Real Estate Blog

Before you buy property overseas you need to know what you're doing. Here are seven fundamental guidelines for investing successfully in overseas real estate, each critically important, especially in emerging and undervalued markets.

I got this information from my longtime friend and former colleague, Kathie Peddicord. Kathie is an experienced offshore real estate consultant and author of “How to Retire Overseas.”

1. Beware of net commissions. In many countries, real estate agents (not the property owners) set the sale price. The seller specifies what amount he wants to make but tells his agent: “Sell the place for whatever you want." The agent may try to sell for 50% or even 100% more.

In foreign markets these deals are particularly dangerous for buyers, because there's no U.S.-style Multiple Listing Service. So, there's no way to compare selling prices of similar properties. The easiest way to avoid this practice is to negotiate directly with the property owner.

2. Title insurance is available for offshore real estate. Buyers will always be told by the seller and his attorney that the title is good … that there is no need to worry … that they'll do all the paperwork to register the property in your name.

Never, ever rely on verbal promises, especially since almost anywhere you can buy a title insurance policy almost identical to what you'd find in the U.S. Raising the question of title insurance early in the discussions will head off future problems. If the seller has something to hide and becomes confrontational, you should look elsewhere.

3. Always buy fully titled real estate, not “rights of possession.” Rights of possession are found in some countries like Panama. This means you get only possession of a property with the possibility that the full title may be obtained after a length of time (normally about 15 years). But such rights are subject to legal challenge by the titled owners of the land.

The owner of the land trying to sell his rights of possession and his agent may not tell you that the land is not titled. If you ask, they may tell you "rights of possession are just like title." That's untrue. Walk away from any property being sold merely as rights of possession.

4. Beware of laws that restrict foreign ownership. When buying foreign real estate, you must know the local rules governing foreign ownership of the specific land in which you interested.

In some countries, foreign buyers must purchase through a corporation. In others, foreigners are not allowed to buy oceanfront or coastal property or in other designated areas. Calculate the expense of dealing with such restrictive rules to decide if you are getting a good deal.

5. Offshore real estate markets can be difficult to navigate. In many countries there are no multiple listings, no sales histories, and often no real estate agents. For foreign buyers, the asking price may be higher than for a local because the seller assumes you don't know the market and that you have more money to spend.

To avoid this, start with local realtors and get an idea of the general market. Visit areas of interest. Look for "For Sale" signs. Stop in local bars and talk with whoever you can. It helps if you have a reliable local contact to act as your front person to be sure you're quoted true local market prices.

6. Learn the options of offshore financing. In Western Europe, Panama and Mexico, loans should be available through a local bank, especially if you're a resident of the country. Although European rates are low, you can't get the high loan-to-value loans that U.S. banks used to give before the crash. Also, don't expect a 30-year mortgage; 20 years is more typical. In less-developed countries, your options may be limited to developers who offer direct financing with terms that are generally are not appealing.

You might arrange a loan in the U.S. using U.S. collateral (a second mortgage). Some offshore private banks will lend money against the value of your investment portfolio held with them in your choice of currencies, but watch the currency exchange risk.

7. Market price, not asking price, must be your guide. For real estate in developing markets, the asking price is just a starting point; there are no multiple listings or comparative sales lists. Sellers price property based on what they'd like to make, momentary cash needs or how neighboring properties have sold, regardless of how those properties compare with their own.

Bottom line: Offer only what you believe the property really is worth, even if it’s only half the asking price. What it is really worth, the market value, is determined by the prices at which similar properties have recently sold.

Don’t Forget about Reporting

Until now, U.S. law has not required that direct ownership of real property in a foreign country be reported per se to the IRS. At the moment, a U.S. person can own an offshore vacation or retirement home with considerable privacy.

However, U.S. persons are required to report income from real estate holdings, wherever they are located, so this privacy does not apply to rental real estate.

But non-reporting of foreign real estate may be about to change.

The so-called 2010 HIRE Act contained the “Foreign Financial Assets Report” (FATCA) that requires that U.S. persons file a new (as yet unissued) IRS form with their income tax return to disclose any foreign “financial assets” with a combined value exceeding $50,000.

It appears that personally owned offshore assets, such as real estate or business assets that are not owned by a legal entity, might be excluded from this new report. But the law gives the IRS broad discretion to write the reporting rules so until those rules are issued the question remains open.
I’m watching this closely and will let you know if something changes or if we get any additional information.

Start looking for your offshore haven, and take your time to find the right realtor, lender and, most importantly, the right home where you’ll spend not just your retirement money, but perhaps your retirement itself. International living is easy if you know the ropes.

That’s the way it looks from here,

Bob Bauman
Legal Counsel and Senior Editor, The Sovereign Society