land along major rivers. Investors motivated by a farming lifestyle or by crop and livestock markets will seek land suitable for cultivation or pasture. Returns from farmland tend to be more volatile than returns from timberland due to government involvement in the markets. Many investors have a mix of motivations and accordingly seek a mix of land types.

How do you go about investing in timberland?

In general, there are two ways to go about investing in timberland. One way is direct private investment where the investor owns the asset. The other is indirect investment where you purchase stock in a public company that owns the asset. The way you invest depends on your motivations.

Direct Investment

Direct investment gives the investor more control over the decision of when to sell timber. This can have a very beneficial impact on returns. You can purchase land to meet a variety of motivations. Disadvantages include the task of finding assets to buy, discerning fair value, finding asset managers, and finding buyers when you are ready to sell (lack of liquidity).

A key issue with direct investment (mostly affecting smaller non-institutional investors) is that markets for privately owned rural land are notoriously difficult. For example, finding assets to buy is difficult because there is no central clearing house of properties available for purchase and the for-sale-by-owner market is huge (our experience is  up to 50 percent of private land sellers do not use an agent to find a buyer). Also, discerning fair pricing requires expertise in appraising land and standing timber. Consequently, most investors engage professionals to assist with finding, buying, managing and selling land.

Indirect Investment

Publicly traded forest products companies seek to maximize financial return. Buyers with this motivation find a good fit here. Advantages to indirect investment are that it simplifies the task of finding, buying, managing and selling timberland assets. The price is published every day so there is low price uncertainty. And, the companies have professionals to manage the assets (selling timber, planting trees, fixing roads, paying property taxes, etc.). A disadvantage to investing in a public company is that quarterly demand for dividends, which affects share price, forces these companies to sell timber even in poor markets.

Institutional investors (pension funds, endowments, sovereign wealth, etc.) and high net worth individuals often address these issues by investing through Timberland Investment Management Organizations (TIMO’s). These are private companies that specialize in finding, buying, selling and managing timberland assets. Although most have financial return as their mission, some specialize in conservation timberland. The best TIMO’s offer geographic diversity (US & global) and have decades of experience identifying deal flow, managing the purchase process, managing the asset on a day-to-day basis, and finding buyers when it’s time to sell.

People who don’t meet the minimum investment threshold for a TIMO (most investors) can get professional assistance from an enormous network of rural land and forestry professionals. Many of these are small, local companies or individuals with deep knowledge of the asset and long experience with local land and standing timber markets.

Is investing in timberland right for you?

This is a question only you can answer. The purpose of this article is to give you a starting spot for further investigation. Here are some thoughts to consider:

  1. Get professional assistance for direct investment. A key issue is that the hardest mistake to overcome is paying too much. The saying is you make your money the day you buy it.
  2. A diverse portfolio is your best protection against loss of value. So only add land if you are looking for diversity.
  3. Direct investment in land requires patient money. Getting in and out of the asset takes time. So only use funds you can afford to invest for 10 years or more. Using your self-directed IRA to buy land is allowed and is the perfect kind of money to use.
  4. Land does not service debt well. Be careful that your reach does not exceed your grasp.

Learn More:

  1. Data on ownership & financial performance of land:
    1. The National Council of Real Estate Investment Fiduciaries (NCREIF):
    2. The Forest Research Group
    3. U. S. Forest Service Resource Bulletin WO-1
    4. Family Forest Owners: An In-depth Profile. By The Sustaining Family Forest Initiative
  2. Direct investment & management professional
    1. All individuals – farm and timber land:
    2. High Net Worth Individuals and Institutions:
  3. Timberland investment & management professionals
    1. Resource Management Service
    2. Campbell Global
    3. Forest Investment Associates
    4. The Hancock Timber Resource Group
  4. Farmland investment & management professionals
    1. Hancock Agricultural Investment Group
    2. American Society of Farm Managers and Rural Appraisers
    3. UBS – Agrivest
    4. TIAA-CREF Ag Investments

 

Located in Birmingham, Alabama, Tom Brickman has 37 years of experience in timberland investment and management businesses across the United States and Central America. He is a Registered Forester, Certified General Appraiser and Real Estate Broker, and helps people buy, sell, and care for rural land. Tom can be contacted via email at tbrick@CyprusPartners.com or by phone at 205-936-2160, and for more information on buying rural land in Alabama, you can visit Tom’s website at www.CyprusPartners.com.

Investing in Growing Companies

September 4, 2014

Guest article by Evan Greenberg:

Over the past three decades, companies like Microsoft, Apple, Google, and Facebook have emerged, not to mention other powerhouses like Chipotle and Under Armour. They have replaced Chrysler, Woolworth’s, Data General, Digital Equipment, and many others in our dynamic economy. Many of these success stories are examples of why an alternative investment platform for accredited investors is important, as many of these companies were private investments before their IPOs, which came much later in their growth cycles. For example, one of my favorite concepts, Stratasys, a leader in 3D printing, has gone up 100-fold since 2002.

Typically, the primary way people were investing in growing companies was either through a direct investment or a venture capital fund, which could only be done inside of an IRA through an administrator like NuView. As defined by The Motley Fool, a hedge fund is described as “a pool of investment capital that a manager invests on shareholders’ behalf.” The crucial difference between a hedge fund and your run-of-the-mill mutual fund is the complete discretion it gives the fund manager to invest where and how he or she chooses. This allows hedge funds to hold any and all investment types, including alternative assets

Our economy has become more efficient, even in the last 15 years, by utilizing capital investors to quickly monetize and add value to emerging companies. Book value is no longer as important as balance sheet cash.

If I said to you that I expected mid-to-high single-digit returns for the next 10-15 years, then you would say that is a plausible idea. However, if I said that I expected the Dow Jones Industrial Average to hit 50,000 and the S&P 500 to hit 5,000 in the same time frame, you would probably call me crazy. Believe it or not, I forecast that both of those scenarios will occur before 2030.

While all good things come to an end, I’m still predicting this secular bull market will last for a long time. Dow 50,000 sounds like a spectacular number, but it is slightly above traditional market returns after 13 years of sideways action. This may not be a roaring bull to remember, but it won’t be one to forget, either.

 

Evan Greenberg is the Founder and Portfolio Manager for the LegendCap Opportunity Fund, which is an approved hedge fund on NuView’s platform that makes investments in emerging growth companies and allocates up to 20 percent of its assets to alternative investments such as private placements. Evan broadcasts a financial radio show in Phoenix and can be contacted at evan@legendcapfunds.com or (516) 662-0303.