by Ivan Doherty, Chief Operating Officer & Investment Advisor, IFG Asia
Buying real estate in any country can often be time consuming and nerve wracking. If you are based in the country of purchase this can make it a lot easier, but cross-border purchases can be fraught with difficulties.
Most expats, because of their location, often find it easier and more convenient to buy-off plan property rather than second-hand property, the main reason being that it is often packaged and easy to transact the deal. In addition, with new property, in many countries, building guarantees are often included which reduce risk and the ongoing maintenance costs that may be associated with older properties. If you are living 4,000 miles away, you don’t need the headaches!There have been far fewer off-plan developments around since 2008 due to the financial crisis and lack of liquidity for developers, but they are now slowly but surely coming back and being marketed to potential buyers and I would like to comment on some of the issues that have arisen for investors who have bought off-plan property outside their country of residence:
Why are you buying this unit?
This is a difficult one to rationalize, as we are all emotional and tend to buy property that fits our personality. Are you buying the property to be able to live in one day, or purely for investment? Or both? Try and separate your feelings and look at the objective of the purchase. All off-plan property in glossy brochures look attractive.
It would be worth looking at the property cycle statistics in the country where you intend to purchase – ideally you would not want to purchase at the top of the cycle. You can also aim to buy currency at a favourable rate by looking at historical trends. This does not take too long to research.
You need to thoroughly check out the developer and who is building the project and what experience they have. If this is their first project, I would advise caution. It is always advisable to choose a developer with a solid track record. They know the pitfalls and likely have a good source of financing in place, allowing the project to complete.
If the developer is using a real estate agent to market the project, check out, question and clarify all the points raised in their marketing literature and sales pitch. Ask how they will help you transact the business from start to finish.
Many investors tend to view property purchase on the basis of affordability (which is fine from a budgeting perspective). Also look at the value of any property on its cost per square foot/ metre. This shows what you are really buying. By way of an example, if you have two similar units in the same area, one for USD200,000 which is 100 sq metres and one for USD200,000 which is 135 sq metres, on the face of it, the latter unit appears the better value. You need to ask why, and do your research.
Larger units tend to offer better value in this regard due to economies of scale i.e. the cost of building a larger or smaller unit is not that different, so they can often offer a scaled discount.
Some countries allow you to own property in your own name or in the name of a holding company as a non-resident. Other countries (Thailand and the Philippines being two examples) may have restrictions on ownership for overseas buyers. They can insist that the property is held in the name of a resident nominee owner and you need to check out the legal implications of this.
If you sign a contract, you need to have a clause included that means that the purchase will only proceed subject to finance. This is particularly relevant given bank lending policy since the financial crisis. Somebody who bought off-plan in 2007 with a two-year completion date, may have had trouble financing it in 2009. In addition, it is better to apply for your loan within 6-months of completion to allow yourself plenty of time to find alternatives before the closing date.
If you are buying off-plan, then it is fairly usual to pay an initial deposit when you sign the contract, usually USD1,500+. In addition you have to pay, say, 10% after 30 days and maybe another 10% after 6 months, with the balance on completion. All schemes are different, so be aware of this schedule and check that you have sufficient liquidity.
Fixtures and fittings
Many off-plan units come fully fitted out, and some don’t (London can be either/or for example). If not, then check how much it would cost to provide the fittings. In addition, please be a little skeptical of developers that make a big claim about the fixtures and fittings. After a few years of wear and tear, they may have to be replaced anyway, so do not pay over for a depreciating asset.
These will include management, tax, sinking fund and maintenance fees. Please look at these very carefully. Also ask the agent about the effect of these costs as the property ages, i.e. the older the property the higher the maintenance costs.
It is common for new projects to come with ‘sweeteners’. They often come in the form of guaranteed yields for one or two years. Ask who is providing the guarantee. Ultimately you are paying for this guarantee, so ask them the purchase price with the guarantee stripped-out, to compare the two. Sometimes they can work in your favour and sometimes not. Remember, any guarantee puts a financial burden on a third party, make sure they have resources to cover that.
In short, understand clearly the taxes on purchase, taxes on the way through, and on future sale as well as any need for assistance with filing an annual tax return in the country where the property is located.
Buying a resort property may sound like a great idea, particularly if you like the place and have visited. The two main drawbacks may be a lower rental yield, as it may be seasonal and in addition, selling a second-hand holiday unit can be difficult.
This is singularly the one area where a project, once completed, can go wrong. If the management company letting your unit have little or no experience, it can lead to a myriad of problems. For example, the lack of a realistic yield as the company is not marketing it correctly and a deterioration in the property itself through lack of up-keep. In addition, how long do the managers wish to tie you into their management contract? Read the small print very carefully.
Personal risk management
From a financial planning perspective, it is also advisable to consider the maximum potential downside. What would happen if the developer ran out of money and went bankrupt? Please satisfy yourself that the developer has sufficient financial resources to return the deposit should the development fail to complete. Secondly, what would happen if you could not get the finance you had hoped for? Do you have the money to buy it in cash, or do you risk losing the property and your deposit?
Be clear why you are buying the property and how long you plan to hold it. With this in mind, it is good to ask the agent questions about the market and how easy it would be to sell. As stated already, it may be easier to sell a property in a busy city than a specific resort.
In summary, buying an overseas off-plan property can be a dream for some people and a very successful life choice and financial decision, but it comes with many things to think about and should not be rushed into.
About the author
Ivan Doherty manages a portfolio of client investments across a wide range of industry sectors. He has 20 years’ experience in Financial Planning and holds advanced professional qualifications (G60) with the Chartered Institute of Insurance in the UK. His company role is of Chief Operating Officer for the IFG Asia business.
Ivan has a significant knowledge on group retirement and employee benefit schemes and individual retirement planning and budgeting.
As a long term resident of Japan, Ivan has built a large network of contacts who specialize in wide ranging areas to assist expatriates with their overall planning, such as tax, banking, trust and will planning.